All of this is going to require the same combination of forces that brought about the PPA, namely, industry innovation first, backed and ratified by public policy innovation.
As we know, academic studies, pilot projects, and early adoption by pioneering plan sponsors preceded every major element of the PPA’s core policies, from auto-enrollment to savings escalation to the use of life-cycle defaults. It is time now for plan sponsors and providers to continue that tradition of innovation and begin acting right now — under current law — to pioneer the best practices that will lift workplace savings to a new level.
As a baseline, plan sponsors should move rapidly to fully adopt the auto-features that PPA endorsed. While pickup has been rapid, the job is far from finished. But the fiduciary risk calculation has clearly shifted. After all, once you really know that something works, such as seat belts, it’s up to you to buckle up or be negligent. The same applies to adopting auto-features and great defaults.
Let me share just one thought about defaults because that word itself, defaults, can sometimes seem to have a pejorative connotation, kind of like “leftovers.” But I believe the single most important decision sponsors make in designing a plan is the choice of the default option. In fact, when you really think about it, the default option really ought to represent what a sponsor and provider believe to be the best, the most-likely-to-succeed, strategy that we can think of. It really ought not to be just the default, but also the plan’s first-order recommendation.
Some participants, of course, will prefer to take full control of their investment options, and they should remain free to do so. But the most intense competition and thought leadership debate in workplace savings really ought to focus on how — and through which strategy —we can create the most reliable, risk-adjusted default solutions, the ones most likely to enable participants to achieve the highest replacement rates. That’s the key goal, after all.
A second step industry can take right now is to adopt more conservative asset allocations, most notably in mature-phase life-cycle strategies, so that participants who actually need to draw on these funds for income have more protection against market extremes.
A third step, which a few sponsors have already taken with Putnam, is to offer absolute return strategies as plan defaults or as low-volatility options. We expect these strategies to play a major role in future workplace plans, and we look forward to seeing many competitors join us in providing them.
Fourthly, it is perfectly legal right now for sponsors to integrate lifetime income options into their plans, either low-cost annuities or the growing array of non-annuity income products now coming to market. It is also permissible for sponsors to offer participants access to advice and guidance on investment choices within their plans and beyond.
Taken together, the adoption of these best practices would, I believe, mark the same kind of qualitative improvement that PPA enabled. In other words, we already have it in our power to create a new generation of workplace plans that would provide millions of Americans with a reliable Retirement Paycheck, the well-deserved reward for a lifetime’s savings.
We can continue evolving from a system that made it somewhat hard to succeed, to a new model that makes it very tough to fail. Nothing stands in the way of these best practices except two very powerful forces: inertia itself — the sheer force of habit — and fear of litigation.
To me, that suggests that, while we will see continued innovation led by pioneering, fearless plan sponsors and providers, if we want to fully realize the potential of a new generation of workplace savings, we will need some major new legislation to ratify best practices and help plan sponsors extend them across the whole workplace savings world.
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.
