Policy makers should support increased use of products that provide reliable lifetime income, such as income and drawdown funds, guaranteed pay-out plans and annuities, according to Robert Reynolds, president and chief executive officer of Putman Investments.
To foster confidence in such products, Reynolds (left) called on Congress to create an optional national insurance charter and a new lifetime income security agency empowered to approve assured lifetime income products. The new agency also would administer an industry-funded, risk-based national insurance fund to protect current and future retirees, much like the bank deposit insurance fund overseen by the Federal Deposit Insurance Corp.
In a speech at the Retirement Income Industry Association’s spring conference in Chicago on Tuesday, Reynolds also announced plans by Putnam to offer a suite of income-oriented funds that aim to help advisors work with retirees in developing strategies for monthly income flows, at varying levels of risk tolerance, to address their changing lifestyle and financial needs throughout retirement.
“Everyone focuses on ‘the number,’ which we can’t stand,” Reynolds said. “We structure it more like a paycheck, and calculate what is needed each month, rather than as a lump sum. Needs change in retirement, and calculating monthly income is the flexible way to address any changes that might arise.”
When commenting on his retirement income agency proposal, Reynolds warned that budget cutting advocates in Washington might be tempted to target the deferral of federal income taxes on contributions to defined-contribution plans, such as 401(k) plans, individual retirement accounts and variable annuities. Slashing or eliminating these tax incentives, Reynolds noted, would reduce the motivation to save at a time when many Americans already face a shortfall in their retirement savings and lack confidence in their ability to enjoy a secure retirement.
“As the oldest baby boomers reach the traditional retirement age of 65, we need to go beyond helping Americans accumulate assets for retirement to helping them draw those assets down to provide income throughout retirements that could last 20 to 30 years or more,” Reynolds said. “It’s even more challenging to draw assets down substantially as it was to accumulate them in the first place.”
“There’s a new, very healthy wave of competition among asset managers and insurers to serve retirees’ income needs,” he added. “If we could create a new agency to hold these products to rigorous standards and back them with an industry-financed fund like the FDIC, we could see a real surge in consumers’ confidence and broad emergence of innovation from firms seeking to create lifetime income solutions for working and retired Americans. We need a partnership between private industry and public policy to make that happen.”
Reynolds noted that the sales of annuities have been flat to negative—falling from $218 billion in 2002 to $210 billion in 2010—despite two market crashes that ought to make guaranteed income more attractive. Multiple reasons account for that, according to Reynolds, including costs, issues of transparency, consumers’ reluctance to lose control of sizeable shares of their life savings and concerns that a single provider might not be able to deliver the full benefit promises for decades into the future. A new federal agency to review lifetime income offering and back them up with funded guarantees could address many of those fears, he suggested.
The agency that Reynolds proposed would be empowered to approve, or conversely deny, approval to the full range of guaranteed lifetime income products, including annuity of non-annuity lifetime income funds. It also would administer a risk-based national insurance pool, funded by the industry itself, to ensure the safety of investor assets. Insurers with top-tier credit scores and those which offer very conservative annuity or draw-down plans would pay lower fees into the pool than those with lower scores or more aggressive plans. The agency would be authorized to disapprove products and deny them coverage.