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Putnam’s innovative efforts to improve retirement information for plan participants can provide guidance as the federal government develops new industry rules.Putnam welcomes the U.S. Department of Labor’s (DOL) efforts to improve lifetime income information for retirement plan participants. The DOL has published an Advance Notice of Proposed Rulemaking regarding the proposal to require lifetime income illustrations on pension benefit statements under section 105 of ERISA.

Putnam President and CEO Bob Reynolds has repeatedly stated that “The best measure of success for any retirement system is its ability to reliably replace — for life — the income people made while working.”

With this principle in mind, Putnam’s approach to the 401(k) marketplace has been to build an interactive user experience for plan participants that seeks to shift participants’ focus beyond current account balances and allocations and toward estimated monthly income needs in retirement. Putnam’s goal is to motivate plan participants to make better savings and investment decisions that will lead to more successful retirements.

In 2010, Putnam developed and launched the Lifetime Income experience, built around Putnam’s Lifetime IncomeSM Analysis Tool (LIAT). LIAT seeks to create a qualitatively different way for participants to experience and interact with their retirement savings plans.

Now, several years into our effort to assist participants in making better retirement savings decisions through a focus on estimated monthly income, we are sharing our approach and insight as the DOL moves forward with rulemaking.

The Lifetime Income Analysis Tool personalizes retirement planningPutnam’s LIAT provides a personalized estimate of the participant’s retirement savings plan, including current balances, future employee contributions and company matches, and projected Social Security benefits. Also factored in, if provided by participants, are outside retirement savings.

• Retirementplanningshouldbebasedonanunder-standingofgeneratingalifetimeincomestream.

• Putnam’sLifetimeIncomeexperiencehasdemonstratedapositiveinfluenceonpartic-ipantsavingsbehavior.

• TheU.S.DepartmentofLabor’sgoalofaddinglife-timeincomeillustrationsonpensionbenefitstatementsadvancestheefforttohelpretirementplanparticipantsmakebettersavingsdecisions.

• Rulesgoverningthedistri-butionofthisinformationshouldbeflexibleandopentoinnovation.

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July 2013 » White paper

The public policy challenge: Fostering innovation to improve retirement security Edmund F. Murphy IIIHead of Defined Contribution, Putnam Investments

“ The best measure of success for any retirement system is its ability to reliably replace — for life — the income people made while working.”

— Bob Reynolds, Putnam President and CEO

JULY 2013 | The public policy challenge: Fostering innovation to improve retirement security

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Through LIAT, participants are able to compare their retirement income needs with their current progress toward meeting those needs. Participants can immedi-ately model and assess the impact of changes they can make to their savings (deferral amounts), retirement age, and investment mix (asset allocation). And with one mouse click or phone call they can confirm these changes, which will be effective as of their next paycheck.

LIAT helps retirement savers overcome inertiaThe Lifetime Income Analysis Tool is designed to move participants away from an often paralyzing discus-sion of how they need to save millions of dollars in order to successfully retire. Instead, it encourages an understanding of the long-term impact of participants’ current saving behavior within their plan — along with specific, actionable steps they can take to help improve it.

A new feature estimates future health-care costsRecently, Putnam has built on the LIAT experience with a new online tool that enables plan participants to estimate their potential future health-care costs in retirement. The estimates can be personalized based on a variety of individual health state data that participants may enter privately. This new Health Cost Estimator (shown above) uses the same monthly time frame as LIAT’s income estimates and can be accessed by a single click. Our early findings show that having at least a baseline estimate of health-care costs motivates participants to increase their savings rates.

Putnam’s Lifetime Income Analysis Tool

The analysis is based on a retirement age selected by the participant and on invest-ment returns that reflect the actual asset allocation of the participant’s account using stochastic (“Monte-Carlo”) models. The income estimate is based on gender-specific mortality tables and assumes periodic withdrawals from savings that remain invested throughout retirement. All results are presented in today’s dollars, better enabling participants to understand and analyze the results.

Comparing monthly income with the amount participants are reasonably estimated to need in retirement creates a powerful motivation to “close the gap.”

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The LIAT experience points to several findings1

Since our introduction of LIAT, we have learned:

•Participants better understand monthly retirement income that is stated in current dollars, and respond to it more effectively than to a simple statement of total retirement plan balances and allocations.

