The Evolving DC Landscape:

Challenge and Innovation

Robert L. Reynolds The year 2011 marks a key moment in the evolution of the defined contribution system.
President and That’s because the oldest baby boomers are now turning 65 at the rate of about 7,000
Chief Executive Officer
a day. They are crossing a once-in-a-lifetime inflection point — between accumulation
Putnam Investments
and decumulation — and must now turn their life savings into reliable sources of life-
Edited from a speech time income.
given to the Putnam This individual challenge — one retiree at a time — comes as the DC system as a whole
Defined Contribution
is in transition, a very positive transition, in my view. The full impact of the Pension
Forum, Boston,
Protection Act of 2006 is now being felt, right before our eyes, as ideas like auto-
Massachusetts, on
enrollment, savings escalation, and guidance to qualified default options become the
April 1, 2011
norm. We’re seeing the system become much more robust.

I would argue, in fact, that we’ve very nearly solved the puzzle of how to accumulate
enough assets in a DC plan to replace a major share of income in retirement. Young
workers investing in well-designed plans today will likely build enough assets over their
careers to draw 40% or 50% income replacement — just from their DC plans alone.

The oldest baby This is far more than current DC retirees have been able to achieve. And despite the
boomers are now gloomy warnings we heard just a while ago, total defined contribution plan assets have
turning 65 at the rate of almost fully rebounded from the black swan events of 2008–2009. The DC system has
about 7,000 a day. clearly become America’s primary retirement plan, the main source of retirement
They are crossing a income for future generations.
once-in-a-lifetime
inflection point — As I’ve learned over three decades in the business, this system is constantly evolving,
between accumulation adapting, and improving its ability to maneuver through tough markets and deliver
and decumulation — more reliable income solutions. To make that case, let me look back at some of the key
and must now turn challenges for the DC system that were disclosed during the market slump of 2008–
their life savings into 2009. Then, I’d like to show you some of the ways that Putnam has responded to those
reliable sources of
challenges.
lifetime income.
Key challenges
Here are some of the key concerns about DC that surfaced as a result of the “great
stress” test of 2008–2009. We had roller-coaster volatility — made worse because it
followed several years of relative calm. Some lifecycle funds with target dates as close
as 2010 held equity shares over 60% and were crushed, setting off a wave of investiga-
tions and recriminations in Washington and the press.

I’ve always believed that the
best test of any retirement
savings plan, solution, or
system is how well it
succeeds in replacing the
income people made while
working and sustaining that
income for life.
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Key defined contribution policy challenges disclosed by the
2008–2009 market slump
•High market volatility
•Excessive risk in some lifecycle funds
•Excessive or opaque DC fees
•Need to shift focus from asset totals to lifetime income capacity
•Need for innovation in lifetime income provision
•New focus on “retirement readiness”
Some members of Congress, the media, and regulators zoned in hard on supposedly
high or hidden fees in workplace plans, and in some cases, they had a point. Other
policymakers, perhaps more thoughtful ones, called for a shift in focus from asset totals
and allocations to the potential lifetime incomes, or monthly payouts, that DC plans
could generate.
There was a wave of interest and innovation in lifetime income provisions. The Department
of Labor and the Treasury sent out a request for information and got over 800 replies.
And “retirement readiness,” defined as bringing participants to the point where they
can successfully retire and support their lifestyles, became the new industry standard.
It’s about time, if you ask me. I’ve always believed that the best test of any retirement
savings plan, solution, or system is how well it succeeds in replacing the income people
made while working and sustaining that income for life.
Some people in retirement services reacted defensively to these challenges. But denial
was not our approach at Putnam. It never will be. I believe deeply in the potential of the
DC system. But I also believe that when 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
real solutions. That’s what we have been doing at Putnam over the past two years. Here
are some examples.
Putnam’s response to volatility — the Absolute Return suite
As many of you know, we actually had a full suite of Absolute Return funds in develop-
ment just as securities markets were caving in 2008. We rolled them out in December of
that year and took them public in the first quarter of 2009. These funds aim to deliver
1%, 3%, 5%, and 7% over T-bills, net of fees on a rolling three-year basis — no matter what
markets do.
 Absolute Return suite rollout

I believe every investor should

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

We’ve had a great response from the marketplace: over $3 billion in AR sales through
over 10,000 advisors. The AR suite offers advisors and investors a whole new dimension
of diversification — across investment philosophies as well as asset classes.

Personally, I believe every investor should have some portion of his or her portfolio in
the hands of managers who are charged, and incented, to deliver positive results, and
who can’t cite down markets as an excuse.

