We Need Industry Innovation Backed by Public Policy: Part 2 of 2

Here are just a few elements that should be at the heart of the next great step forward in retirement legislation: “The Workplace Savings and Lifetime Income Act of 20-something…” Hopefully, it will happen in 2010 or maybe 2011 — the sooner the better!

For starters, automatic workplace plan design should be made mandatory.

• Employers who go beyond that, by offering voluntary “matches” to workers’ savings should be rewarded with an outright tax credit. They are, after all, putting their money on the line to help to meet a national savings challenge.
• Caps on volatility and pure equity exposures should be considered, especially close to retirement.
• Absolute return strategies should be recognized as valid defaults and investment options.
• Congress should also enable workplace savers to get the advice and guidance they need.
• It seems fair to me to also insist that advisors and providers disclose their fees, investment risks, and responsibilities clearly and in plain English, without inundating participants with useless and irrelevant data.
• Workplace savers who choose to adopt lifetime income guarantees should receive additional tax breaks for choosing a more secure withdrawal strategy. Why?  Because converting life savings into lifelong income is even more challenging than accumulating a nest egg in the first place. Yet the decision to give up some control of assets is a hard one. It needs incenting. Perhaps the first $10,000 a year in protected income should be tax-free, with no bias between annuities and nonannuity products.
• To guard against irrational competition on income guarantees, we should create a new national insurance charter, a national insurance regulator, and an FDIC-like fund to back up lifetime income guarantees from insurers.
• Last, but definitely not least, employers who do the right thing for their workers by offering advice, guidance, and lifetime income options should be given legal safe harbor protection.

We know from very recent experience that once strong legal protection is offered, sponsors respond and uptake is rapid. Without legislation, change is glacial.

I am absolutely convinced that with these sorts of changes — led by private innovation, backed by wise policy, and ratified by law — we can create a 21st century workplace savings system that provides a reliable foundation to support our entire retirement system. That would be a huge step forward.

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.

Retirement Reform Speech