Solving America’sLifetime Income Challenge

Solving America’sLifetime Income Challenge

Robert L. ReynoldsPresident andChief Executive OfficerPutnam Investments

Robert L. ReynoldsPresident andChief Executive OfficerPutnam Investments

2

0

5

10

15

20

2005 2015 2025 2035 2045

Medicare

Medicaid

Social Security

Entitlements as percent of GDP

Sources: GAO Sept. 2004 baseline extended analysis; Bruce Bartlett, Tax Reform Agenda for the 109th Congress 15 (2004). More recent data not available at the time of this presentation.

Absent reform, entitlement costswill dominate federal budgetsAbsent reform, entitlement costswill dominate federal budgets

Average total tax revenue as percent of GDP

18%

(%)

3

Social Security replacement rates are declining — under current lawSocial Security replacement rates are declining — under current law

For earners retiring at age 65. After Medicare Part B deduction (2030 includes higher normal retirement age).Sources: Alicia H. Munnell; 2004. “A Bird’s Eye View of the Social Security Debate”; Center for Retirement Research at Boston College.More recent data not available at the time of this presentation.

Average replacement rate of pre-retirement incomefrom Social Security

38.7%29.4%

2004 2030

4

A gap in assured retirement income is growingA gap in assured retirement income is growing

Today

Workincome

Traditionalpension

SocialSecurity

In 20 years

Investmentincome

Other retirement income

Guaranteed income

Workincome

Traditionalpension

SocialSecurity

Investmentincome

TheGap

For illustrative purposes only.

5

We have a huge coveragechallenge to meetWe have a huge coveragechallenge to meet

75 million Americans haveno workplace retirement plan

Source: Office of Management and Budget, “A New Era of Responsibility: Renewing America’s Promise,” 2009.

6

But DC savings plans are a huge success story ― and a great base to build onBut DC savings plans are a huge success story ― and a great base to build on

30

43

56

2926 24 22 20

75

19

33 36

1980 1985 1990 1995 2000 2008

American workers covered(Millions)

DB plans

DC plans

Sources: EBRI, ICI, Bernstein Research, Empirical Research Partners, Bureau of Labor Statistics, 2008; and American Benefits Council, 2/24/2009.

7

America’s DC system has continually evolved and adaptedAmerica’s DC system has continually evolved and adapted

• Purely voluntary — “opt-in”

• Vast increase in choiceand options

• Limited guidance and planning

• Used mainly stable value and money market fundsas defaults

1980s to 2006The first generation:Workplace Savings 1.0

• The Pension Protection Act endorses automatic enrollment — “opt-out”

• Offers automatic savings escalation

• Recognizes “qualified default investment alternatives” (QDIAs)

• Offers employers significant legal safe harbor protection

2006 to todayThe second generation:Workplace Savings 2.0

8

The Pension Protection Act (PPA) has revitalized the DC system The Pension Protection Act (PPA) has revitalized the DC system

Source: McKinsey & Company, 2008 “Redefining Defined Contribution.” Projected asset appreciation rate of 6.1% (after fees) by asset classes is assumed to be 7.1% for equities, 4.7% for fixed income, 2.2% for money market/stable value, and 5.75% for asset allocation funds.

Estimated growth in DC assets by 2015

2006$4.1

trillion

2015$7.5 to $8.5

trillion

9

But 2008 delivered a “wake up” shockon risk…But 2008 delivered a “wake up” shockon risk…

Source: S&P Index, 12/31/08. Past performance is not indicative of future results.

-43%

-35% -37%

1931 1937 2008

1-year stock market declines greater than 30%

10

2007 2005 1994 1993 1992 1987 1984 1978 1970 2006 1960 2004 1956 1988 1948 1986 1947 1979 1926 1972 1923 1971 1916 1968 1912 1965 2000 1911 1964 1990 1906 1959 1981 1902 1952 1977 1899 1949 2003 1969 1896 1944 1999 1962 1895 1926 1998 1953 1894 1921 1996 1946 1891 1919 1983 1940 1889 1918 1982 1939 1888 1905 1976 2001 1934 1886 1904 1967 1973 1932 1881 1898 1963 1966 1929 1877 1897 1961 1957 1914 1875 1892 1951 1997 1941 1913 1874 1886 1943 1995 1920 1903 1872 1878 1942 1991 1917 1890 1871 1864 1925 1989 1910 1887 1870 1858 1924 1985 1893 1883 1869 1850 1922 1980 1884 1882 1868 1849 1915 1975 1873 1876 1867 1848 1909 1955 1857 1860 1866 1847 1901 1950 1854 1853 1865 1844 1900 1945 1954 1841 1845 1861 1842 1880 1938 1933 2002 1839 1835 1859 1836 1855 1936 1958 1885 1974 1837 1833 1856 1834 1852 1927 1935 1879 2008 1930 1831 1827 1851 1832 1846 1908 1928 1862

