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Stacy Schaus, CFP, SVP, Defined Contribution Practice Leader ...
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Stacy Schaus, CFP, SVP, Defined Contribution Practice Leader ...


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  • Speaker NOTES: We know that there are multiple sources of retirement income that participants may rely upon. We anticipate social security to be available, particularly for those who need it most: the lower income employees. We know that DC will be vital as an added source of Income especially for the lower and middle income earners. Others may be fortunate to have DB, deferred compensation or other assets to rely on. Many Need to tap into their home equity to make ends meet.
  • Speaker NOTES: Are the current DC plans sufficiently Diversified? Unfortunately not. Over time assets that were once diversifying, have become less diversified. Here you see that relative to the S&P 500 all of the other equity categories are closely correlated. This is even true of non-U.S. equity both in the developed and emerging markets. The only diversifying asset class on the typical DC menu is the bond fund.
  • Speaker NOTES: As you can see adding these types of asset classes introduces diversification relative to the S&P 500.
  • Transcript

    • 1. “ Will Volatile Markets and Inflation Unravel the Best Laid Retirement Plans? How to Protect DC Assets” Webcast sponsored by Dow Jones Indexes and PIMCO October 10, 2008 This presentation contains the current opinions of the manager and such opinions are subject to change without notice. This presentation has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this presentation may be reproduced in any form, or referred to in any other publication, without express written permission of Pacific Investment Management Company LLC. ©2008, PIMCO.
    • 2. Defined Contribution Concerns
      • Majority of American workers will rely on DC assets as core element of retirement income
      • Recent market performance has prompted fear and some to run to stable value and fixed income in DC plans
      • DC plans are unlikely to meet retirement income goal given savings and investments today
      • DC investment menus lack true diversification
      • Protection from credit and inflation concerns is lacking in majority of plans
    • 3. DC Savings Can be Critical For Achieving Adequate Retirement Income Replacement + + Lower Income Employees Higher Income Employees ? = Greater Relevance For: SOURCE: Research Foundation of the CFA Institute * Default investment options, such as target date strategies, seek to increase the total value of DC Savings by improving the investment returns on contributions. Note that the wealth contribution from investment returns can be positive or negative, depending on the success of the investment strategy over the individual’s specific time horizon. 20% - 40% Social Security 40% - 60% DC Savings (contributions + investment returns*) Varies Widely
      • Other Wealth
      • Defined Benefit Pension
      • Health Savings Account
      • Deferred Compensation
      • Home Equity
      • Personal Savings
    • 4. Typical DC Savings and Asset Allocation Likely to Fall Short Assumptions: Starting salary - $50,000 Real wage increase – 1% Savings rate – 6%-9.8% over 40 years Employer match – 3.5% * Results are approximate, hypothetical, and based on a simulation. 37% of participants may fail to reach 50% real income retirement goal! 99% 100% 37% 50% 91% 75% Probability of not meeting income replacement goal* Projected DC real income replacement
    • 5. Current DC Core Options May Show Little Real Diversification Bond Risk Equity Risk Despite Typical DC investment Menu of 15 Offerings…majority are within the below asset classes which reduce to only two risk categories Small/Mid Cap Core International Equity Large Cap Growth Large Cap Equity Index Large Cap Value Core Bond Stable Value/Money Market
    • 6. Core Line Up May Hold More Risk Than Desired… While 70% May be Invested in Equities SOURCE: Callan DC index approximate allocation by asset classes
    • 7. 96% of DC Investment Risk May Be Driven by Equities SOURCE: PIMCO 1 60% / 40% capital allocation to S&P 500 Index and LBAG, respectively 2 The basic formula for standard deviation of a two asset portfolio is used to create the exhibit above. Standard deviation is computed as the square root of the following three components 1. [the weight of asset 1 squared multiplied by its variance] plus 2. [the weight of asset 2 squared multiplied by its variance] and plus 3. [2 multiplied by (the correlation of assets 1 and 2 multiplied by the product of their weights multiplied by the product of their individual standard deviations]. The time period is January 1987 – December 2007. 70% [Equity] / 30% [Bond] Capital Allocation = 96% [Equity] / 1.25% [Bond] Risk Allocation % of Capital Allocation does NOT equal % of Risk Exposure
    • 8. Need for Broader Asset Diversification, Enhanced Returns and Protection Drives DC Design Tier I: Custom Tier II: Core Offerings Target Dates Strategies: Created using “Mix of Core” plus special opportunities and tail risk management Tier III: Brokerage Stocks and ETFs Bonds Mutual Funds Cash / Stable Value Global Bonds Inflation Protection Global Equity Corporate and High Yield Treasuries Mortgages Non US Developed Emerging Markets Absolute Return, Opportunistic and Distressed TIPS Commodities and Direct Energy REITS and Direct Real Estate Infrastructure U.S. Large, Mid, Small International Developed Emerging and Frontier Markets Private and Venture Capital Long/Short Strategies
    • 9. Real Assets Diversify and Add Inflation Protection to Core Offerings Correlation vs. Market/Time -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Correlation vs. S&P Dow AIG Commodity Index S&P 500 Lehman U.S. Treasury: U.S. TIPS Dow Wilshire REIT
    • 10. An Improved Framework for Strategic Diversification Best : Stocks Mixed : Commodities & Nominal Bonds Worst : TIPS Best : Commodities Mixed : Stocks & TIPS Worst : Nominal Bonds Best : TIPS Mixed : Commodities & Nominal Bonds Worst : Stocks Best : Nominal Bonds Mixed : Stocks & TIPS Worst : Commodities Low/Falling High/Rising Low/Falling I N F L A T I O N High/Rising R E A L G R O W T H
