Putnam's Reynolds makes the DC call

Call it Robert Reynolds' Hail Mary pass.

Mr. Reynolds, who was plucked from Fidelity Investments less than a year ago to resurrect the once-mighty Putnam Investments, earlier this month made his first big public play as the Boston-based firm's chief executive officer by unveiling a sweeping list of proposals aimed at fixing the defined contribution system.

Among Mr. Reynolds' proposals:

•creating a national insurance charter and an FDIC-like fund to back up lifetime income guarantees;

•requiring employers to offer a lifetime income option, either through annuities or other insured methods, adding tax incentives to employees who invest in lifetime income products and extending tax credits to employers who match worker contributions;

•setting caps on the equity exposure in target-date funds as they become mature; and

•adopting legislation that would require employers to enroll all of their workers in 401(k) plans automatically and increase their contributions over time.

“Usually after a tough period like this you're presented with an opportunity to make the system better,” Mr. Reynolds said in an interview. “We need to fix 401(k)s, which have become the retirement plan of this country. At Putnam, we want to get out in front of the issues.”

While the call by Mr. Reynolds, an NCAA college football referee for 15 years, was viewed as a reaction to public scrutiny of the $4 trillion DC market following last year's market crash, competitors and industry insiders say it has as much to do with Mr. Reynolds trying to get Putnam back into the DC game. And while many find fault with the details of his proposal, they say he might just bring the entire industry along with him.

“Some of the proposals in (Mr. Reynolds') manifesto struck us as a marketing advantage to Putnam,” said Richard Davies, head of product strategy at AllianceBernstein Defined Contribution Investments of New York. “To advocate for more conservative funds in target-date products when Putnam has some of the most conservative funds is a little self-serving.”

Michael Francis, president of investment consultant Francis Investment Counsel LLC, Pewaukee, Wis., said Mr. Reynolds' proposals were a “way for Putnam to get back into the conversation of defined contribution plans. “Every big mutual fund company wants these assets — they're sticky, the contributions are predictable — they're dream customers.”

Putnam, whose reputation was damaged by an insider trading scandal in 2003, wants to snag back some of those prized assets, said Mr. Reynolds. Consider: In 2000, the company had $57 billion in DC assets, representing roughly 49% of the firm's then $117 billion in U.S. institutional tax-exempt assets. As of 2008, the firm had just $5.7 billion in DC assets, slightly more than half of the firm's $10.8 billion in U.S. institutional tax-exempt assets. Putnam posted an earnings loss of $19 million in 2008, according to the annual report of its parent Great-West Lifeco Inc., Winnipeg, Manitoba, a subsidiary of Power Financial Corp., which bought the firm in August 2007 for $3.9 billion.

Meanwhile, Mr. Reynolds has been recruiting former Fidelity executives to ramp up its effort. In October, he hired Jeffrey Carney as senior managing director and head of global marketing and products. Mr. Carney was president of Fidelity Retirement Services under Mr. Reynolds, and most recently, president of Bank of America's retirement and global wealth and investment management client solutions.

Also in October, he hired former Fidelity fund managers Nick Thakore and Robert Ewing as managing directors and portfolio managers for large-cap equities. Mr. Reynolds said Putnam is testing a lifetime income guarantee product — with the annuity provided by Great-West Life — that firm officials hope will boost sales to participants in company-sponsored retirement plans.

“Of course we want to become a big player in the DC,” said Mr. Reynolds. “But I also have a national interest in making this the most viable system there is possible. I have a passion for this, and there are still holes we need to address.”

Not everyone agrees with Mr. Reynolds' proposed measures. “We need to protect participants before and after retirement, but I'm not sure a national charter is the way to go,” said Jan Jacobson, senior counsel, retirement policy, at the American Benefits Council, a Washington-based trade association representing mostly Fortune 500 companies. “Once it's part of government I'm worried about what a Congress of the future might do to it. Likewise, we've been in favor of automatic enrollment but prefer that it be encouraged rather than mandated.”

Cynthia Egan, president of Baltimore-based T. Rowe Price Retirement Services, said setting limits on equity allocations “takes away the competitive advantage of companies doing their own investment research.”

Some of Mr. Reynolds' measures, including requiring all employers to auto-enroll workers, could also cause a backlash from clients, said Drew Carrington, UBS Global Asset Management's head of defined contribution and retirement solutions, Chicago.

“We need a national conversation about these topics, but what will upset clients is all the words "mandate,' "limit,' "require,'” said Mr. Carrington. “Big corporate clients know that once you start down to mandating things, companies look for ways to not be involved.”

Mr. Francis added that smaller companies, too, might shy away from getting involved in 401(k)s if the government mandated that all employees be enrolled. “Smaller companies would be upset. After all, what makes 401(k)s so popular is the voluntary nature of them.”

Mr. Reynolds, however, said once smaller companies have 401(k) plans, auto-enrollment does not add expenses, because they can be paid by participants unless there is an employer match. Similarly, he said the national charter wouldn't require more money pouring into Washington because the FDIC-like fund would be supported by the financial system itself.

Despite their misgivings, most industry experts say his efforts might help bring change to the DC system. “I don't think we'll see a mega-401(k) bill anytime soon (as a result of Mr. Reynolds' proposals), but we'll likely continue to focus on clarifying and highlighting parts of the Pension Protection Act,” said Kristi Mitchem, managing director, head of U.S. defined contributions at Barclays Global Investors, San Francisco.

Mr. Carrington said Mr. Reynolds is “saying controversial things. We would never come out and support most of that government-intervention stuff. But the environment is certainly more open to regulation than 18 months ago.”