Participant-Directed Plans Overview - Problems / Solutions Features Benefits

Transcription

1 Participant-Directed Plans Overview - Problems / Solutions Features Benefits Plan Sponsors Plan Participants Plan Advisors / Consultants Third Party Administrators / Record-keepers Presented by: James Pupillo CIMA, CIMC Managing Director, Partner direct jpupillo@hightoweradvisors.com

2 Participant Directed Plan QDIA Overview: D. Introducing Liability Derived intelligence - LDi TM 1. LDi is: a. NOT an investment product b. A Qualified Default Investment Alternative (QDIA) Managed Account Program c. Asset-Liability approach to each Participant's account d. Improved method for solving Plan Participant retirement readiness 2. Superior to a Target Date or Risk Based Fund solution 3. More specifically LDi is a: a. Systematic management system that manages each self-directed Participant's account b. Aimed towards achieving their retirement income replacement ratio for retirement readiness. c. Do provide hard working Americans a fighting chance to retire with dignity 2

3 Participant Directed Plan QDIA Overview: A. The Shifting Retirement Landscape Participant Investment Advice: 1. Plan Sponsors Dilemma: What investment options fulfill a plan fiduciary s responsibilities for Participant investment advice and transparency with fee disclosure? a. Qualified Default Investment Alternatives (QDIA) Safe harbor b. regulation 408(b)2 c. regulation 405(a) d. other constant changes 2. Participant-Directed Defined Contribution Plans [401(k), 403(b), 457, etc.] constant change: a. New regulations governing investment choices and financial advice b. new investment options appearing on a regular basis 3. Until recently, two popular strategies to address this dilemma: a. Target Date or Life Style Funds based on either risk tolerance or age defaults b. Many 401(k) professionals believe both fall short: - Risk Based LSFs miss real goal - long-term return needed to retire - Age Based TDFs ignore Participant's deferral & account balance goal projections c. Other viable alternatives? 3

4 Participant Directed Plan QDIA Overview: B. Investment Vehicle Solutions Trends 1. Collective Investment Trusts (CITs) renaissance solution 2. RIA Model Portfolios new solution 3. Separately Managed Accounts (SMAs) gaining popularity 4. All offer Plan Sponsor & Record-keeper Advantages: a. Low expense ratios and transparent pricing: i. CITs offer institutional pricing ii. CITs, expense ratio include all active management fees, brokerage and custody b. Transparency in fund holdings: i. Holdings in each CIF portfolio ii. Holdings posted monthly on website. c. Flexibility in fund holdings: i. CITs not subject to Investment Company Act of 1940 ii. SMAs allow greater flexibility in cash levels and equity holdings iii. CITs structure - liquidity and ability to react quickly to market conditions d. Easy to record-keep: i. CITs are the funds of choice for most record keepers ii. CITs never split holdings or declare dividends, much easier accounting 4

5 Participant Directed Plan QDIA Overview: C. Still need better Participant guidance to achieving retirement readiness 1. Problems: Many Participants favor money markets & invest in stocks near market peaks a. The first decision almost ensures they won t have enough to retire with confidence b. The second loses what little they have accumulated c. Participants need actuarial like help and much more than a Target Date Fund solution d. Participants need to measure success or failure relative to the Participant's needed return i. Not return measures of some irrelevant market benchmark ii. Not risk measures based on standard deviation volatility or beta 2. Solution: Plan Participant access to advisory program that provide: a. Liability Derived intelligence TM an asset-liability approach to portfolio management b. Program that offers Participants tailored low-cost professionally-managed accounts c. Program that does most of the portfolio management for the Participants 5

6 LDi Features: A. Different - DB-izing the 401(k) plan 1. Liability Derived intelligence - asset-liability approach 2. Liability Derived index LDi calculated per Participant account(s) 3. Considers each Participant's age, retirement date, account balance, salary, salary deferral, and external retirement assets to identify their retirement income replacement ratio B. Modular - seamless Integration 1. Agnostic to all existing Plan Advisors and service providers 2. Agnostic to all current investment fund options C. It works! - Sophisticated Simplicity 1. More than a Target Date Fund based on a birth date 2. Asset Liability approach to meeting retirement readiness goals 6

