Innovating to sustain America’s

workplace savings system

Robert L. Reynolds This conference has a great theme: “sustainable innovation.” I say that because even
President and though “sustainable innovation” may sound like a contradiction in terms, it precisely
Chief Executive Officer
captures the challenge that we face — as a nation. We do need bold innovation in
Putnam Investments
national policy if we want to sustain America’s promise of a better future. We do have
Edited from a speech to stop an unsustainable drift toward fiscal crisis and national decline.
given to the Tower Group My talk this morning — about innovation in workplace savings — actually goes to
Annual Conference on
the heart of this debate about national solvency. Because innovations in retirement
Sustainable Innovation
policy — especially strengthening workplace savings — can help drive a transition that
in Financial Services,
our country absolutely has to make. We must move away from old patterns of debt,
Boston, Massachusetts,
on April 14, 2011 leverage, and debt-fueled consumption, and toward a new economic model centered
on higher saving, investment, new business formation, and job creation: a solvent
America that can compete, win, and grow in tough global markets. That’s our challenge.
Here’s what drives it.

America is aging. Life expectancy is rising. Baby boomers are turning age 65 at the
rate of about 7,000 per day. Over the next 20 years, the number of Americans over 65
will nearly double — from 40 million to 72 million. That’s more than the population of all
but a handful of U.N. member nations.

This demographic shift is straining public and private retirement systems across the
nation. And unless Social Security, Medicare, and Medicaid are substantially reformed,
these three entitlement programs are projected to account for as much as 18% of U.S.
gross domestic product by 2045 — a level comparable to the average of the entire federal
budget since World War II. At this level of GDP, the government would have to enact
massive tax increases to pay for education, infrastructure, the military, or anything else.

Entitlements as percent of GDP

(%) 20

15 Average total

18% tax revenue as

percent of GDP
Medicare

10
Medicaid

5 Social Security

0
2005 2015 2025 2035 2045

Sources: GAO Sept. 2004 baseline extended analysis; Bruce Bartlett, Tax Reform Agenda for the 109th
Congress 15 (2004). More recent data not available at the time of this presentation.

Future retirees will have
to save more while they
work, and then master the
art of turning lifelong
savings into lifetime
income. That’s a task that
is both trickier and riskier
than building up a nest
egg in the first place.
2 than the percentage saying they were “confident.”
Clearly, we are on an unsustainable course. And yet, even as growing entitlement
spending threatens the country’s fiscal solvency, Social Security replacement rates are
declining. In 2004, Social Security replaced, on average, nearly 39% of a retiree’s pre-
retirement income. However, by 2030, as a result of rising eligibility ages and increased
deductions for Medicare costs, this figure is projected to decline to about 29%. Moreover,
every serious Social Security reform proposal would limit the growth of benefits — at least
for more affluent retirees — and raise eligibility ages for most workers. Consequently, a
declining Social Security replacement rate may be more severe, especially for the well-off.
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.
A growing assured income gap
Today’s retirees draw nearly two thirds of their total income from Social Security, defined
benefit plans, or both. However, in the future, these income sources will play a much smaller
role for private-sector retirees, and possibly also for public-sector retirees. Future retirees
must save more during their working years and then convert these savings into lifetime
income — a task that is both trickier and riskier than building a nest egg in the first place.
Leading to a growing “gap” in assured retirement income
TODAY IN 20 YEARS
Investment Investment
income income
THE
Work Work GAP
income income
Social
Security
Traditional Social
Traditional pension Security
pension
Guaranteed income
Other retirement income
For illustrative purposes only.
Against this backdrop, it is not surprising that retirement confidence — as measured by
the Employee Benefits Research Institute (EBRI) — hit a new low in March 2011. For the
first time since EBRI began compiling retirement confidence data, the percentage of
respondents indicating they were “not confident” about their retirement was higher

