The need for assured income assets in 21st century retirement plans

In his keynote address to retirement industry leaders at the recent Pensions & Investments West Coast Defined Contribution Conference, Putnam Investments President and Chief Executive Officer Robert L. Reynolds emphasized the growing need for assured income assets in retirement savers’ portfolios.

As American workers live longer, and as income from traditional sources like pensions and Social Security shrinks, a mix of relative return, absolute return, and assured income strategies could respond to the risks of inflation, volatility, and longevity — the three major threats to retirement portfolios.

The following illustration shows, conceptually, the changing roles that asset management and insurance could play in an investor’s financial life.

lifetime allocation

This illustration is hypothetical and not indicative of any fund or product.

Prudence holds that there is a place for insurance even at a very young age, as well as for relative-return, market-benchmarked investments well into a person’s 90s. At Putnam, we believe there should also be a growing element of Absolute Return strategies in a person’s lifetime product allocation, and a substantial role for assured lifetime income to form a secure base in retirement.

We look forward to a constructive debate about the relative percentages of these elements in the retirement financing puzzle, which will require asset managers and insurers to work together with policymakers for the benefit of Americans. We hope that 2010 will be the year when retirement reform is enacted, finally enabling workplace savings plans to generate more dependable sources of lifetime income.

Consider these risks before investing: Asset allocation decisions may not always be correct and may adversely affect fund performance. The use of leverage through derivatives may magnify this risk. Leverage and derivatives carry other risks that may result in losses, including the effects of unexpected market shifts and/or the potential illiquidity of certain derivatives. International investments carry risks of volatile currencies, economies, and governments, and emerging-market securities can be illiquid. Bonds are affected by changes in interest rates, credit conditions, and inflation. As interest rates rise, prices of bonds fall. Long-term bonds are more sensitive to interest-rate risk than short-term bonds, while lower-rated bonds may offer higher yields in return for more risk. Unlike bonds, bond funds have ongoing fees and expenses. For the 500 Fund and 700 Fund these risks also apply: Stocks of small and/or midsize companies increase the risk of greater price fluctuations. REITs involve the risks of real estate investing, including declining property values. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. Additional risks are listed in the funds’ prospectus.