Fees and Funds:
Five Ways to Improve Your DC Plan
Defined Contribution Plan Initiatives
September 15, 2009
© 2009 Towers Perrin

Lisa J. Alkon
 Lisa Alkon, Principal, National Leader, Governance
and Compliance Advisory group — Towers Perrin
Boston office
 28 years of retirement consulting on compliance
and design issues
 Extensive experience with Fortune 1000 clients
in both for-profit and not-for-profit environments
 A recognized authority on governance and
compliance issues
© 2009 Towers Perrin 2

Marina L. Edwards
 Marina Edwards, Senior Consultant, Governance
and Compliance Advisory group — Towers Perrin
Chicago office
 A national leader for vendor search and fee
benchmarking projects
 19 years of 401(k), 403(b) and pension plan
expertise in qualified and nonqualified plans
 Extensive experience with Fortune 1000 clients
and plan complexities
 A recognized expert and speaker at defined
contribution conferences and widely quoted
in national publications
© 2009 Towers Perrin 3

Peter D. Grant, CFA
 Peter Grant, Senior Investment Consultant, Investment
Consulting Group — Towers Perrin New York office
 16 years consulting to 401(k) and pension plans,
endowments and foundations
 Extensive experience with Fortune 500 clients
and plan complexities
 A recognized guest speaker for national defined
contribution and defined benefit conferences
on target date funds, liability-driven investing
and portfolio transition issues
© 2009 Towers Perrin 4

Today’s agenda
 Welcome and introductions
 Webcast topics

Fiduciary best practices
Vendor assessments and fee reviews

Target date funds

 Annuity options

Company match issues

 Questions and answers
 Closing remarks
© 2009 Towers Perrin 5

DC Plans — Market evolution
 DC plan focus has evolved rapidly and issues around plan design are
expected to grow
 Corporate cost containment
 Inadequacy of Social Security benefits for majority of population
 Increasing emphasis on DC plans to adequately provide retirement
income security
 Employee concerns over retirement assets and retirement
income security
 For ERISA class actions, the monetary value of the Top 10 private
plaintiff settlements entered into or paid in 2008 totaled $17.7 billion*
 By comparison, 2007 totaled $1.8 billion
*Sourc e: Seyfarth Shaw’s Fifth Annual Workplace Class Action Litigation
Report
© 2009 Towers Perrin 6

1. Fiduciary best practices
 Important time frames to remember
 Collect and review DC plan investment fees (investment
fee + revenue share) at least annually
 As an interim step, every two to three years, obtain market pricing
on the DC plan through a “request for information” (RFI)
 Take the DC plan out to bid once every five to six years through
a “request for proposal” (RFP)
 Determine if company-driven events (layoffs, plant closings)
will create restrictions on your stable value fund or loan
payoff provisions
 If DC plan has company stock
 Understand if your advice product includes company stock
in the analysis
 Consider hiring an independent third-party fiduciary/trustee
to advise on company stock (directed or discretionary)
 Document, document, document
© 2009 Towers Perrin 7

2. Vendor search and fee reviews
 Vendor assessments — areas to consider
 Will there be a new plan design?
 Are there new services that will be added?
 Will the investment line-up be refreshed at that time?
 Ensure you have a 404(c) checklist and clarity surrounding
the vendor services
© 2009 Towers Perrin 8

2. Vendor assessments and fee reviews (cont.)
 Fee reviews — areas to consider
 What tools is the vendor providing toward full-fee disclosure?
 Evaluate need for attorney-client privilege
 Understand various benchmark approaches and potential risks
— Large plans (assets >$500M) typically require customized RFI
— “Plain vanilla” plans may be able to rely on non-RFI approaches
 Assess whether the plan generates “excess revenue”
— Do qualified diversified investment alternatives (QDIAs)
Generate revenue to the vendor?
— Seek to lower the investment share classes
— Establish an “ERISA budget account” for excess revenue
 Obtain clarity on pricing associated with nonqualified plans
 Review equitability of fee structure to participants
 Create a Fee Policy Statement
© 2009 Towers Perrin 9

2. Vendor assessments and fee reviews (cont.)
 Vendor contract review and negotiation — areas to consider
 Review notification timeline required if either party chooses to leave
 Are there fees associated with leaving?
 Understand whether there is a separate contract for the
advice/managed account product
 Implement vendor service guarantees with fees at risk
for nonperformance
 Has there been discussion or financial commitments from the
vendor about retirement readiness/replacement income?
© 2009 Towers Perrin 10

3 and 4. Investment design introduction
 The next segment of this Webcast focuses on DC plan investment design
 Investment design, and products such as target date funds (TDFs)
and annuities, are considered with respect to four areas
Evolving DC plan investment designs

Achieving fundamental plan objectives, such as retirement
income security
Analytical processes of evaluation
 Fit within a strategic DC plan decision-making framework

