Putnam CEO Views Retirement Landscape, Calls for Changes from Fund Industry
BOSTON, MA, November 16, 2005 -- In his keynote speech delivered at the National Association of Variable Annuities Annual Convention on October 24, and released publicly today, Ed Haldeman, chief executive officer of Putnam Investments, detailed the barriers Americans face in planning for their financial future. He praised recent innovations in the investment industry helping investors make better choices, called for changes in fund marketing and detailed how Putnam has steered its investment offerings away from temptations that can derail workers' retirement plans.
Pointing to the low financial resources of American workers, Putnam's CEO cited research showing that more than half of workers over the age of 55 have less than $55,000 in savings and investments. Yet, over 30 years of retirement, they will need $1.2 million to replace $75,000 in annual income, even after receiving Social Security. Further, a worker retiring at age 65 will need an average of $16,000 a year for 20 years just to pay traditional medical expenses not covered by Medicare.
"Obviously, longer life spans make this under-savings problem worse. Tomorrow's retirees should be thinking about having to generate income for 30, 35 or 40 years in retirement," stated Mr. Haldeman.
Calling the retirement of the baby boomers "one of the most anticipated and analyzed demographic events of all time," Haldeman raised questions on why Americans are so financially unprepared for this event.
First, he cited irrational human behavior. "Behavioral research suggests that even when people understand the issues and have the best of intentions, their saving decisions are subject to the vagaries of human behavior." Compounding the problem is the way people deal with choice. "One study of employer plans found that the more funds available, the smaller the percentage of employees who enrolled in them."
Putnam's leader also pointed to mutual fund marketing practices that make it more difficult for investors to be successful. He identified three: "First, we should stop launching funds in a narrow asset class immediately following tremendous outperformance of that asset class. Second, we must do a better job of disclosing what investors need to know, and we have to find a way to make those disclosures in a way that is understandable to the average investor. Third, we must stop advertising high rates of returns earned in a short period of time in very narrow asset classes."
Mr. Haldeman gave examples of how the three practices impact investors. He explained that launching new products in a narrow asset class after a run-up encourages rear view mirror investing and discourages diversification. Better disclosures about risks, fund expenses, and transaction costs would encourage investors to hold funds longer. And finally, aggressive advertising of high rates of return in a narrow asset class also encourages non-diversified investing.
Turning to steps Putnam has taken to help investors be more successful, he cited Putnam's firms-wide "CDS" investment management style, "consistent, dependable and superior over time."
"We believe that this pattern of investment results will cause investors to lengthen the period of time they hold our funds. If investors receive results that are consistent and dependable, they are less likely to chase hot funds or run from under-performing funds," Mr. Haldeman told the NAVA audience. Putnam's CEO also referred to data from a Putnam study illustrating that only one-third of recent retirees had consulted a professional advisor. Yet, those that did had assets three times greater than those that didn't. "Those who had saved the most consulted an advisor," he pointed out.
Despite all the challenges facing investors trying to create an economically comfortable retirement, Mr. Haldeman believes recent changes in retirement products are helping workers invest more and more prudently. He described new features Putnam is offering 401k plans for automatically enrolling employees unless they intentionally opt out. The traditional industry practice is vice-versa. He also described Putnam's Gap Analysis program that provides each retirement plan participant with a view of his or her balance, contribution rate and potential savings shortfall at retirement. "This year alone, we've mailed out roughly 10,000 of these statements, and the percentage of participants who have increased their savings rate because of them has been meaningful." He also praised asset allocation and target retirement funds' ability to automatically diversify portfolios that, left to individuals, would not be balanced. Both products are offered by Putnam.
But the most important single factor in accumulating assets, said Haldeman, is the rate at which employees defer income to retirement plans. He described a recent Putnam study comparing how changes in fund performance, asset allocation and deferral rates affected outcomes. "We found that a change in deferral rate from 2% to 4% had 90 times the impact as a change in the underlying funds."
In closing his remarks to the annuity organization, Mr. Haldemen commended the Investment Company Institute for advocating that diversified portfolios play a role as the default options in retirement plans with automatic enrollment. The ICI has urged the Department of Labor to provide safe-harbor relief to plan sponsors in such situations, thereby protecting sponsors from potential litigation. "I would ask NAVA and other influential organizations throughout the mutual fund and variable annuities industries to help make diversification the standard practice in this country's workplaces by seeking safe-harbor protection from the DOL," urged Putnam's CEO.
In conclusion, Mr. Haldeman told the audience that the needs of investors must precede all other considerations. "Putting investors first means filtering every activity of the firm through the eyes and, therefore, the best interests of clients and shareholders. As we are reminded by NAVA's mission statement, all participants in the mutual fund and annuity business must make sure that investors always come first. While we may not agree with all of their criticism, as an industry, we need to grapple with the issues raised by industry critics. If we don't take up this challenge, regulators, politicians or the marketplace will - and in ways that may well prove detrimental to our industry and our clients."
About Putnam
Founded in 1937, Putnam Investments is one of the nation's oldest and largest money management firms. As of October 31, 2005, Putnam managed $187 billion in assets, of which $126 billion is for mutual fund investors and $61 billion is for institutional accounts. Putnam has headquarters in Boston and offices in London and Tokyo. For more information, go to www.putnaminvestments.com.
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