1931 1937 1907 1828 1825 1840 1829 1838 1830 1863 1843

-50% to -40%

-40% to -30%

-30% to -20%

-20% to -10%

-10% to 0%

0% to 10%

10% to 20%

20% to 30%

30% to 40%

40% to 50%

50% to 60%

183 years of annuallarge-companystock returnsPercentage total return oflarge-company stocks,1825–2008

…and volatility has been severein the new century…and volatility has been severein the new century

Source: The Ibbotson Large Company Stock Index is based on the S&P 500 Composite Index. Prior to 1957, it consisted of 90 of the largest U.S. stocks. Prior to 1926, it is based on the New York Stock Exchange database compiled by Roger Ibbotson, William N. Goetzmann, and Liang Peng of the Yale School of Management.Past performance is not indicative of future results.

20012001

2002200220082008

20002000

20072007

20062006

20042004

20032003

20052005

11

U.S.bonds

U.S. Treasury bills

Absolute Return Funds

Balanced portfolio

U.S. stocks

Int'l real estate

Int'l stocks

Comm-odities

Emerging market stocks

Absolute Return strategies did curb losses through 2008’s market crashAbsolute Return strategies did curb losses through 2008’s market crash

Past performance is not indicative of future results. Indexes are unmanaged and used as a broad measure of market performance. It is not possible to invest directly in an index. The asset class categories are defined as follows: U.S. Bonds: Barclays Capital Aggregate Bond Index; Treasury bills: ML 3-month T-Bill Index; Absolute Return Funds: The average 2008 annual returns of 17 absolute return mutual funds as identified by Morningstar in their 7/14/09 article, “What’s so absolute about absolute return funds?”; balanced portfolio: Portfolio comprised of 60% stocks, 30% bonds, 10% cash; U.S. stocks: S&P 500 Index; international real estate: MSCI REIT Index; international stocks: MSCI EAFE Index; commodities: Goldman Sachs Commodity Index; emerging markets: MSCI Emerging Markets Index. Performance is not indicative of the performance of any specific investment. Results for longer time periods may differ from results shown for 2008.

Asset class performance in 2008 (%)

-10.6

-20.4

-37.0 -38.0-43.4 -46.5

-53.3

+5.2 +2.1

12

It is time to create a new generationof DC plan designIt is time to create a new generationof DC plan design

WorkplaceSavingsWorkplaceSavings

13

Key elements ofWorkplace Savings 3.0Key elements ofWorkplace Savings 3.0

► Build on PPA’s base of auto-enrollment, escalation, and defaults

► Include much stronger protection against volatility

► Built-in options for guaranteed lifetime income

► Provide advice and guidance for all participants

► Provide legal safe harbor for employers who do theright thing

► Finish the job — move beyond accumulation to lifetime income solutions

► Build on PPA’s base of auto-enrollment, escalation, and defaults

► Include much stronger protection against volatility

► Built-in options for guaranteed lifetime income

► Provide advice and guidance for all participants

► Provide legal safe harbor for employers who do theright thing

► Finish the job — move beyond accumulation to lifetime income solutions

14

The lifetime financial flight path

20 4030 50 7060 9080

Age

Accumulation Distribution

Solving for a safe landing:From accumulation to distributionSolving for a safe landing:From accumulation to distribution

Transition

??

??

76 milli

on Boomers

15

Source: Annuity 2000 Mortality Table, American Society of Actuaries. Figures assume you are in good health.

65-year-old coupletoday

The good news/bad news risk: LongevityThe good news/bad news risk: Longevity

50% chanceof one survivor at age 92

25% chanceof one survivor at age 97

16

Calculated based on a hypothetical 3% rate of inflation (historical average from 1926 through 2002 was 3.06%) to show the effects of inflation over time; actual inflation rates may be more or less and will vary.

Our old Nemesis: InflationOur old Nemesis: Inflation

Today In 10 years In 20 years In 30 years

The eroding value of $1

41¢

55¢

74¢

17

1994 2008Year

1 2 3 4 5 6 7 8 9 10 11 12 13 14Year15

Volatility harms wealth accumulationVolatility harms wealth accumulation

Consistentperformance

$348,8059% return*

Growth of a $100,000 initial investment1994–2008

$100,000

-8%

+32%

-1%+16%

+13%-9%

+21%

+4%

+18% +1%+9%

+8% +1%

+10%

+24%

+5%

+20%

+34%-14%

-36%

+41%

+50%

-32%

+32%

+21%

+17%

+26%

-15%

+33%

-46%Volatile

performance

$192,1119% return*

* Average of yearly returns for the 15-year period.The example is for illustrative purpose only and does not reflect average annualized returns or the performance of any Putnam fund, which will fluctuate.Consistent performance is illustrative of Ibbotson U.S. Long-Term Government Bond Total Return Index. Volatile performance is illustrative of Goldman Sachs Commodities Index.You cannot invest directly in an index. Note that the reverse could be true, and a more volatile investment may result in outcomes favorable to investors.