7 LDi Benefits: B. Plan Sponsor Benefits: 1. Transparency - full fee disclosure (408(b)2 and 405(a) compliance 2. Enhanced employee productivity less unproductive employee down time a. Education meetings reduction time b. Eliminates frivolous risk tolerance modeling questionnaires c. Reduces time Participants need to manage retirement accounts at work 3. Seamless QDIA plan integration 4. Easy recordkeeping 5. Low cost SMA and ETFs (half expense of average Target Date Fund) 6. Fiduciary Academic Credentials & Training Resources a. Retirement Learning Center QDIA legal opinion letter -John Carl & Robert Rafter Nationally renown ERISA Attorneys b. The Retirement Advisor University (TRAU) - Certified 401(k) Professional C(k)P training curriculum c. 3ethos/Thunderbird Graduate School of Global Management - Global Fiduciary Strategists curriculum content d. LDi certification for Plan Advisors, Participant Trainers and service providers - Participant Trainers available - Train the Trainer provisions available 7. website support 7

8 LDi - Liability Derived intelligence a QDIA managed account program LDi Benefits: C. Plan Participant Benefits: 1. LDi Plan Participant Advisory Report LDi-PPAR a. Education meetings reduction time b. Eliminates Risk tolerance modeling questionnaires c. Reduces time Participants need to manage retirement accounts at work d. Prudent decision making information provided i. LDi portfolio default - based on target return needed to achieve retirement readiness ii. Salary deferral contribution illustrations iii. Various salary deferral funding & Portfolio risk scenario comparisons iv. Paycheck ramification table illustrations (of various scenarios) v. maximum contribution / catch-up provision information vi. Actual retirement income replacement ratio tracking vii. Automated dynamic glide path - 5 year LDi8 maximum / 3 year LDi6 maximum vii. Sample monthly annuitization dollar payment at plan stated retirement age 2. Hands free professionally managed accounts 3. Automated Event / Market Driven LDi portfolio adjustments 4. Transparency - Full fee disclosure 5. Low cost SMA and ETFs 6. website support 8

9 Plan Participant Advisory Report - PPAR

10 Plan Participant Advisory Report PPAR A. PPAR Concept 1. LDi program guides a path for each Participant's self-directed account 2. PPAR illustration provisions: a. Identifies and continuously monitors each Participant's Liability Derived index TM LDi -Index b. Based on plan Participant's age, plan retirement date, salary, salary deferral rate, account balance c. Asset / Liability Driven approach tailors portfolio Upside Potential / Downside Risk attributes (Figure 1) d. LDi-Index TM replaces laborious & often biased &/or inaccurately completed risk tolerance questionnaires e. Risk tolerance questionnaires that may provide counter-intuitive recommendations Figure 1 10

11 Plan Participant Advisory Report PPAR B. Time-Tested Strategy 1. The LDi TM a. Identifies targeted return to achieve Participants retirement income replacement ratio. b. Linked to Participant's desired retirement replacement income 2. Liability Derived intelligence TM Strategy a. Optimal active manager mix b. Optimal blend of active and passive investments 4. Liability Derived intelligence Foundation is Participant's LDi TM a. Track investors return to achieve retirement cash flow (Figure 2) R E T U R N Assets LOWER THE LDI LDI 8% Liabilities RAISE THE LDI 5. Investor s LDi-Index TM is the Primary Benchmark We Use To: a. Measure performance b. Analyze managers' characteristics c. Dynamically monitor the portfolio s risk/return attributes T I M E Figure 2: Liability Driven Intelligence approach to determine and monitor Participants LDi-Index 6. Tested & Refined Methodology over Two Decades¹ For period May 1995 to June 2005, Pensions & Investments magazine published the Pension Research Much more than a life cycle or target date fund 11

12 Desire to Meet or Exceed the LDi-Index Over Investor s Full Time Horizon Maximum High Moderate Low Minimum LDi Suitability Matrix LDi11 LDi9 LDi7 LDi5 LDi3 Maximum High Moderate Low Minimum Desire to Meet or Exceed the LDi-Index in Any Given Year(s) Over Time Horizon 12

13 LDi3 Equity Range 0-35% LDi Fund Descriptions Defensive Capital Preservation - Low Volatility Risk (Conservative) Maximum priority to meet or exceed your Liability Derived index of LDi3 in each given year. Minimum emphasis is given to attempt meeting higher returns over longer time horizon. Emphasis is on preventing capital losses consistently throughout the shorter time horizons while minimizing return volatility. LDi5 Equity Range 35-50% LDi7 Equity Range 50-70% LDi9 Equity Range 70-85% LDi11 Equity Range % Purchasing Power Preservation Low/Medium Volatility Risk (Moderate) High priority to meet or exceed your Liability Derived index of LDi5 in the next 1-3 years. Low emphasis is given to attempt meeting high returns over longer time horizon. Emphasis is on current income with some focus on growth to outpace inflation over a 3-5 year time horizon. Capital Appreciation with Income Medium Volatility Risk (Moderate Aggressive) Moderate priority is to meet or exceed your Liability Derived index of LDi7 in 5 or more year time horizon Equal emphasis is given to attempt meeting moderate capital growth and current income over a 5 year or longer the time horizon. Capital Appreciation High Volatility Risk (Aggressive) Low priority to meet or exceed your Liability Derived index of LDi9 in any or each given year. High emphasis is given to attempt meeting your Liability Derived index over a 5-10 or longer time horizon. High emphasis is given to attempt meeting growth of capital with little or no income consideration over the 5-10 or longer time horizon. Maximum Capital Appreciation Very High Volatility Risk (Most Aggressive) Minimum priority to meet or exceed your Liability Derived index of LDi11 in any or each given year. Maximum emphasis is given to attempt meeting your Liability Derived index over a 5-10 or longer time horizon. High emphasis is given to attempt meeting growth of capital with little or no income consideration over the 5-10 or longer time horizon. 13

