1. The U.S. Retirement System: Challenges and Solutions
Robert L. Reynolds President and CEO Putnam Investments and Great-West Financial
The U.S. Retirement System: Challenges and Solutions
The International Pension Conference of Montreal
June 9, 2014

2. Over the past 50 years, U.S. legislation has created a host of tax-advantaged vehicles for retirement savings…
Selected major U.S. retirement legislation
1962
Self-Employed Individuals Tax Retirement Act — Keogh plans
1974
The Employee Retirement Income Security Act (ERISA) — IRAs
1978
The Revenue Act of 1978 — 401(k) plans and SEPs
1997
The Taxpayer Relief Act — Roth IRA
2006
Pension Protection Act (PPA) — Auto-features and QDIAs in DC plans
As with the employer-based health-care system in the U.S., the American retirement system has grown up almost piecemeal – with multiple personal retirement savings vehicles being created by Congress over the years – Keogh plans, Individual Retirement Accounts, 401(k) plans, Roth IRA’s and several others. All of these offer tax benefits of some sorts (typically deferral of taxes on contributions and/or earnings) for money saved for retirement.
Many of these programs were initially conceived as supplementary savings vehicles…but with the continued shift away from Defined Benefit programs, these vehicles have often become the primary savings programs for many employees.
The most significant piece of legislation to recognize this shift – and treat 401(k)’s and other workplace savings plans in a systemic way was the Pension Protection Act of 2006 – or PPA -- and I’ll be coming that to that legislation shortly. Suffice for now to say that the PPA was a good beginning in dramatically improving the potential outcomes for U.S. workplace savers.
Source: ICI (excluding annuities, except those in other retirement plans).

3. Combined OASI and DI contributions vs. S&P 500 (1970–2014)
…creating a “hybrid” system that combines revenue from Social Security payroll taxes plus earnings from investments in workplace savings plans
Combined OASI and DI contributions vs. S&P 500 (1970–2014)
($ Millions)
Index value
Sources: S&P 500 data from Yahoo Finance; and OASI and DI data from the Annual Statistical Supplement, 2013.

4. In private workplace savings, the rise of defined contribution plans has shifted responsibility from institutions to individuals…
Percent of retirement assets, 1975–2012
As this graph shows, we have moved since the 1970’s from a retirement system in which the bulk of assets were held in Defined Benefit structures to one where most people must take responsibility for their own retirement savings through Defined Contribution programs. This trend gathered speed through the later years of the last century and crossed a tipping point around the new millennium – as DC plans came to hold the majority of all U.S. retirement assets. The trend continues unabated today.
The private sector was the initial driver here – because of concerns that guaranteed pension liabilities often put well established companies at risk of survival over time. Further, as the U.S. workforce became more mobile, the DB pension model made less sense for more and more employees.
The shift has been significantly slower in the public sector due to the entrenched influence of public unions. Even here, though, the fiscal realities of underfunded liabilities – estimated in the range of $2-4 trillion -- is leading to pressures for change in many states and localities.
Source: ICI (excluding annuities, except those in other retirement plans).

5. …and with the passage of the Pension Protection Act of 2006, workplace plan design has come to the forefront…
Enabled auto-enrollment and savings escalation
Endorsed defined lifecycle/balanced default options
Provided legal safe harbor for employers
Usage of key PPA-endorsed features
The key changes that the PPA permitted – and encouraged – were the use of “automatic” enrollment, automatic savings escalation, and guidance to qualified default investment options – notably balanced funds or lifecycle funds.
Taken together, as a package, the adoption of these core “auto-features” has the potential to dramatically improve participation, savings rates, asset allocation and outcomes within any given plan…far more than traditional communications and education efforts ever could.
These “best practices” had already existed in some of the most far-sighted and paternalistic companies’ plans – but the passage of the PPA was critical – because it gave them an explicit blessing – and more importantly offered plan sponsors who adopted these plan designs “safe harbor” from litigation…
In effect, PPA took these cutting-edge ideas from behavioral science research – and brought them into the mainstream -- virtually overnight.
The result was one of the most rapid “up-takes” of policy guidance by private industry – ever – as these best practices spread across corporate America – driven by industry leaders.
Source: Profit Sharing/401k Council of America.

6. …and will help total U.S. retirement assets grow from $19T to $25T by 2018 — with IRAs and DC outpacing DB
U.S. retirement market assets
($B)
$25.2T
CAGR
5.8%
$18.9T
4.0%
3.7%
Taken together, the various components of the US retirement “system” represent an already massive – and growing – multi-trillion dollar opportunity for asset gathering.
The overall market is expected to continue to grow from nearly $18 trillion US in 2012 to nearly $24 trillion by 2017 – with some of the fastest growth coming in the so-called “rollover” space – as Baby Boomers retires at a rate of roughly 10,000 a day – and many of them “roll over” assets from their workplace plans into Individual Retirement Accounts.
As the shift from DB to DC would suggest, strong growth rates are anticipated for private DC assets as well…but even while losing market share, DB assets, too will continue to rise.
All in, this market presents one of the greatest growth opportunities for asset managers on earth.
5.4%
$14,297
$10,041
8.6%
Sources: Department of Labor, ICI, U.S. Census Bureau, Federal Reserve, PBGC, EBRI, Cerulli Associates, Empirical Research Partners, Putnam Analysis.
Private DC includes 401(k)s, money purchase plans, profit sharing plans, Keoghs, and Taft-Hartley DC plans. Public DC includes Federal Thrift Savings plans, 403(b) and 457 plans.

7. Real solutions in workplace savings are right at hand
Replacement percentages of pre-retirement income
Average household replacement score
61%
No access to workplace plan
Active in DC plan
Automatically enrolled in plan
Has auto escalation
Deferring 10%+
Sources: Putnam’s Lifetime Income Study, 2014; and U.S. Census data estimates (2012 Statistical Abstract, Table 690: Money Income of Households).

8. What we believe
The DC system will be the primary source of retirement income for most U.S. families
We must also find ways to secure access to workplace savings for all
Better outcomes can be achieved — indeed, are being achieved — through automatic plan design and income-oriented guidance for participants
Apart from participation, the most powerful driver of success is raising savings rates — to 10%+ of their earnings