Rethinking retirement

Excerpted from remarks delivered by Robert L. Reynolds, President and CEO, Putnam Investments, to the U.S. Chamber of Commerce/AARP Conference, Rethinking Retirement: Moving Ahead Without Leaving Anyone Behind.

We all want every working American to be able to save for a dignified, well-financed retirement. I trust we also all agree that it is in the interest of every American business to see every worker have a real ownership stake in the American enterprise. I am confident that these two goals can be achieved — in tandem — by strengthening both the public and private elements of our nation’s retirement system.

We all know that there is a serious risk of rising elderly poverty if we don’t act soon to shore up our public and private retirement systems and lift Americans’ savings rates.

But the most salient point I want to make today is that we are actually closer to significantly improving the system than most people realize.

401kIn the workplace savings arena, at least, we actually know what works. My greatest hope for this conference would be that we could begin today to reframe the national debate about retirement savings — away from problems and toward solutions — and then on to action to make those solutions real.

We can build on successes — successes that are already taking place within America’s existing defined contribution savings system.

Workplace savings as a “system”

To put it in a nutshell: We can fix whatever is not working with 401(k)s by using what is working well with 401(k)s. That’s especially true since the passage of the Pension Protection Act of 2006 (PPA).

By endorsing the best savings plan design elements — namely auto-enrollment, re-enrollment, automatic savings escalation, qualified default investments — PPA marked a qualitative change — one that has already begun to transform all workplace savings plans for the better. Pre-PPA, workplace savings plans were seen mainly as just “supplements” to Social Security and defined benefit plans. Post-PPA, the wave of change among 401(k) plans across corporate America has begun to create a framework resembling a true national retirement system, though the build-out is far from finished.

In the seven years since PPA was signed into law, we’ve seen best practices like auto-enrollment spread across most large American corporations and raise the retirement readiness of millions of workers.

The policy implications of Putnam’s Lifetime Income Survey

We can see the positive benefits clearly — as well as the continuing shortfalls — in the Lifetime Income Surveys (LIS) that Putnam has done over the past three years in collaboration with Brightwork Partners. These surveys take stock of the total assets of more than 4,000 working Americans aged 18 to 65, weighted to match U.S. census parameters.

Overall, we estimate that working Americans may be able to replace roughly 61% of the income they enjoy during their working careers. That confirms the future risk — for millions — of a serious drop in living standards in retirement, even when we include Social Security.

But what is most important, and positive, about the survey’s findings is the powerful evidence they provide about what is working well in American retirement savings today, under current law and through current workplace savings plans.

The only road to readiness runs through the workplace

First and foremost, we need to recognize that the only real solution to America’s retirement savings challenge lies in payroll deduction plans at the workplace. The difference in retirement readiness between Americans who have access to workplace savings plan and those who do not is staggering.

Our lifetime income research shows us that, at the median, Americans who have no savings plans on the job may be able to replace just 41% of their work-life incomes once they retire, and remember, that’s including Social Security.

Americans who do have access to savings plans at work may be able to replace 73% of their pre-retirement incomes. Workers who are active in defined contribution plans could replace 79% of their work-life income. Those who are automatically enrolled in their plans could do even better — tracking towards 91% income replacement. Those who enrolled in auto-escalation are headed to 95% replacement rates.

Perhaps most strikingly, those who defer at rates of 10% or more are estimated to replace fully 106% of their working income once they choose to retire.

That’s success by any measure. And we’re not talking about some tiny, outlying exception here. We estimate that nearly 23 million individual retirement savers could be on track to replace more than 100% of current income in retirement and they come from all income classes, not just the well-to-do.

Three steps from here to retirement readiness

Here are three highly impactful steps that would take us from here to retirement readiness.

  • First, let’s aim to make the best practices endorsed by the Pension Protection Act of 2006 the new norm for all workplace savings plans. Let’s go “full-auto”: auto-enrollment, re-enrollment annually, auto escalation to higher deferrals, and automatic qualified target date or balanced funds, and protection from litigation, for every workplace savings plan in America. There really is no reasonable doubt left that these basic structural elements do raise participation, deferrals, account balances, and the likelihood of retirement readiness. Knowing that, I feel like a medical doctor who has discovered a vaccine that can prevent a serious illness, in this case, financial stress and elderly poverty. That’s why I’d like to see these auto-features be made mandatory for all workplace savings.
  • The second big step toward boosting this country’s retirement readiness is to extend some form of workplace savings access to all working Americans. Many of the ideas proposed so far to do this, such as the auto-IRA concept or proposals for simplified 401(k)s, would actually be quite inexpensive for companies to implement. Of course, if we did require companies to offer savings plans, they should also be generously compensated through the tax code and protected from liability through safe harbors.
  • The third action step we need to take is to lift the bar on savings rates across the workplace savings system from the roughly 7% level we’ve achieved today to a new baseline of 10%-Plus. There is no more powerful driver of retirement success than deferral rates and I feel a fiduciary duty to call for 10%-Plus as the new industry baseline. We really don’t serve anyone well by allowing them to believe that saving 3%, or 5%, or even 7% is enough to ensure retirement readiness.

In conclusion

I know these three steps to retirement readiness are easy to say but tough to do. Securing savings access for all will surely require new legislation. But if we are serious about rethinking retirement and leaving no one behind, these are the most powerful three steps we could take. With them, I believe we can create a workplace savings system in America that makes success easy and failure hard. We can inoculate generations to come against the risk of elderly poverty. And that, it seems to me, is a goal worth fighting for.

IMPORTANT:  The projections, or other information generated by the Lifetime Income Analysis Tool regarding the likelihood of various investment outcomes, are hypothetical in nature. They do not reflect actual investment results and are not guarantees of future results. The results may vary with each use and over time. The analyses present the likelihood of various investment outcomes if certain investment strategies or styles are undertaken, thereby serving as an additional resource to investors in the evaluation of the potential risks and returns of investment choices. 

Each simulation takes into account the participant’s current plan balance and investment mix, as well as his or her age, income, retirement date, contribution rate, likely future savings, and estimated Social Security benefit. The tool runs over 50 billion market simulations to provide an estimate of a monthly income likely to be generated at retirement. The Lifetime Income Analysis Tool is an interactive investment tool designed for Putnam 401(k) participants to illustrate the estimated impact of a participant’s plan balances and projected savings on income in retirement. The tool takes into account both before-tax and after-tax accumulated balances and future regularly scheduled contributions for estimated projections. It cannot account for dramatic changes in a participant’s personal situation, including unexpected expenses and other financial situations that may negatively affect one’s estimated monthly income in retirement. You are advised to consider your other assets, income, investment options, investment time horizon, income tax bracket, and risk tolerance when planning for specific investment goals. It is recommended that you consult a financial advisor for more information. It is important to note that the results from this tool are estimates based on what you input today. The results are not a guarantee of actual outcomes and will change as your inputs change.

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