14 Plan Participant Advisory Report - PPAR Sample Statement

15 <Your Company Logo> 401(K) PROFIT SHARING PLAN PLAN PARTICIPANT ADVISORY REPORT PPAR <Participant Name> Participant # <111111> Your company, has <Your Participant Advisory Consultant> to advise you with an investment strategy for your retirement savings account. This plan Participant advisory service provides you with a LDi Plan Participant Advisory Report -PPPAR. This personalized PPPAR details our investment recommendation based upon your personal retirement account factors as described on the next page. We are pleased to present this PPPAR for your review. This report illustrates an investment strategy best suited for your retirement account profile. This strategy is designed to allow you to realize your Liability Derived Index LDi in an attempt to provide 70% of your current salary at retirement. The recommendation is based on your current age, current salary, retirement plan account balance, plan contribution rate and a normal retirement age of 65. Read this recommendation carefully. In any case, we encourage you to consult further with your plan, personal financial, or tax advisors for additional guidance. The Plan Participant Advisory Report - PPPAR measures the success or failure of your Liability Derived Index - not the market's return. Periodic review of progress toward your goal ensures that you stay on track. Your annual PPPAR will let you know if your Liability Driven Index has changed or if you need to take other action. Disclaimer The LDi Qualified Default Investment Alternative (QDIA) managed account program is not designed to be a financial planning tool or is it to be used to assess an investor's risk/return characteristics. The LDi does not factor market volatility as a primary risk nor does it sufficiently account for the investor's level of acceptable risk or risk tolerance. The determination of the LDi for the investor does not consider the investor's periodic payments, bonuses or commissions other than salary, nor does it take into consideration assets held outside of the plan or any other forms of external income sources such as social security or spousal support. The LDi Program does not take into consideration the investor's tax situation, debt or future changes in assets or income needs. The investor should evaluate their level of risk tolerance based on their own investment knowledge, experience, demographics and net worth and consider either adjusting their portfolio risk, investigating alternative investment options, or consulting with an investment advisor to consider their specific situation and needs. The program assumes that the LDi is the underlying goal of the investor, and the possibility of the investor failing to reach the LDi accordingly is a primary investor risk. Investing in financial securities involves risk. The higher the LDi the greater the potential for significant loss of principle in your retirement account balance. Ignoring or under estimating the LDi increases the risk of not replacing a sufficient amount of pre-retirement salary. HighTower Advisors-Scottsdale makes no assurances implied or implicit that the LDi assigned to each Participant will be achieved nor if achieved will result in replacing a significant amount of pre-retirement salary. The LDi program should only be used as a starting point to assist in determining the requirements needed to replace a significant portion of pre-retirement salary at retirement. Past performance is no guarantee of future results. HighTower Advisors-Scottsdale, its affiliates, and its employees are not in the business of providing tax or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the "promotion or marketing" of the transaction(s) or matters(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer's Particular circumstances from an independent tax advisor.

