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Workplace Savings 3.0

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Strengthening today’s defined contribution plan to meet the retirement income needs of tomorrow

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Workplace Savings 3.0

  1. 1. Solving America’s Retirement Savings Challenge Robert L. Reynolds President and Chief Executive Officer Putnam Investments
  2. 2. What is driving America’s retirement savings challenge? • We live longer • While programmed lifetime income sources decline • Responsibility for investment and lifetime income has shifted to individuals 1
  3. 3. Absent reform, entitlements will dominate federal budgets Entitlements as percent of GDP 20 Average tax revenue 15 18% as percent of GDP Medicare 10 Medicaid 5 Social Security 0 2005 2015 2025 2035 2045 Sources: GAO’s Sept. 2004 baseline extended analysis; Bruce Bartlett, Tax Reform Agenda for the 109th Congress 15 (2004). 2
  4. 4. Social Security replacement rates will decline Average replacement rate of pre-retirement income from Social Security 38.7% 29.4% 2004 2030 For earners retiring at age 65. After Medicare Part B deduction (2030 includes higher normal retirement age). Sources: Alicia H. Munnell; 2004. “A Bird’s Eye View of the Social Security Debate;” Center for Retirement Research at Boston College. 3
  5. 5. The first generation: Workplace Savings 1.0 1982–2006: 401(k) becomes America’s plan of choice • Purely voluntary for sponsors and participants • Multiple choices • Heavily dependent on communication and education • Continuous improvement in features and service 4
  6. 6. Workplace Savings 1.0 While competition kept workplace fund fees down Mutual fund expense ratios Stock funds Bond funds Money market funds 1.54 1.46 1.13 1.09 0.64 0.62 Industry average 0.90 0.51 0.98 0.47 0.72 0.86 0.67 0.39 0.40 0.78 0.74 0.60 Industry average (asset weighted) 401(k) average (asset weighted) 1997 2007 1997 2007 1997 2007 The industry average expense ratio is a simple average of all mutual funds, and is not asset-weighted. Source: “The Economics of Providing 401(k) Plans: Services, Fees, Expenses, 2007,” ICI Research Fundamentals, December 2008. 5
  7. 7. Workplace Savings 1.0 As Defined Contribution became America’s plan of choice American workers covered (Millions) 75 DC plans 56 DB plans 43 33 36 30 29 19 26 24 22 20 1980 1985 1990 1995 2000 2008 Sources: EBRI, ICI, Bernstein Research, Empirical Research Partners, Bureau of Labor Statistics, 2008; and American Benefits Council, 2/24/2009. 6
  8. 8. Workplace Savings 1.0 But hit a ceiling on participation and savings rates Participation rates Deferral rates (% of eligible workers) (% of salary) 69.9 64.7 7.5 7.5 63.4 63.1 7.4 7.1 6.6 56.9 1988 1993 1998 2003 2006 1988 1993 1998 2003 2006 Sources: Standard & Poor’s, DALBAR, Bureau of Labor Statistics, EBRI, National Center for Health Statistics, FMR, 2007, 2008. 7
  9. 9. Workplace Savings 1.0 The key lesson: Inertia, defaults, and design determine results 99.98% Organ donor consent rates 12.0% Germany Austria Source: sciencemag.org, Vol. 302, November 21, 2003. 8
  10. 10. Workplace Savings 2.0: The PPA “nudge” 2006: The Pension Protection Act offers a “nudge” 9
  11. 11. Workplace Savings 2.0 The Pension Protection Act passes in 2006 • Enabled auto enrollment and savings escalation • Endorsed defined lifecycle/ balanced default options • Provided legal safe harbor for employers 10
  12. 12. Workplace Savings 2.0 And PPA drove rapid change DC plans adopting DC plans offering Auto-enrolled auto enrollment target date funds employees who stayed in plan 2004 2007 2004 2007 2008 58% 36% 90% 11% 12% Sources: Investment Company Institute, Center for Retirement Research, Profit Sharing/401k Council of America, 2008. 11
  13. 13. Workplace Savings 2.0 But 2008 brought a once-in-a-lifetime shock 1-year stock market declines greater than 25% 1931 1937 1974 2008 -26% -35% -37% -43% Sources: Putnam, 2008. Source: S&P 500 Index, 12/31/08. 12
  14. 14. Workplace Savings 2.0 Many near-term lifecycle funds now appear risky Equity allocation for the top 2010 lifecycle funds 63.1% 59.2% 58.1% 57.0% 55.7% 55.0% 53.8% 53.0% Industry average 47.2% 38.2% 28.0% A B C D E F G H I Putnam Fund families Source: Strategic Insight Simfund, February 2009. 13
  15. 15. Workplace Savings Strengthening today’s defined contribution plan to meet the retirement income needs of tomorrow 14
  16. 16. Workplace Savings 3.0 Next generation plan design • Build on PPA’s base of auto-enrollment, escalation, and defaults • Include much stronger protection against volatility • Built-in options for guaranteed lifetime income • Provide advice and guidance for all participants • Full, transparent disclosure of fees, risks, and responsibilities • Provide legal safe harbor for employers who do the right thing 15
  17. 17. Workplace Savings 3.0 Consistent returns vs. market volatility Treasury $100,000 bills + 5% initial investment $163,125 12/31/98 -37% Stocks $87,004 -38% It can take years to recover It took stock investors How long will it from a market setback. about 3.5 years to recover take this time? from the last bear market. 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 This example of hypothetically consistent returns is for illustrative purposes only. It does not reflect the performance of any Putnam fund, which will fluctuate. The returns above Treasury bills are achieved over consecutive three-year periods starting December 31, 1998, and rolling monthly. Treasury bills are represented by the Merrill Lynch U.S.Treasury Bill Index. Stocks are represented by the S&P 500 Index. You cannot invest directly in an index. Past performance is not indicative of future results. 16
  18. 18. Workplace Savings 3.0 The growing programmed income “gap” Today In 20 years Investment Investment income income The Work “Gap” Work income income Social Security Traditional Social Traditional pension Security pension Guaranteed income Other retirement income 17
  19. 19. Workplace Savings 3.0 Guaranteed income could protect against catastrophic losses 30 years of withdrawals from a $1M retirement portfolio $2,378,771 $2,378,771 Best-case income $1,352,090 Worst-case income $640,390 $524,889 Median final $238,186 account value No guarantee 50% guaranteed Based on 5% annual withdrawals inflated each year by 3%. 18
  20. 20. Workplace Savings 3.0 We need industry innovation backed by public policy Industry innovation Workplace Savings 3.0 Policy support 19
  21. 21. Extend workplace savings to all Americans 75 million Americans have no workplace retirement plan Office of Management and Budget, “A New Era of Responsibility: Renewing America’s Promise,” 2009. 20
  22. 22. Solving America’s Retirement Savings Challenge Robert L. Reynolds President and Chief Executive Officer Putnam Investments
  23. 23. The opinions expressed today are those of Robert L. Reynolds, President and Chief Executive Officer, Putnam Investments. Mr. Reynolds is affiliated with Putnam Retail Management. Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus containing this and other information for any Putnam fund or product, call your financial representative or call Putnam at 1-800-225-1581. Please read the prospectus carefully before investing. 22

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