PPA endorsed three game-
changing elements of
workplace savings-plan
design: automatic enrollment,
savings escalation, and asset
allocation guidance.
What’s more, roughly 75 million Americans — more than 40% of the total labor force —
work for employers that do not offer any type of payroll-deduction savings plan.
Defined-contribution plans are a strong base to build on
We have a strong defined-contribution (DC) workplace saving system that currently
reaches more than 83 million workers — a number that continues to grow. And there
are 40 million workers covered by defined-benefit plans. However, that number is not
growing. This suggests to me that if we can strengthen the DC system and extend its
reach, we can take huge strides toward meeting the challenge of retirement finance. And
there is every reason to believe that we can strengthen and extend the DC savings system.
American workers covered by DC plans
100
83
75 DC plans
75
62
(Millions)
48
50 38 35 38 DB plans
40 42 42 42
40 39
25
20
0
1980 1985 1990 1995 2000 2005 2008
Sources: Private Pension Plan Bulletin, Abstract of 2008 Form 5500 Reports, U.S. Department of Labor,
December 2010. Collective Bargaining Status of Pension Plans, Total Participants by Type of Plan.
Defined contribution plans have continued to evolve
The DC system has been changing and evolving for over 30 years. Ever since the first
generation of 401(k) plans emerged in the 1980s — what I refer to as “Workplace
Savings 1.0” — we’ve seen innovations such as loan options, daily valuation, multiple
investment choices, lifecycle funds, and dozens of others. And with the passage of the
Pension Protection Act of 2006 (PPA), we took a giant step toward making the 401(k)
plan — and DC plans generally — America’s primary retirement system. PPA endorsed
three game-changing elements of workplace savings-plan design: automatic enroll-
ment, savings escalation, and asset allocation guidance. What’s more, PPA gave plan
sponsors adopting these elements strong legal protection against litigation.
As a group, these core elements of plan design marked a qualitative shift, which is why I refer
to the post-PPA era as “Workplace Savings 2.0.” Today, the evidence of these policy innova-
tions is clear: we have essentially solved the challenge of retirement accumulation.
Recent research shows that young workers should be able to replace between 40%
and 60% of their pre-retirement incomes provided that their DC plans enroll them
automatically, increase their savings from about 6% to 10%, and guide them to age-
appropriate asset allocations, mostly through lifecycle funds. And this is before
counting Social Security, other savings, home equity, life insurance, or any other
assets these workers may have. In other words, these post-PPA auto-enrollment
plans really get the accumulation job done — provided employees start with a
deferral of at least 6% and escalate from that level.
3

I have always believed that the
best test of any retirement
system is the extent to which
it succeeds in replacing the
income employees made
while working, and sustaining
that income for life.
4 We believe deeply in the potential of the DC system. But we also believe that when
As plan sponsors increasingly adopt this approach, millions more workers are being put
on the right course. Accordingly, the DC industry is being revitalized, with total assets
projected to reach $5.5 trillion by 2015. There is no question, though, that the stock
market crash of 2008–2009 was a serious shock to the system.
The impact of the 2008–2009 market crash
As one of the four worst equity-market declines of the past century, the 2008–2009
crash was a true “black swan” event. Many other asset classes also declined precipi-
tously in a rare, highly correlated slump.
The 2008–2009 crash inflicted a real shock
1-year stock market declines
greater than 25%
1931 1937 1974 2008
-26%
-35% -37%
-43%
Source: S&P 500 Index. Past performance is not indicative of future results.
The crash occurred just as the oldest baby boomers, who were the first demographic
group to spend a substantial part of their careers contributing to DC plans, were on the
cusp of retirement. The good news is that DC savers who didn’t panic by selling and
locking in their losses have seen their accounts largely recover, due to the powerful
market rally that began in March 2009.
However, this systemic “stress test” disclosed serious issues, forcing DC providers
and policymakers to come up with innovative solutions. Market volatility was truly
unnerving, particularly in light of the fact that this period followed several years of
relative calm. In fact, complacency brought on by this calm may be why some lifecycle
funds with target dates as close as 2010 had equity allocations exceeding 60%. Some
of these funds were simply crushed in the market decline, setting off a wave of
government investigations and press criticism.
During the crisis, some members of Congress, the media, and regulators spotlighted
supposedly high or hidden fees in workplace plans, and in some cases, they were right.
Other, more-thoughtful policymakers wanted to shift the focus from asset totals and
allocations to the potential lifetime incomes that DC plans could generate.
At the same time, “retirement readiness,” or plan sponsors focusing on ways to help
participants retire successfully, became the new industry standard. In my view, this
emphasis was long overdue. I have always believed that the best test of any retirement
system is the extent to which it succeeds in replacing the income employees made
while working, and sustaining that income for life.
Some in the retirement services industry reacted defensively to these challenges,
or simply denied that changes were needed. That was not our approach at Putnam.
 experience discloses real flaws, those of us who have faith in DC’s potential should be
the first to respond to legitimate criticism and find effective solutions. That’s what we
have been doing at Putnam during the past two years.

