Putnam CEO Reynolds Calls for a “New Generation” of Workplace Savings Plans with Lower Volatility & Lifetime Income Solut...

Drawing what he described as “the right lessons” from last year’s market extremes, Putnam Investments President and Chief Executive Officer Robert L. Reynolds today called for a new generation of workplace savings plans that do more to lower volatility and create more dependable sources of lifetime income.

“We need to do more to protect working Americans from the inflation, volatility, and longevity risks that can make lifelong security in retirement so hard to reach,” Reynolds said. He explained that 401(k) plans should be made much more resistant to market downturns, such as those experienced in 2008.

Speaking at the National Investment Company Service Association’s (NICSA) East Coast Regional Meeting in Boston, Reynolds said, “The Pension Protection Act of 2006 (PPA) has gone a long way toward solving the challenge of savings accumulation. Auto-enrollment, savings escalation, and asset allocation guidance all work — but we need to finish the job. The next challenge in workplace savings plans will be to offer guidelines, even guardrails, to ensure that workers’ savings are protected as they reach retirement age.”

Reynolds indicated that retirement plan sponsors, plan administrators, financial advisors, and workers themselves should consider a “lifetime financial product allocation” pattern that includes:

• Reliable lifetime income options (both annuities and non-annuity solutions), to protect against longevity risk;
• Relative return strategies (stock and bond funds, and asset allocation funds), to protect against inflation risk; and,
• Absolute return strategies, to protect against both inflation and volatility risk.

Asset managers, insurance companies, and service providers all have significant roles to play in the development and distribution of products for such a glide path, in which asset allocations — and the relative share of investment and insurance services used — would adjust steadily as a worker approaches and enters retirement.

“Preserving Wealth Is An Active Endeavor”

Reynolds noted the potential danger of excessive reliance on index funds and other passive investments as a core element of a mature retirement portfolio, saying that “preserving wealth is an active endeavor. Index funds and other passive investments that track benchmarks are guaranteed to lose value when the markets they track sink, as we saw happen to the investments of many workers last year. People in or near retirement are not well served by too-great a concentration of passive investments, thinking they are a protection against a downturn.”

Reynolds’s remarks expanded upon his May 2009 retirement savings challenge to the financial services industry: to strengthen 401(k)s and other defined-contribution plans to more reliably deliver lifelong income to workers. Reynolds’s “Workplace Savings 3.0” concept built on the PPA’s principles of automatic enrollment, automatic savings escalation, and guidance to lifecycle and balanced fund allocation strategies — which he described as “Workplace Savings 2.0.” This second-generation model, ratified by the passage of the PPA, transformed the purely voluntary, multi-choice 401(k) pattern that dominated the first generation — “Workplace Savings 1.0” — from roughly 1980 to 2005. But in the wake of the market trauma of 2008, Reynolds argued, there is need for more change.

“Today,” Reynolds told his audience at NICSA, “America is moving from a long era of leverage, consumption, and reckless excess to a new respect for thrift, prudence, hard work, reasonable risk-taking, and entrepreneurship. There is little we could do that would contribute more to that change than re-booting our workplace savings system and better linking a lifetime’s labor to more secure, lifelong income.”

Leadership in Retirement Product Innovation

Putnam recently announced that its RetirementReady® Funds are the industry’s first suite of target date funds that integrate target absolute return strategies with traditional relative return mutual funds. The enhancement is designed to lower volatility during accumulation and to pursue a higher level of income for investors in retirement. The suite of 10 dynamically managed funds, each of which has a target date based on when investors expect to begin withdrawing assets, will seek to better shield investors close to or in retirement from market extremes, thereby creating a more stable sequencing of investment returns. The funds strive to do this without sacrificing the potential for gains in more positive markets.

The first use of absolute return strategies in target date funds is just the most recent step in Putnam’s commitment to the retirement market. Earlier this year, Putnam launched a new 401(k)/defined-contribution platform for advisors and their plan sponsor clients that provides them with highly flexible and scalable services and solutions.

The application of absolute return strategies to lifecycle investing exemplifies Putnam’s renewed leadership in product innovation. During the past year, Putnam launched the industry’s first suite of target Absolute Return Funds, which already have attracted over $500 million in investments;* Spectrum Funds, which invest in the securities of undervalued, leveraged companies; and Global Sector Funds, which target stocks in dynamic sectors across global markets.

NOTE: For more information on Putnam CEO Robert Reynolds’s address to NICSA, please visit www.theretirementsavingschallenge.com

About Putnam Investments

Founded in 1937, Putnam Investments is a leading global money management firm with over 70 years of investment experience. As of August 31, 2009, Putnam had $110 billion in assets under management. Putnam has offices in Boston, London, Frankfurt, Amsterdam, Tokyo, Singapore, and Sydney. For more information, go to putnam.com.

* Putnam’s target Absolute Return Funds are not intended to outperform stocks and bonds during strong market rallies.

Putnam mutual funds are distributed by Putnam Retail Management.