•While lifetime income estimates may not always be precise, they can and should be personalized to individual circumstances in order to provide meaningful information to participants.

•Comparison of the monthly income that participants are on track to create with the amount they are reasonably estimated to need in retirement creates a powerful motivation to “close the gap” — most often by increasing their savings rates, which, in our view, is the dominant variable in determining retirement readiness.

•Among individuals who use the Putnam Lifetime Income experience, including the LIAT, 30% changed their deferral rates, and 8 out of 10 increased the amount they are saving. On average, deferral rates among these participants increased by 18%.

Putnam supports wise retirement innovationsPutnam supports the intent of the DOL’s Advance Notice of Proposed Rulemaking regarding lifetime income illustrations — to show participants their plan balance converted into a projected monthly income stream in retirement. Based on our experience, we recommend that the DOL consider a number of modifications to the proposed rule described in the advance notice.

We recommend that the rule provide significantly greater flexibility in both the projection and conver-sion methodologies. For example, we recommend that highly personalized, more accurate projections, like those calculated through Putnam’s LIAT, be shared on plan benefit statements. In addition, we are quite concerned about the fact that the only allowable approach for converting balances to retirement income

1 Based on participant website usage data for the period 6/30/10–6/30/13; LIAT users are defined as participants who logged on to the website and moved the deferral rate slider on the Lifetime Income Analysis Tool at least once.

is annuity-based. Since the vast majority of participants do not annuitize their entire retirement savings at retire-ment, this conversion approach provides a number that may not be relevant to most participants’ experience.

In conjunction with greater methodological flexibility, we would ask the DOL to reconsider the establishment of safe harbor assumptions, as opposed to allowing a multiplicity of “reasonable” income projection methods. As to the specific safe harbor assumptions proposed, we have a particular concern about the rate-of-return assumption used in the projection methodology. By using a fixed rate of return, the methodology ignores the asset allocation of the participant’s account. Further, the fixed-rate-of return assumption ignores investment risk.

Beyond that, Putnam supports lifetime income illus-trations based on future projections, rather than on current balances only. The goal of presenting monthly income calculations should be to encourage better long-term savings and investment decisions. In our experience, income estimates on balances and contri-butions projected forward to a personalized retirement date are highly effective in achieving that goal.

Overall, flexibility is vital. Standardized method-ologies and safe harbor assumptions can too easily become established as industry practices. This creates the danger that beneficial innovation may be stifled.

Dialogue represents an opportunity to expand what worksPutnam welcomes and supports the DOL’s efforts to present monthly income in retirement calculations to participants. We believe that in order to avoid undercutting the current benefits of innovation and discouraging future innovation, it is critical that the final rules be modified to allow greater methodological flexibility, to avoid safe harbor assumptions that may codify less-than-ideal standards, and to focus on the numbers that are most likely to motivate positive savings and investment decisions.

To explore more details of Putnam’s comments on the DOL’s proposed rulemaking, review our submission at http://www.dol.gov/ebsa/newsroom/fsanprm.html.

The Lifetime Income Analysis Tool seeks to create a qualitatively different way for participants to experience and interact with their retirement savings plans.

JULY 2013 | The public policy challenge: Fostering innovation to improve retirement security

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IMPORTANT: The projections, or other informa-tion 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 likelihood 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 investment 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 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 takes into account both before-tax and after-tax accumulated balances and future regularly scheduled contribu-tions for estimated projections. It 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. You are advised to consider your other assets, income, investment options, investment time horizon, income tax bracket, and risk tolerance when planning for specific investment goals. It is recommended that you consult a financial advisor for more information. It is important to note that the results from this tool are estimates based on what you input today. The results are not a guarantee of actual outcomes and will change as your inputs change.

Health-care costs and projections are provided by HealthView Services, Inc., a third-party vendor. They provide broad, general estimates and information that may help you consider your retirement income needs by better understanding potential health-care costs. This estimate is provided for educational purposes only, and you should not rely on it as the primary basis for your medical, insurance, investment, financial, retirement, or tax planning decisions. Costs are estimated, hypothet-ical in nature, and not guaranteed. Your actual medical costs will likely vary (sometimes significantly) from the estimates. Putnam does not believe that HIPAA applies to the data obtained from plan participants using this new tool.