Innovation on several fronts

While many lifecycle funds were, in fact, too risky, Putnam’s lifecycle funds were among
the most conservatively allocated in the industry — even before the crash. Our lifecycle
fund’s equity exposure at its target date was 28%, which was nearly 20 percentage
points below the industry average of 47.2% and way below the allocations of those firms
that chose to compete by taking on more risk. Consequently, when the crisis hit, we did
not need to ratchet down our equity exposure, as many competitors did and have been
doing ever since. But we did innovate to address investors’ concerns about volatility.

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. Most recent data available.

In December 2008, we launched the industry’s first full suite of Absolute Return funds
with specific return targets. These funds aim to deliver 1%, 3%, 5%, and 7% over Treasury
bills, net of fees, on a rolling three-year basis, regardless of what the markets do. There
are no guarantees, but I’m pleased to say that all four of our Absolute Return funds have
delivered positive results with lower-than-market volatility. The funds’ managers are
empowered to use a wide variety of strategies and tactics to pursue their return targets
and constrain volatility.

Innovation to address volatility: Putnam’s Absolute Return Fund Suite

In my view, every investor

should have some portion of
his or her retirement portfolio
in the hands of managers who
are paid to deliver positive
results and can’t cite down
markets as an excuse.

We have had a great response from the marketplace, with sales to date of more than
$3 billion through more than 10,000 advisors. Our suite of Absolute Return strategies
offers advisors and investors a whole new dimension of diversification across investment
5
Putnam’s view is that plan
sponsors and participants have
a right to see, and providers
have an obligation to show, all
fees and expenses with their
plans. Period.
6
philosophies as well as asset classes. In my view, every investor should have some
portion of his or her retirement portfolio in the hands of managers who are paid to
deliver positive results and can’t cite down markets as an excuse.
Being sufficiently confident of the benefits that may result from seeking to lower
volatility, we made another innovation: integrating Absolute Return strategies into
the lifecycle fund that serves as the default choice in Putnam’s own 401(k) plan.
As for the issue of fees and fee disclosure, we believe sunlight is the best disinfectant.
Putnam’s view is that plan sponsors and participants have a right to see, and providers
have an obligation to show, all fees and expenses with their plans. Period. So, we’ve
made an industry-leading commitment to full and clear fee disclosure. We have nothing
to hide and a great deal of trust to gain.
Full, clear disclosure to plan sponsors and participants
PLAN SPONSOR PARTICIPANT
Putnam has also adopted a unique “income view” for participants in the DC plans we serve.
After all, the goal of DC plans is income during retirement, and most people think of income
as a monthly figure. So today in Putnam DC plans, rather than first seeing the dollar total of
their retirement holdings and maybe an asset-allocation pie chart, participants see an esti-
mate of the monthly income they are likely to need in retirement, expressed in current
dollars. They also see a projection of how much future income they will have based on their
current contribution rate, asset allocation, future investment returns, and projected retire-
ment age. By punching a few keys, they can factor in estimated Social Security income, as
well as income from other assets outside of their DC plan.
Putnam’s Lifetime Income
Analysis Tool
•Intuitive, user-friendly focus
on income
•Drives changed behavior — notably
higher deferrals
•Creates something unprecedented:
“impulse saving”