© 2009 Towers Perrin 11

3 and 4. Evolution of DC plan — investment design
Issues facing sponsors are cross functional
“Personalized” Retirement
 Addressing longevity risk through TDFs, Today Tom orrow
 TDFs  Savings level
annuities, etc.  Investment choice  Turnkey strategy
Future
 Advice engines  Age of savings depletion
 Improving behavior through effective  Index: Percent returns  Index: Standard of living
education and communication
Issue Resolution
 Containing plan costs and fees  Payout risk (TDFs, annuity, hybrid)
 Savings properties (auto escalation matches, etc.)
 Investment vehicles (traditional/Roth; in/out of plan
 Adequate governance/compliance procedures
annuity)
 Governance/compliance audits
3- to 4-Tier Plan Design (15 options — unlimited)
Present
Choice Resolution (10-100+ options)
Past
Simple Structures
(<10 options)
1980s 1990s 2000s 2010s 2020s
© 2009 Towers Perrin 12

3 and 4. DC plan evolution — plan sponsor actions
 The actions we see today that start personalizing retirement include
 Savings Levels: Understanding how to improve DC plan decisions
and investment design by combining quantitative analysis of savings
patterns with investment strategy decisions (e.g., target date fund
asset allocation)
 Turnkey Strategies: Incorporating the plan objective (e.g., retirement
income security) in the evaluation of alternative turnkey strategies,
and including in the analysis unique benefit elements (pension benefit)
and corporate demographics
 Age of Savings Depletion: Using a quantifiable metric in the
evaluation of investment design that can be communicated to
participants once the sponsor determines the investment structure
 Standard of Living: Adding another consideration to the objective-
setting and ongoing evaluation process that ties corporate benefit
strategy to plan sponsor decision making
© 2009 Towers Perrin 13

3. Target date funds — what we already know
 TDFs and risk-based (life strategy or life cycle) funds help participants
by providing one plan option that adjusts investment risk based on either
age or risk preference
 Lawmakers acknowledged benefits of these funds by classifying them as
QDIAs in 2008
Interest Knowledge
Target Date Multi-Asset Funds Time Risk-Based Multi-Asset Funds
(life cycle) (life strategy or balanced)
% Allocation
% Allocation
Money Market
High Yield
U.S. Inv. Grade Fixed Inc.
EAFE
Domestic Equity
Age Age
© 2009 Towers Perrin 14

3. Target date funds — what remains uncertain
 However, variability in TDF performance in 2008 and the fairly flat
slope of many TDF glide paths indicate that the market has yet
to reach consensus on the age-old conundrum: How to adequately
address longevity risk without increasing investment risk
Top 15 Target Date Funds
One-Year Return at 3/31/09 One-Year Return Distribution
10
3.1
0 16
14
-10
12.12
-20
12
-21.3
-23.8
-30
8
-40
-35.5
-38 -38.1 6.75
2010 2030 2050 60% S&P Bar-
Funds Funds Funds Equity/ 500 Agg. 4 3.75
4
40% 2.25
Fixed
0
Std. dev. Range
Sourc e: eVestment Allianc e database
© 2009 Towers Perrin 15

3. Target date funds — fiduciary responsibilities
 Fiduciary responsibilities can vary depending upon whether the TDFs
are customized or off the shelf (see table below)
 Addressing longevity risk is not on the list of responsibilities
Primary Fiduciary Responsibilities: Customized vs. Off-the-Shelf TDFs
Fiduciary Responsibilities Customized Off the Shelf
Select/monitor the TDF manager No Yes
Design/monitor the TDF “glide path” Yes No
Select/monitor investment managers Yes No
Rebalance/monitor portfolio allocations Yes No
 Sponsors are starting to improve the TDF selection process using
quantitative analysis and incorporating the savings program objective.
Key issues being added to the analysis include
 Does the company sponsor a DB plan?
 What is the combined participant and employer savings profile?
 How are participants’ assets currently invested, and what is their
demographic profile?
 What is the targeted probability of retirement income security?
© 2009 Towers Perrin 16

3. Target date funds — connecting the plan
objective and investment strategy evaluation
 Connecting the fundamental objective of retirement income security
with the TDF scenario analysis helps to resolve key issues
 Implications of the current benefit design and its adequacy
in providing long-term investment security
 How to connect the investment decision-making process
to the investment program’s underlying objective
 The shortcomings of common participant savings practices
Sample Scenario Analysis Illustration
Projected Age for Savings Depletion for 60 Year Olds*
100% Fixed 60% Equity/40% Fixed Active TDF Passive TDF
Percentile Outcome 50% Worst 10% 50% Worst 10% 50% Worst 10% 50% Worst 10%
Pension, plus 6% 104 91 119 114 119 109 119 109
savings
No pension, 6% savings 76 75 82 76 83 76 81 76
No pension, 12% savings 85 85 116 98 114 94 113 95
* Assumes retirement at 65, 70% inc ome replac ement, $60k salary and Soc ial Sec urity benefits.
© 2009 Towers Perrin 17

4. Why add annuity options to a 401(k)?
Employees are increasingly
responsible for ensuring Employees need access to
they do not outlive their tools and products to help
retirement funds… them meet their retirement
And they are expected to income needs
live longer
Employers are shifting away
from offering defined benefit Employers have several
plans to defined contribution alternatives when considering
plans annuities
© 2009 Towers Perrin 18

