Putnam’s Reynolds Calls for ‘Assured Income’ in DC Plans

By recognizing these three essentials, Reynolds said, "we've nearly cracked the code" in the accumulation phase of retirement plans. The challenge now is creating lifetime retirement income from those accumulated assets. A number of unknowns, including market volatility, longevity, and sequence-of-returns risk (the influence of a down market's timing on how long a retiree's savings last), can lead to nest eggs being eroded way too early. 

Making a DC Plan More Like a DB Plan
There's no single solution to this challenge, Reynolds said, although annuities and annuity-like products are an obvious tool. Longevity insurance, for example, eases the pressure on finances later in life, allowing a policyholder to leave a larger estate. However, annuities' perceived cost and complexity limit their appeal, while insurers' financial woes have made consumers wary of handing over large sums to a single company. "Today," he noted, "households own as many annuities as they do goldfish." 

In the subsequent Q&A with attendees, Reynolds said that equities also play a role in helping retirees cope with inflation and political unpredictability, but Putnam recommends an allocation of no more than 20%. [This summer, the Putnam Institute released a study recommending that to minimize sequence-of-returns risk, retirees' equity allocation should be on the low side of 5% to 25%.] 

Reynolds advocated two reforms to better regulate the "multitrillion-dollar" assured-income market:

1. A national insurance charter. The 50 state charters that now apply are a big hurdle for any employer considering annuities as part of a retirement savings plan. 
2. A new regulatory body to vet assured income products. This national insurance pool–the "Lifetime Income Security Agency" (LISA)–would be funded with risk-based fees paid by insurance companies. Offered inside retirement plans, a LISA-approved product could provide confidence to participants that the insurer would keep its promises. 

Also, noting that deficit hawks are circling hungrily over the tax break for retirement plans, Reynolds urged financial advisors to "tell Congress to keep their hands off retirement savings," most of which are taxed at full rates when withdrawn. 

The need to create assured retirement income is "a tremendous challenge for our society, but an opportunity for our industry," he said. "We Americans, when we think our country is off track, we don't just worry. We fix things."

For more onsite reporting from the 2011 Retirement Income Symposium, please visit the RIS home page.