I completely agree that the
federal deficit is a true national
security issue. We must bring it
under control. We need to get
the U.S. economy growing
faster than our debts or we will
wreck the America we have
inherited. But whatever we do
to curb the deficit, we should
never reduce incentives for
personal or workplace savings.
Personal and workplace savings
are an essential element to
restoring America’s long-term
solvency because true solvency
includes strong household
balance sheets as well as a
sustainable federal budget.
Every dollar of retirement
savings is one less dollar that
will be asked for from the
government in the future.
If participants see a gap between what the tool projects they will need, and the amount
of income their savings will produce, they can move sliders for “retirement date,”
“deferral rate,” and “allocations” to see how changes in one or more of these might help
to close the gap. With two clicks of the mouse, any changes participants make will be
effective as of their next pay period.
Our initial experience with this Lifetime Income Analysis Tool shows something that few
of us in retirement services ever expected to see: impulse savings.
Threat to workplace savings from deficit reduction and tax reform
I’ve outlined several good examples of innovations that improve and sustain DC plans.
However, as I mentioned earlier, we face a potential new risk from well-intentioned but
poorly conceived efforts in Washington to cut the federal deficit and simplify our outra-
geously complex tax code.
To understand this risk, you need to view savings incentives through the bizarre lens
through which many deficit “hawks” see the world. From their perspective, the tempo-
rary tax forgiveness retirement savers get from putting money in an IRA, 401(k) plan, or
a variable annuity are “tax expenditures.” They have no way of measuring any dynamic
benefit that savings may bring. As a result, it is not surprising that both of the recent
deficit commissions proposed capping saving incentives. One of the commissions
initially proposed sweeping away all savings incentives, then settled for a suggested
cap of $20,000 per year or 20% of salary, whichever is greater.
This proposal might not seem terribly menacing. But, once savings-related tax breaks
are on the table, they are in play and the temptation to cut into them deeply is great. If
you believe this risk is small or remote, let me remind you what happened during the last
major overhaul of the tax code, which occurred in 1986. Under that legislation, ceilings
for 401(k) contributions were severely slashed and so many conditions were placed on
IRAs that IRA sales were stymied for years.
The top-three “tax expenditures” from the viewpoint of Washington deficit hawks are
workplace health plans, home mortgage-interest deductions, and retirement savings,
and any or all of these are possible targets for capping or elimination.
Let me be clear on this point. I completely agree that the federal deficit is a true national
security issue. We must bring it under control. We need to get the U.S. economy growing
faster than our debts or we will wreck the America we have inherited. But whatever we
do to curb the deficit, we should never reduce incentives for personal or workplace
savings. It would be a terrible policy mistake to try to restrain government profligacy by
undercutting incentives for individuals and families to secure their own retirements.
All “tax expenditures” are not created equal. Personal and workplace savings are an
essential element to restoring America’s long-term solvency because true solvency
includes strong household balance sheets as well as a sustainable federal budget. Every
dollar of retirement savings is one less dollar that will be asked for from the government
in the future. And the incentives for workplace savings work, in part by encouraging
employers, especially small businesses, to offer plans for their workers.
7

More than 71% of employees
earning between $30,000 and
$50,000 save for retirement,
but only if they have access to a
payroll deduction savings plan
at work. Among moderate-
income workers who lack
access to a workplace savings
program, fewer than 5% set
aside money for retirement.
8
The chart below shows the distribution of tax breaks for workplace savings by income
level. As you can see, 62% of tax deferrals go to people earning less than $100,000,
with 38% going to those earning more. Some on the political left see this as an unfair
tax break for the affluent. But let’s compare these tax deferrals to the taxes recipients
actually pay. Here again, 62% of these tax deferrals go to those earning less than
$100,000. However, these low- and middle-income workers pay just 26% of total
federal income taxes. So they get nearly twice as large a share of tax breaks as the share
of taxes they actually pay. The remaining 38% of tax deferrals go to those earning more
than $100,000 but these people pay three quarters of all federal income taxes. In other
words, more affluent workers get almost exactly half the share of savings-related tax
breaks as they pay in taxes.
Share of tax expenditures vs. share of federal income taxes paid — by
income levels
(%) 60%
52%
40%
32%
30%
27%
23%
20% 18%
11%
8%
0%
Under $50,000 $50,000–$100,000 $100,000–$200,000 $200,000 or more
Participants with access and retirees with account balances
Share of federal income taxes (after credits) paid
Source: American Society of Pension Professionals and Actuaries, 2011.
Under every serious Social Security reform proposal, benefits for low-income workers
will be protected, as they should be. At the same time, the brunt of tax increases and
benefit reductions will fall on affluent to wealthy Social Security recipients. How, then,
is it fair, or politically feasible, to also undercut the private savings efforts of this more-
affluent group?
Let me suggest another reason for caution regarding any deficit-reduction or tax-reform
proposals that weakens workplace savings and the incentives many employers have to
offer retirement plans.
Access to workplace savings is vital for low- and
moderate-income workers
More than 71% of employees earning between $30,000 and $50,000 save for
retirement, but only if they have access to a payroll deduction savings plan at work.
Among moderate-income workers who lack access to a workplace savings program,
fewer than 5% set aside money for retirement.
The impact of access: Percent of moderate income workers
($30,000–$50,000) who save for retirement
(%) 80
71.5%

60

40

20

4.6%
0
With access to workplace plan Without workplace plan — IRA only

Source: Employee Benefits Research Institute (2010) estimate using 2008 Panel of SIPP (Covered by an
Employer Plan) and EBRI estimate (Not Covered by an Employer Plan-IRA only).

So capping or eliminating incentives for workplace and other retirement savings is

exactly the wrong approach. Moving in that direction could have a devastating impact,
sending millions of low- and moderate-income workers toward retirement with essen-
tially no savings. Instead of making this mistake, we should do everything we can to
expand workplace savings coverage — even to the point of mandating coverage — for
the many millions who lack it.