4. Annuities — update on common considerations
 To help address longevity risk for participants, several annuity
products today are designed to provide 401(k) participants
with lifetime income upon retirement
 While common annuity structures can lessen longevity risks,
plan sponsors are just starting to evaluate how to utilize the
investment option either in plan or out of plan
 Recent surveys indicate that only a few sponsors have added annuities.
Limited usage most likely is due to:
 Additional legal requirements (especially for in-plan options) despite
recent DOL safe harbor addressing annuity provider selection
 Benefit portability
 Participant usage
 Complexity in communication and participant education
 Less attractive annuity benefit due to low interest-rate environment
 Credit risk
© 2009 Towers Perrin 19

4. Annuities – what are the choices?
Provide annuity distribution option from Plan at retirement
 Plan purchases annuity, and then distribute at retirement or hold in plan
 Both purchase and holding of annuity subject to ERISA fiduciary
standards and joint and survivor requirements can apply
 Benefits include more favorable rates and features
Facilitate annuity payment at retirement
 Plan distributes lump sum that is rolled into IRA annuity; also can
facilitate out of plan product usage for appropriateness
 Out of plan option reduces, and can remove ERISA fiduciary exposure
Provide annuities as in-plan investment option
 Provides ability to average annuity rates over career, potentially offers
minimum returns and equity exposure, and facilitates guaranteed
income
 ERISA requirements, usage, structure, and cost are obstacles to
address
© 2009 Towers Perrin 20

4. Annuities — the change afoot
 A recent DC plan survey by PIMCO of 32 investment consulting
firms indicated
 Only 22% of respondents indicated they were “unlikely to add
a guaranteed income product” (53% “somewhat likely” and
25% “likely” to “very likely” to add guaranteed income product)
 Lifetime income (guaranteed minimum withdrawal benefit) was the
most appealing product with 84% interest; fixed annuities were second
at 65%
 Primary concerns for not including a guaranteed product included
— Insurance company default risk (84%)
— Cost (72%)
— Transparency (68%)
© 2009 Towers Perrin 21

4. Annuities — the change afoot (cont.)
 Insurance industry products under review by interested
clients include
 Lifetime income (guaranteed withdrawal benefit)
 Fixed annuity
 Longevity insurance
 Variable annuity
© 2009 Towers Perrin 22

3 and 4. Next steps to develop strategic game plan
 The future of retirement income security depends upon several
key factors
 Understanding the cost in terms of required savings and contributions
 Offering simple solutions that participants can easily understand
 Education that addresses prudent investment and saving behavior
 Assuming DC plans are the preferred savings vehicle going forward, key
action steps include
 Quantifying the plan’s basic objectives (e.g., what is the target age
of savings depletion and level of retirement income security)
 Measuring how saving practices and investment strategies
combine to support objective attainment
 Having a strategic game plan that connects the decision-making
process and action steps to a plan objective, such as
retirement income security
© 2009 Towers Perrin 23

5. Is reinstating the 401(k) match the right
solution in a recovering business environment?
 Many employers changing/suspending the 401(k) match expect
the change to be temporary
 For most, the basic expectation is that the suspended match
will be restored in its pre-suspension form once business
conditions improve
 A number of employers are taking a second look at that supposition
with an eye toward three areas of consideration
 to profitability
Link
Total retirement adequacy

Total rewards allocation and health/wealth linkages

© 2009 Towers Perrin 24

5. Finding the right retirement solution:
The role of the workforce
Workforce Considerations
Employees Are
Our Most Important
Investors
Employees Are Focus on employee
Our Greatest Asset engagement and
performance —
unleashing
discretionary effort
Employees Are
Our Highest Cost Focus on maximizing
human capital ROI
Focus on reducing
total labor costs
Design Perspective
© 2009 Towers Perrin 25

5. Can programs be redesigned to revise incentives,
and improve tax efficiency and retirement adequacy?
Today’s Employee Compensation Future Employee Compensation
Matc Matc
h h
Suspended
Cash 401(k) 401(k)
Cash 401(k) 401(k)
ee match
ee match
contrib. contrib.
Health
Health Health Funded Cash
Capped or HSA
care
Insurance Pension insurance ret. HRA balance
no ret.
med.
Current Consumption Future Consumption
Current Consumption Future Consumption
© 2009 Towers Perrin 26

5. Other defined contribution design considerations
 Enhancement to include Roth 401(k) contributions
 Allow employees window during 2010 for in-service withdrawals
for conversion to Roth IRA
 Limitations on in-service withdrawals
 Unused vacation/sick time as contributions
 Investment advice versus investment education
© 2009 Towers Perrin 27

For more information
Lisa Alkon
617.638.3922
lisa.alkon@towersperrin.com
Marina Edwards
608.838.8640
marina.edwards@towersperrin.com
Peter Grant
212.309.3620
peter.grant@towersperrin.com
© 2009 Towers Perrin 28