The goal, as we see it, is to strengthen defined contribution plans and enable them to meet the retirement needs of future generations. To paraphrase Bill Clinton, “Let’s mend them, not end them.” Just as the PPA marked a qualitative change from first generation DC plans, especially by endorsing much better design for the accumulation phase, version 3.0 of workplace savings needs to finish the job that PPA started and extend better design ideas through the distribution phase as well.
Our goals should be to lower volatility, shield participants against even severe market events, and offer them support in securing reliable lifetime incomes, which is, let me say it again, the defining measure of any well-designed retirement system.
So for starters, we would like to see the auto-plan features of PPA made mandatory. The debate is over here. Auto-enrollment, savings escalation, and qualified defaults all work. They clearly improve most participants’ results, just as seat belts and air bags save lives. These auto-plan features should be mandatory elements of 401(k) plan design, though participants should retain the freedom to opt out.
Next generation plan design should include much stronger protection against market volatility, notably as employees draw close to retirement age. We have just seen how unbounded competition can lead to excessive risk in life-cycle products. One way to avoid that would be to limit, or “cap,” the share of pure equity in the mature phase of life-cycle funds, say in the ten years prior to and beyond target retirement dates. The retirement “red zone” concept that Prudential often speaks of makes a lot of sense here.
At Putnam, we believe workplace plans should also make use of absolute return strategies as a new category of qualified defaults and as investment options. There is no guarantee that absolute return funds and strategies will achieve the positive results they aim for, but think about this: Relative-return funds or strategies, which track closely with their benchmarks, are virtually guaranteed to lose value when the markets they track plummet. Absolute return strategies have at least the possibility of earning positive returns, no matter what markets do. We believe these strategies will earn a central role in retirement portfolios and serve to dampen workplace plans’ volatility.
It is also time to build lifetime income options — in the form of annuities or other insured non-annuity income streams — directly into workplace plans. Guaranteed income options can offer significant protection, especially in worst-case markets, as we will see. And we can, I believe, find ways to encourage participants to choose them.
All plans should also offer participants access to advice and guidance. And fees, risks, and responsibilities should be even more clearly disclosed than they already are.
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.
