DC Current: Bob Reynolds spoke on retirement reform, but what he left unsaid was more interesting than the speech

Here is a stat for you: During a half-hour speech by Bob Reynolds, CEO of Putnam Investments, the U.S. debt grew by about $60 million, or about $2 million a minute.

Reynolds used the numbers in a National Press Club speech this week to frame his case for using retirement system reform as the first serious but achievable step toward restoring solvency to America’s future.

I found the speech most interesting not exactly for what he said (though it was substantive) – but more for what it didn’t say. I signed off from the speech thinking that a real debate around retirement reform is more likely than most people think, and that the mutual fund industry is already taking control of that debate – which has the potential to be a bad thing for RIAs.

Reynolds advocated for reforming both of the complementary retirement systems in the United States: the private system made up of defined benefit and contribution plans, and Social Security. He said they fit into the larger picture of increasing savings throughout the economy. That’s critical if the nation is to avoid having a debt that is 90% of GDP by 2020, which is where it will be if the current trend continues.

Reynolds was also advocating for ways to stimulate the economy. But he acknowledged that the far harder part was curbing spending and changing consumptive ways.

“That’s a fiscal time bomb, and I think everybody in American can hear it ticking,” he said. “This is not austerity, this is sanity.”

Changes to the private system

Reynolds advocated for several big changes in the private retirement system, including automatic IRAs that almost all businesses would have to provide. Two proposals that incorporate auto IRAs are before Congress now, he said. He also proposed speeding the implementation of automatic enrollment in company 401(k)s and automatic increases in savings rates to go along with rising income. In an idea likely to raise hackles among some RIAs and asset managers, he also suggested that participants be steered toward target date, or lifecycle funds.

The automatic enrollment ideas jive with what studies and actual experience have shown: that people save more if they are automatically enrolled. In fact, said Sean Cunniff, research director, brokerage and wealth management service of TowerGroup of Needham, Mass., auto enrollment is the one thing shown to move the dial, because the single greatest factor in whether people save enough fore retirement is how much they save, and over how long.

So far, so good, from the RIA perspective. But if automatic enrollment sweeps people into mutual funds, especially lifecycle funds – as Reynolds suggested – advisors could be neatly cut out of the equation.

Moreover, the idea of lifecycle funds in particular is controversial. SEC Chairwoman Mary Schapiro called them out last year for being inconsistent. What the alternative is to ill-conceived Target Date Funds.

Sharon Snow, CEO of Metropolitan Capital Strategies, an RIA and asset manager in Manassas, Va., went one step further.

“They are lipstick on a pig,” she says. Someone close to retirement now, she pointed out, would likely end up with a fund that had high bond allocation.

“Who wants to be in bonds now?” she said.

Indeed, the Pension Protection Act of 2006 enabled companies to automatically enroll workers and to guide them into target date funds. Many people who had been in cash were steered into equities – just in time for the market crash.

There are alternative structures, Cunniff pointed out, like a personalized managed account.

“Would I rather be in a Putnam mutual fund, paying 80-120 basis points … or would I rather be in a BlackRock ETF, paying 5-10 basis points plus 80 for an advisor who would build a portfolio about me?” Cunniff said.

Left out of the picture

What never arose at all during Reynolds speech were the recent unprecedented series of regulations and proposed regulations by the Department of Labor that are attempting to lower fees and increase transparency in the retirement world. Those changes are reshaping the retirement plan advisory business in favor of fiduciary advisors, and may end up reducing fees that participants pay. We at RIABiz have been covering the new regs more-or-less exhaustively, so it was interesting that Reynolds didn’t even mention them. Why the DOL’s massive new 401(k) disclosure requirements are a 'very, very big deal’. One explanation is that the mutual fund industry of which he is a representative is likely to be hurt by the sudden illumination of hidden fees mandated by the DOL. Perhaps Charles Ferguson’s Inside Job, which I wrote about two weeks ago, left lingering suspicions in my mind about the crosswinds between powerful execs advocating “altruistically” for a particular government policy. DC Current: A damning view of financial services from Inside Job’s director, Charles Ferguson

But I think it’s more likely, actually, that Reynolds left the regulations out of his speech because the DOL’s moves aren’t likely to get to the heart of the matter at hand: increasing people’s savings rates substantially.

Real attempt at SS reform?

Social Security reform has long been known as the third rail of U.S. politics.

Reynolds speech made me consider that the third rail is a little less electrified.

The confluence of a new class of Republican debt hawks, the slow but steady drumbeat that’s built over the years for increasing the retirement age for people who don’t have grueling physical jobs, and a shift in the national mood toward embracing savings may have opened a window of opportunity.

“Once you tune out the hysteria and hyperbole … it’s very clear that Social Security reform does not require draconian measures, just some very uncommon political courage,” Reynolds said.

Speaking as a leader of the powerful mutual fund industry, he gave a stamp of approval to the Social Security reform proposals by the deficit reduction panel that issue its report last week. They included increasing the retirement age to 68, and capping benefits for wealthier earners.

Most significantly, Reynolds did not include any proposal to privatize Social Security, long a favorite idea among some Republicans and the mutual fund industry. The financial crisis that decimated so many 401(k) plans may have taken that idea off the table for the foreseeable future.