Policymakers should support increased use of products that
provide reliable lifetime income, such as lifetime income and
draw-down funds, guaranteed pay-out plans and annuities, according
to Robert L. Reynolds, president and chief executive officer of
Putnam Investments. To foster confidence in such products, Reynolds
called on Congress to create an optional national insurance charter
and a new Lifetime Income Security Agency empowered to approve
assured lifetime income products. The new agency also would
administer an industry-funded, risk-based national insurance fund
to protect current and future retirees, much like the bank deposit
insurance fund overseen by the Federal Deposit Insurance
Corporation.
In a speech at the Retirement Income Industry Association’s 2011
Spring Conference in Chicago today, Reynolds also warned that
budget-cutters in Washington might be tempted to target the
deferral of federal income taxes on contributions to
defined-contribution plans, such as 401(k) plans, individual
retirement accounts and variable annuities. Slashing or eliminating
these tax incentives, Reynolds noted, would reduce the motivation
to save at a time when many Americans already face a shortfall in
their retirement savings and lack confidence in their ability to
enjoy a secure retirement.
“As the oldest Baby Boomers reach the traditional retirement age
of 65, we need to go beyond helping Americans accumulate assets for
retirement to helping them draw those assets down to provide
reliable income throughout retirements that could last 20 to 30
years or more. It’s even more challenging to draw assets down
sustainably as it was to accumulate them in the first place,” said
Reynolds.
“There’s a new, very healthy wave of competition among asset
managers and insurers to serve retirees’ income needs,” Reynolds
explained. “If we could create a new agency to hold these products
to rigorous standards and back them with an industry-financed fund
like the FDIC, we could see a real surge in consumers’ confidence
and broad emergence of innovation from firms seeking to create
lifetime income solutions for working and retired Americans. We
need a partnership between private industry and public policy to
make that happen.”
Reynolds noted that sales of annuities, have been flat to
negative – falling from $218 billion in 2002 to $210 billion in
2010* – despite two market crashes that ought to make guaranteed
income more attractive. Multiple reasons account for that,
according to Reynolds, including costs, issues of transparency,
consumers’ reluctance to lose control of sizeable shares of their
life savings and concerns that a single provider might not be able
to deliver the full benefits promises for decades into the future.
A new federal agency to review lifetime income offering and back
them up with funded guarantees could address many of those fears,
he suggested.
The Lifetime Income Security Agency (LISA) that Reynolds
proposed would be empowered to approve, or, conversely, deny
approval to, the full range of guaranteed lifetime income products,
including annuities or non-annuity lifetime income funds. It also
would administer a risk-based national insurance pool, funded by
the industry itself, to ensure the safety of investor assets.
Insurers with top-tier credit scores and those which offer very
conservative annuity or draw-down plans would pay much lower fees
into the pool than those with lower scores or more aggressive
plans. The Lifetime Income Security Agency would be authorized to
disapprove products, and deny them coverage.
“Federal review and a risk-based assessment for lifetime income
offerings would help to curb the temptation that we have seen again
and again for lifetime income providers to make unsustainable
promises whose failure then further erodes consumer trust,” said
Reynolds. “The impact on confidence in lifetime income provision
could be as great as what the FDIC achieved after the banking
crises of the Great Depression, and would come at an equally
critical turning point in our history, the retirement of the Baby
Boomers.”
Possible Budget-Cutting Moves to Reduce Tax Incentive for
Retirement Savings
Reynolds also noted that several recent proposals in Washington
to reduce the federal budget deficit include limits on so-called
tax expenditures, such as the deferral of taxes on contributions to
many IRAs, 401(k) plans, variable annuities and other retirement
savings vehicles. Currently, savings in many of these accounts grow
tax-free until they are withdrawn at retirement, and then are taxed
at a rate that typically is lower than during the accountholder’s
working life. Some proposals under discussion would limit or
eliminate the deferral of taxes on contributions; this would
generate additional tax revenue now, according to Reynolds, but
could be a disincentive for individual savers or for businesses to
offer workplace savings plans. “It would be a terrible policy
mistake to curb federal profligacy by undermining incentives for
private saving. America needs to move to solvency not just for the
government, but at the household level, too,” he added.