We are convinced that absolute return strategies will earn many key roles in future
investment strategies ranging from default offerings in DC plans to elements that can
be blended into lifecycle, 529, and other risk-mitigated strategies.

Integration of AR strategies in Putnam lifecycle funds

PUTNAM RETIREMENTREADY FUNDS’ GLIDE PATH
100%
Money market

Absolute Return
50%

Asset Allocation

0%
2055 2050 2045 2040 2035 2030 2025 2020 2015 Maturity

We’re sufficiently confident of the benefits that may accrue from seeking to lower vola-
tility that we now use RetirementReady® Funds as the default choice in the 401(k) plan
of our own Putnam employees. I would note, by the way, that Putnam’s own lifecycle
offering, RetirementReady, already had a quite conservative roll-down, reaching 25%
equity exposure at its target date.

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We believe there is no
universal drawdown strategy
for retirement income. No
single, static solution can
reliably last a lifetime. Every
person’s or family’s needs,
risk tolerances and life
circumstances are unique —
and they change over time.
We believe that plan sponsors
and participants have a right to
see, and providers have an
obligation to show, all fees and
expenses within their plans.
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We believe there is no universal drawdown strategy. No single, static solution can reliably
last a lifetime. Every person’s or family’s needs, risk tolerances, and life circumstances
are unique — and they change over time. So we believe everyone should work with an
advisor to create an individual income plan and then regularly review it, at least annually,
and revise it to suit changing market and personal circumstances. In other words, we
take an advisor-centric approach to lifetime income, and the planning tool we’ll be
offering is meant to help advisors work with their clients, not displace them.
Putnam’s commitment to full disclosure
Another key issue the market crash exposed was the need for full, clear disclosure to
plan sponsors and participants of the fees and expenses in their workplace plans.
Putnam acted on this well before the Department of Labor set out its first draft rules on
fee disclosure.
Full, clear disclosure to plan sponsors and participants
PLAN SPONSOR PARTICIPANT
Why did we do that? Because we believe that plan sponsors and participants have a
right to see, and providers have an obligation to show, all fees and expenses within their
plans. We have nothing to hide and a great deal of trust to gain through this commit-
ment to full transparency. Of course, we also disclose all of the services the plans we
administer provide — so that participants can gain a real sense of the value they are
paying for.
Putnam’s lifetime income focus
Another thing we’ve done, which goes to the very core of what DC savings are all about,
is to adopt a unique, new “income view” for the participants in the DC plans we serve —
Putnam’s Lifetime Income SM Analysis Tool. Again, we decided to do that even before
legislation was introduced by the Senate Aging Committee that aims to make such an
income view mandatory. We adopted this approach because it made sense to us.

The goal of DC plans, after all, is income in retirement, and most people think of that as a
monthly figure. So today, in Putnam DC plans, instead of first seeing the dollar total of
the retirement holdings and maybe a pie chart of allocations, participants see an esti-
mate of the monthly income they are likely to need in retirement expressed in current
dollars. They also see a graphic image of how much future income they are projected to
create for themselves, based on their current contribution rates, asset allocations, future
investment returns, and projected retirement age.

Putnam’s Lifetime Income Analysis Tool

•Intuitive, user-friendly focus

on income
•Drives changed behavior — notably
higher deferrals
•Creates something unprecedented:
“impulse saving”

By punching a few keys, participants can factor in estimated Social Security income and
even calculate potential income drawn from other non-plan assets. If they still see a gap
between what the tool projects they’ll need and the amount of income they are projected
to draw from their savings, then they can move one of three sliders: on retirement dates,
deferral rates, or allocations, and see how those changes might help close the gap. Two
more mouse clicks, including confirmation, and those changes will actually be made —
effective a participant’s 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.

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Success in DC requires a
willingness to continually
change, evolve, and never be
wholly satisfied with what
you’ve achieved to date. We’re
building that kind of culture —
continuous improvement — into
Putnam’s DC business.
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The industry’s new standard: “Retirement Readiness”
To sum it up, all of us at Putnam are very pleased to see that the DC industry has a new
consensus goal to aim for, retirement readiness. Getting participants ready to retire
successfully and with real peace of mind is what defines the value that we, and you, seek
to offer.
Let me leave you with this thought: The defined contribution business is dynamic, ever
changing, and capable of delivering great value to those who rely on it. Success in DC
requires a willingness to continually change, evolve, and never be wholly satisfied with
what you’ve achieved to date. You have to be open to fresh ideas from sponsors, advi-
sors, and yes, sometime even from our critics in the media and politics.
We’re building that kind of culture — continuous improvement — into Putnam’s DC busi-
ness. So you can rely on us to keep evolving and keep trying to do a better job for you
and for your clients.
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
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.

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