More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Pay-to-Play Rule Violating the pay-to-play rule can result in serious consequences, and RIAs should adopt robust policies and procedures to prevent and detect contributions made to influence the selection of the firm by a government entity.
“Seven thousand baby boomers are turning 65 every day, and will be doing so every day for the next 17 years,” Putnam Investments President and CEO Bob Reynolds told advisors in his keynote presentation at the 4th annual Retirement Income Symposium Oct. 17 in Boston, which was sponsored by AdvisorOne and its sister publications at Summit Business Media's Investment Advisor Group. The challenge will be closing the “assured income gap” they are beginning to face.
Two-thirds of retirement income now comes from sources that future retirees won’t be able to count on, Reynolds (left) pointed out. Defined benefit (DB) plans are disappearing in the private sector and are under pressure in the government sector, while Social Security benefits are likely to shrink, especially for higher-income beneficiaries. Defined contribution (DC) plans will be the primary source of retirement income, but hardly any of them offer assured-income features. “Not yet,” he added.
With retirement security increasingly dependent on personal savings, Reynolds said, an initial policy goal should be making workplace savings plans accessible to more Americans. Today, such plans are available to only half of U.S. workers.
In a Brightwork Partners survey of nearly 3,300 working Americans, Putnam found that workers who were best prepared for retirement (on track to replace 100% or more of their current income) differed from those who were least prepared (likely to replace 45% or less) not in how much they earned, but in having access to an employer savings plan and saving 10% or more of their income.
Reynolds, who led Fidelity Investments into the 401(k) market in 1989, would improve savings plan access by making Universal IRAs mandatory for companies with 10 or more employees. Workers would be enrolled unless they opt out. Requiring this “negative option” in all DC plans would boost participation, the second goal he identified.
He defined the third policy goal as encouraging deferrals of 10% or more. Putnam believes this savings rate, in tandem with Social Security, will provide workers with what they need in retirement. The default deferral of 3% of income, Reynolds said, is “much, much too low” to fund a secure future.
Putnam addresses this issue by promoting “impulse saving” whenever a Putnam-provided retirement plan participant logs onto its website. (Putnam has also created a free iPhone app to encourage investors to save more for retirement.) The first screen they see gives an estimate of the income they’ll need in retirement and urges them to review their current contribution level, asset allocation, and retirement age to be more confident of making that number.
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
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:
- 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.
- 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.