“The tax reform law of 1986 severely restricted the tax benefits
of 401(k) plans and IRAs,” Reynolds continued. “With Baby Boomers
now in or approaching retirement, the stakes are much higher now
than they were 25 years ago. We have to get budget deficits under
control, but we have to do it the right way – by encouraging
savings that fuels investment, business formation and job creation.
In the long run, the only tolerable way to overcome our deficit
challenge is through economic growth – led by the private sector
and fueled by Americans’ own savings. Anything that undermines
personal and workspace savings also undermines those goals.
Congress should dismiss such ideas out of hand.”
Reynolds, a 30-year veteran of the retirement industry who
earlier this year was named among the most influential persons in
the 401(k) sector by a leading publication, has long been an
outspoken advocate for reforming and revitalizing the nation’s
public and private retirement systems. He previously has called for
universal adoption by workplace plans of auto-enrollment, savings
escalation and guidance to wise asset allocation, all of which were
authorized by the Pension Protection Act of 2006. He also has
called for extending the benefits of workplace savings to workers
who have no access to a job-based retirement plan through ideas
such as an Auto-IRA payroll deduction proposal, and has called on
Congress to adopt reforms to save Social Security.
Putnam Investments and Retirement
Since Reynolds, a 30-year veteran of the retirement savings
industry, became Putnam’s President and CEO in 2008, the company
has deepened its commitment to the retirement market and launched a
series of innovations and initiatives to meet emerging customer
needs. These retirement initiatives include a Lifetime IncomeSM
Analysis Tool for plan participants and new levels of fee
transparency disclosures designed to provide the clearest, most
complete overview of fees and expenses in the workplace savings
industry.
Putnam also has announced plans to launch a suite of
income-oriented mutual funds that aim to help advisors work with
retirees in developing strategies for monthly income flows, at
varying levels of risk tolerance, to flexibly address their
changing lifestyle financial needs throughout retirement. The
product suite, comprised of Putnam Retirement Income Fund Lifestyle
1, Putnam Retirement Income Fund Lifestyle 2, and Putnam Retirement
Income Fund Lifestyle 3, is expected to have broad applicability
for defined-contribution, IRA and other retirement assets. **
Putnam also has expanded the services it offers to 401(k)
retirement plans and has developed products to meet the needs of
those planning for or already in retirement. The firm has created a
platform that provides flexible and scalable services and solutions
for advisors, consultants and their plan sponsor clients in every
segment of the retirement market.
Putnam RetirementReady® Funds, the firm’s suite of 10
target-date/lifecycle retirement funds, were the first suite of
lifecycle funds to integrate Absolute Return Funds, which seek
positive returns over a period of three years with less volatility
than has been associated with traditional asset classes that have
earned similar rates of return. Employed in retirement portfolios,
Putnam Absolute Return Funds*** are intended to pursue positive
returns in up and down markets, to help protect against the harmful
effects of adverse investment returns and to seek to reduce
volatility.
About Putnam Investments
Founded in 1937, Putnam Investments is a leading global money
management firm with over 70 years of investment experience. The
firm was recently named one of the top 15 mutual fund families by
Barron’s/Lipper for the second consecutive year. At the end of
February 2011, Putnam had $125 billion in assets under management,
including mutual fund assets of $69 billion and institutional
assets of $56 billion. Putnam has offices in Boston, London,
Frankfurt, Amsterdam, Tokyo, Singapore and Sydney. For more
information, visit putnam.com.
Putnam mutual funds are distributed by Putnam Retail
Management.
* 2010 Annuity Fact Book prepared by the Insured Retirement
Institute
** A registration statement relating to this security has
been filed with the Securities and Exchange Commission but has not
yet become effective. This security may not be sold, nor may offers
to buy be accepted, prior to the time the registration statement
becomes effective.
The information in the prospectus (or Statement of Additional
Information) is not complete and may be changed. This security may
not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This is not an
offer to sell this security and is not a solicitation to buy this
security in any state where the offer or sale is not permitted. No
offer to buy the security can be accepted and no part of the
purchase price can be received until the registration statement has
become effective, and any such offer may be withdrawn or revoked,
without obligation or commitment of any kind, at any time prior to
notice of its acceptance given after the effective date.
***Putnam’s Absolute Return Funds are not intended to outperform
stocks and bonds during strong market rallies.
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