    • 11. Broader Asset Diversification and Best in Class Management Reduces Risk of Failure Assumptions: Starting salary - $50,000 Real wage increase – 1% Savings rate – 6%-9.8% over 40 years Employer match – 3.5% * Results are approximate, hypothetical, and based on a simulation. Now, only 1% of participants may fail to reach 50% real income retirement goal! 81% 100% 1% 50% 50% 75% Probability of not meeting income replacement goal* Projected DC real income replacement
    • 12. Conclusion
      • DC Plans are more likely to meet targets given improved asset diversification, inflation protection and skilled managers
      • Inflation protection is critical and can be added to plans via core, target strategies, as well as within brokerage window e.g., TIPS directly
      • Participants need to understand the true risk of failing to meet goals and be encouraged to save more rather than assume higher risk
    • 13. Appendix Performance and fee Past performance is not a guarantee or a reliable indicator of future results. The performance figures presented reflect the total return performance for Institutional Class shares (after fees) and reflect changes in share price and reinvestment of dividend and capital gain distributions. All periods longer than one year are annualized. Redemption fees are paid to and retained by the Fund and are not sales charges. Details regarding any Fund’s redemption fees can be found in the Fund’s prospectus. Charts Performance results for certain charts and graphs may be limited by date ranges specified on those charts and graphs; different time periods may produce different results. Portfolio structure The portfolio structure is presented to illustrate the underlying funds in which the PIMCO RealRetirement Fund invested as of the date shown and may not be representative of the current or future investments of the fund. The portfolio structure does not include the fund's entire investment portfolio, which may change at any time. Small allocations may round to zero. Risk The fund invests in other funds and performance is subject to underlying investment weightings which will vary. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk; investments may be worth more or less than the original cost when redeemed. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally backed by a government, government-agency or private guarantor there is no assurance that the guarantor will meet its obligations. Investing in foreign denominated and/or domiciled securities involves heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Government securities are backed by the full faith of the issuing government; portfolios that invest in them are not guaranteed and will fluctuate in value. Inflation-linked bonds (ILBs) issued by a government are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. Government. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be suitable for all investors. Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax: a strategy concentrating in a single or limited number of states is subject to greater risk of adverse economic conditions and regulatory changes. The cost of investing in the Fund will generally be higher than the cost of investing in a fund that invests directly in individual stocks and bonds. High-yield, lower-rated, securities involve greater risk than higher-rated securities. Investing in securities of smaller companies tends to be more volatile and less liquid than securities of larger companies. Derivatives and commodity-linked derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. The Fund is non-diversified, which means that it may concentrate its assets in a smaller number of issuers than a diversified fund. This material contains the current opinions of the manager and such opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Pacific Investment Management Company LLC. ©2008, PIMCO. PIMCO Funds are distributed by Allianz Global Investors Distributors LLC , 840 Newport Center Drive, Newport Beach, CA 92660
    • 14. Appendix Index descriptions Each Dow Jones Real Return Target Date Index is a composite of other indexes. The sub-indexes represent traditional stocks and bonds in addition to real return assets such as inflation-linked bonds, commodities and real estate securities that are considered to potentially counterbalance inflation. The component asset classes are weighted within each index to reflect a targeted level of risk at the beginning and end of the investment horizon. Over time, the weights are adjusted based on predetermined formulas to systematically reduce the level of potential risk as the index’s maturity date approaches. The Dow Jones AIG Commodity Total Return Index is an unmanaged index composed of futures contracts on 19 physical commodities. The index is designed to be a highly liquid and diversified benchmark for commodities as an asset class. The Dow Jones Wilshire Real Estate Investment Trust Index, a subset of the Wilshire Real Estate Securities Index (WRESI), is an unmanaged index comprised of U.S. publicly traded Real Estate Investment Trusts. Effective July 1, 2007, the Fund began tracking its performance against a float-adjusted version of the index as the full-market-cap version of the index ceased to be disseminated on June 30, 2007. The Lehman Brothers Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis. The Lehman Brothers U.S. TIPS Index is an unmanaged market index comprised of all U.S. Treasury Inflation Protected Securities rated investment grade (Baa3 or better), have at least one year to final maturity, and at least $250 million par amount outstanding. Performance data for this index prior to 10/97 represents returns of the Lehman Inflation Notes Index. The Morgan Stanley Capital International Emerging Markets Index is an unmanaged index that measures equity market performance in the global emerging markets. As of May 2005, the Emerging Markets Index (float-adjusted market capitalization index) consisted of indices in 26 emerging countries: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey, and Venezuela. The MSCI EAFE Net Dividend Hedged USD Index is an unmanaged index of issuers in countries of Europe, Australia, and the Far East represented in U.S. Dollars on a hedged basis. The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index. The Standard & Poor’s 500 Stock Price Index is an unmanaged market index generally considered representative of the stock market as a whole. The index focuses on the Large-Cap segment of the U.S. equities market. It is not possible to invest directly in an unmanaged index.