This is why I have supported ideas like the auto-IRA payroll deduction proposal — a
bipartisan idea originating from collaboration between the Heritage Foundation and
the Brookings Institution. It offers a reasonable, cost-effective way to draw millions
of lower-income workers into retirement savings, giving them a stake in our free-
enterprise system.

Facing a huge coverage shortfall, we should expand, not undercut,

retirement savings

75 million Americans have

no workplace retirement plan

Source: Presidential State of the Union Address, January 25, 2011.

9
We need a new round of
innovation from the retirement
services industry and from
public policy. We need to
sustain and strengthen
America’s workplace savings
systems to make them a source
of confidence, not anxiety.
We have the resources, the
knowledge, and the systems
in place today to innovate,
sustain, and strengthen
America’s workplace savings
system and secure a better
future. We just need to have
the will to get it done.
10
Industry innovation backed by public policy
We need a new round of innovation from the retirement services industry and from
public policy. We need to sustain and strengthen America’s workplace savings systems
to make them a source of confidence, not anxiety.
We should start with a “grand bargain” compromise on Social Security, which may be
the simplest part of our fiscal challenge but one of the toughest politically. A deal here
would almost surely require Republicans to compromise on some measures to increase
revenue. At the same time, Democrats would have to concede that benefit increases
will need to be slowed or means tested.
We should link a solvent Social Security system to reforms that strengthen private
workplace savings, including the payroll-deduction IRA, so we reach virtually all
working Americans. The best practices of leading plans — auto-enrollment, savings
escalation, and age-appropriate asset allocation — should be made the norm for all
workplace plans.
Plan sponsors should also consider building stronger protection against volatility by incor-
porating Absolute Return strategies into their plans, possibly as qualified default options.
There should be lively competition between a host of lifetime income vehicles — annuities,
non-annuity drawdown funds, and other lifelong income solutions — within retirement
plans and elsewhere. And the next round of retirement and pension legislation should
offer a strong legal safe harbor to plan sponsors adopting these practices.
None of this is pie-in-the-sky. We have the resources, the knowledge, and the systems
in place today to innovate, sustain, and strengthen America’s workplace savings system
and secure a better future.
We just need to have the will to get it done.
The views and opinions expressed are those of Robert L. Reynolds, President and CEO,
Putnam Investments, are subject to change with market conditions, and are not meant
as investment advice. Mr. Reynolds is affiliated with Putnam Retail Management.
Consider these risks before investing: Our allocation of assets among permitted asset
categories may hurt performance. Funds that invest in bonds are subject to certain risks
including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices
of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term
bonds. Unlike bonds, bond funds have ongoing fees and expenses. Lower-rated bonds
may offer higher yields in return for more risk. Funds that invest in government securi-
ties are not guaranteed. Mortgage-backed securities are subject to prepayment risk.
International investing involves certain risks, such as currency fluctuations, economic
instability, and political developments. Additional risks may be associated with
emerging-market securities, including illiquidity and volatility. The use of derivatives
involves special risks and may result in losses. For the 500 Fund and 700 Fund, these
risks also apply: REITs involve the risks of real estate investing, including declining prop-
erty values. Commodities involve the risks of changes in market, political, regulatory,
and natural conditions. Investments in small and/or midsize companies increase the risk
of greater price fluctuations. Growth stocks may be more susceptible to earnings disap-
pointments, and value stocks may fail to rebound. Additional risks are listed in the funds’
prospectus. Variable annuities are long-term investment vehicles intended for retire-
ment planning. Annuities have insurance-related charges and tax considerations, and
are offered by contract only. All guarantees are based on the claims-paying ability of the
issuing company.

Each RetirementReady Fund has a different target date indicating when the fund’s
investors expect to retire and begin withdrawing assets from their account, typically at
retirement. The dates range from 2015 to 2050 in five-year intervals, with the exception
of the Maturity Fund, which is designed for investors at or near retirement. The funds
are generally weighted more heavily toward more aggressive, higher-risk investments
when the target date of the fund is far off, and more conservative, lower-risk invest-
ments when the target date of the fund is near. This means that both the risk of your
investment and your potential return are reduced as the target date of the particular
fund approaches, although there can be no assurance that any one fund will have less
risk or more reward than any other fund. The principal value of the funds is not guaran-
teed at any time, including the target date.

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 like-
lihood 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 invest-
ment 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

11
 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 does not take into
account post-tax contributions to savings. It also 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.

Investors should carefully consider the investment objectives, risks, charges, and
expenses of a fund before investing. For a prospectus, or a summary prospectus if
available, 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.

Putnam Investments
One Post Office Square
Boston, MA 02109
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