18

The price of passivity: How a purely passive portfolio would have fared in 2008The price of passivity: How a purely passive portfolio would have fared in 2008

Beginning of 2008$1,000,000

End of 2008$751,676

Cash

Bonds

Stocks

Stocks are represented by the S&P 500 Index, bonds by the Barclays Capital Aggregate Bond Index, and cash by the Merrill Lynch U.S. 3-month T-bill Index. Example assumes the withdrawal of $50,000 in income spread out over 12 months. Past performance is not a guarantee of future results.

10%

30%

60%

13%

40%

47%

-25%

19

1989 2008

Risk in the sequence of returns:The Lucky InvestorRisk in the sequence of returns:The Lucky Investor

$3,074,205

Best return: 37.58%

Worst return: -37.00%

Returns

Balance

$1,000,000

Returns represented by the S&P 500 Index. Example assumes a $50,000 withdrawal in year 1, increased by 3% in each subsequent year to adjust for inflation. This illustration is hypothetical and not indicative of any fund or product.

Total income withdrawn

$1,343,519

Average return

10.36%

1989–2008

20

Risk in the sequence of returns:The Unlucky InvestorRisk in the sequence of returns:The Unlucky Investor

Returns

Balance

Total income withdrawn

$1,196,731

Average return

10.36%

2008 1989

Best return: 37.58%

Worst return: -37.00%

$0

$1,000,000

2008–1989

Returns represented by the S&P 500 Index. Example assumes a $50,000 withdrawal in year 1, increased by 3% in each subsequent year to adjust for inflation. This illustration is hypothetical and not indicative of any fund or product.

21

2008 1989

Hedging against sequence of returns risk: The Unlucky (but smart) InvestorHedging against sequence of returns risk: The Unlucky (but smart) Investor

Returns

Balance

Total income withdrawn

$1,343,519

Average return

7.69%Best return: 17.50%

Worst return: -10.00%

$826,714$1,000,000

Applying a hedging strategy to limit losses2008–1989

Returns represented by the S&P 500 Index. Example assumes a $50,000 withdrawal in year 1, increased by 3% in each subsequent year to adjust for inflation. This illustration is hypothetical and not indicative of any fund or product. The hypothetical hedging strategy involves buying “put” options to limit the portfolio’s downside risk and financing that purchase by selling “call” options of equivalent value on the same portfolio. Returns are limited to between -10.00% and +17.50%. The option has an assumed maturity of 12 months and that the corresponding interest rate is 2%. There are risks and transaction fees associated with options strategies.

22

Insuring against sequence of returns risk: The Unlucky (but secure) InvestorInsuring against sequence of returns risk: The Unlucky (but secure) Investor

Returns

Balance

Total income withdrawn

$1,343,519

Average return

10.36%

2008 1989

Best return: 37.58%

Worst return: -37.00%

$680,218$500,000

Annuitizing 50% of portfolio2008–1989

Returns represented by the S&P 500 Index. Example assumes a $50,000 withdrawal in year 1, increased by 3% in each subsequent year to adjust for inflation. This illustration is hypothetical and not indicative of any fund or product. There are fees and expenses associated with guaranteed income products. All guarantees are subject to the claims-paying ability of the issuer.

23

2050 2045 2040 2035 2030 2025 2020 2015 2010 Maturity

Putnam’s RetirementReady Funds: Incorporating Absolute Return strategiesPutnam’s RetirementReady Funds: Incorporating Absolute Return strategies

Putnam RetirementReady Funds glide path

Moneymarket

AbsoluteReturn

AssetAllocation

100%

50%

0%

24

Lifetime financial product allocationLifetime financial product allocation

100%

0%

Allo

cati

on

Relative Return strategies

Absolute Return strategies

Guaranteed income

Insurance

Stocks fundsBond fundsAsset Allocation funds

Annuity +Non-annuity

solutions

Health Long-term careDisabilityLife

20 40 65 90

Age

This illustration is hypothetical and not indicative of any fund or product.

25

What’s needed: Industry innovation backed by public policyWhat’s needed: Industry innovation backed by public policy

WorkplaceWorkplaceSavingsSavings

3.03.0

WorkplaceWorkplaceSavingsSavings

3.03.0Industry

innovationIndustry

innovation

Policyinnovation

Policyinnovation

Solving America’sLifetime Income Challenge

Solving America’sLifetime Income Challenge

Robert L. ReynoldsPresident andChief Executive OfficerPutnam Investments

Robert L. ReynoldsPresident andChief Executive OfficerPutnam InvestmentsTHE PUTNAM FUNDS ARE DISTRIBUTED BYPUTNAM RETAIL MANAGEMENT

258982 10/09