The “second generation” of workplace savings had only really begun to take off when we were struck by the great “black swan” event of 2008, a once-in-a-lifetime market shock. Equity markets not only fell more than they had since the 1930s, so did many fixed income markets and even commodities in a rare, deeply damaging correlation.
Like virtually all other investors in the world except those who were exclusively invested in cash, gold, or U.S. Treasuries, millions of participants in workplace savings plans were painfully hit. While the S&P 500 stock index dropped 37%, total assets in 401(k) plans fell 22% to just over $2.3 trillion. Some plan participants, specifically people just entering retirement who actually needed to draw income from shrinking nest eggs, were especially impacted. And the whole 401(k) system was exposed to a barrage of academic and political criticism, much of it misleading, myopic, or flat-out wrong.
Now, I am less interested in arguing about the problems of the past than I am in helping define the solutions of the future. But one criticism of 401(k)s that does have some validity centers on overly risky allocations adopted by many leading life-cycle fund providers, even in “default” target-date funds meant for people due to retire within a year or two. Some leading funds targeted for the retirement date of 2010 had adopted equity exposures well above 50%. That is very risky territory to camp out in when a 100-year flood washes through securities markets.
I am pleased to tell you that Putnam’s own RetirementReady 2010 Fund resisted the competitive pressure to lift equity allocations and instead held to a very conservative level of just 28% equity. But it is easy to understand how life-cycle managers across the industry — competing with no upper boundary on equity allocation — could be tempted to push more and more chips in that direction. Indeed, investors themselves often demand more risk while the good times roll. And the performance ratings that plan sponsors too often rely on can push the same way.
Again, to be clear, I do not buy in — at all — to the blanket criticisms we’ve heard of 401(k)s or of life-cycle strategies, both of which I believe are extremely valuable and valid. But I do believe that as our workplace savings system matures and takes a central role as the prime source of future retirement income, those of us who believe in it most passionately should also be the most determined to keep on improving and refining it.
And when we do see flaws revealed under stress, as we clearly have, we should be the first to want to fix them. Instead of wasting energy rebutting the critics or focusing on the past, let’s get on with creating a better future.
Let me turn now to share with you some thoughts on changes that we at Putnam believe should come together to create a new generation of defined contribution plans in America — what we call Workplace Savings 3.0.
Excerpted from a speech given by Robert L. Reynolds President and CEO Putnam Investments, at the 401KWire.Com Influencers’ Summit 2009: DC-IO Partnership Washington, DC May 6, 2009. The full speech is embedded below.