16 Participant Name: Justin Tyme Participant #: Age:* 57 Annual Salary: $100,000 Account Balance: $700,000 Current Contribution Rate: 3.5% Max Contribution Rate: 22% Max Contribution Dollars: ** $22,000 LDi % equities LDi % equities LDi % equities LDi % equities LDi3 0-35% equities LDi - Index TM Salary Deferral Choices 1% 2% 3.5% 0% 10% 20% 30% 40% 50% 60% 9% 15% Alternate Portfolio Strategies By increasing your contribution to the rates listed below, you could potentially reduce your risk by being placed in a lower equity exposed LDi TM portfolio. PPAR TM Notice: The return needed to replace 70% of your pre-retirement income will place your 401(k) retirement account in the LDi7 portfolio. Please refer to the YALi8 fund profile for more risk and return information. At your current contribution rate you are on track to replace 70% of your pre-retirement salary from your 401(k) account. You will be placed in the LDi8 portfolio until your LDi changes due to contribution levels and/or account balance fluctuations (i.e. employer matching, loans taken, capital market value fluctuations, etc). There are of course no guarantees that this will be achieved. In any case, In any case, we encourage you to consult further with your plan, personal financial, or tax advisors for additional guidance. *Automatic Glide Path: Within five (5) years of retirement, your account will be placed in the LDi7 portfolio. Within three years of retirement your account will be placed in the LDi5 portfolio. This is to reduce equity exposure risk as you approach retirement. **Contribution Rate: Individual annual contribution limits are generally 100% of compensation or $16,500 (indexed), whichever is less. Individuals 50 and older may contribute up to $22,000 ($5,500 catch-up provision). Please verify this data and report any discrepancies to your appropriate Human Resources or payroll personnel. Contribution Rate CONTRIBUTION RATE COMPPARISON Paycheck Ramification Scenarios Monthly Pretax 401(k) Contribution Monthly Actual Paycheck Cost Estimated Annuitization Payment: With your current 3.5% contribution rate and salary you are on track to replace 70% of your pre-retirement income. This would result in: Est. Monthly Payment at retirement : $ 5, % $750 $540 Assumes continued current contribution percent and salary levels, achieving at 15% $1250 $900 least 8% annual net return on 401(k) investments, retirement age of 65, for a fixed amount over 25 years of payments. *** Annual tax savings based on a 28% tax bracket. Actual investment returns experienced may be greater or less than those shown. Performance information selected for this report is hypothetical and has been prepared for purposes of illustration. Past performance is not a guarantee of future results. This Participant Advisory Report or its provider does not provide tax or legal advice. Please consult your tax and/or legal advisor for such guidance. Estimated Monthly Payment assumes continued current contribution percent and salary levels, achieving at least a 8% annual return on 401(k) investment, retirement age of 65, and a fixed 25 years of payments.

17 Plan Participant Advisory Report - PPAR TM Participant Name: Justin Shortbucks Participant #: Age:* 45 Annual Salary: $57,000 Account Balance: $55,000 Current Contribution Rate: 5.0% Max Contribution Rate: 29% Max Contribution Dollars: ** $16,500 LDi % equities LDi % equities LDi % equities LDi % equities LDi3 0-35% equities 10% 17% 25% 0% 10% 20% 30% 40% 50% 60% Alternate Portfolio Strategies By increasing your contribution to the rates listed below, you could potentially reduce your risk by being placed in a lower equity exposed LDi TM portfolio. Contribution Rate LDi - Index TM Salary Deferral Choices CONTRIBUTION RATE COMPPARISON Paycheck Ramification Scenarios Monthly Pretax 401(k) Contribution Monthly Actual Paycheck Cost PPAR TM Notice: The return needed to replace 70% of your pre-retirement income exceeds the return of our most aggressive portfolio LDi11. Please refer to the LDi12 TM fund profile for more risk and return information. At your current contribution rate you are on track to replace approximately 50% of your pre-retirement salary from your 401(k) account. To do so you will be placed in the LDi11 portfolio until your LDi changes due to contribution levels and/or account balance fluctuations (i.e. employer matching, loans taken, capital market value fluctuations, etc). There are of course no guarantees that this will be achieved. In any case, we encourage you to consult further with your plan, personal financial, or tax advisors for additional guidance. *Automatic Glide Path: Within five (5) years of retirement, your account will be placed in the LDi7 portfolio. Within three years of retirement your account will be placed in the LDi5 portfolio. This is to reduce equity exposure risk as you approach retirement. **Contribution Rate: Individual annual contribution limits are generally 100% of compensation or $16,500 (indexed), whichever is less. Individuals 50 and older may contribute up to $22,000 ($5,500 catch-up provision). Please verify this data and report any discrepancies to your appropriate Human Resources or payroll personnel. Estimated Annuitization Payment: With your current 5.0% contribution rate and salary you are on track to replace 50% of your pre-retirement income. This would result in: Estimated Monthly Payment at retirement : $ Assumes continued current contribution percent and salary levels, achieving at least 8% 10% $338 $243 annual net return on 401(k) investments, retirement age of 65, for a fixed amount over 25 years of payments. 17% $563 $405 By raising your deferral contribution rate to 29% you may be able to replace 60% of your 25% $900 $648 pre-retirement income. This would result in: 29% $1,375 $990 Estimated Monthly Payment at retirement : $ 1, *** Annual tax savings based on a 28% tax bracket. Actual investment returns experienced may be greater or less than those shown. Performance information selected for this report is hypothetical and has been prepared for purposes of illustration. Past performance is not a guarantee of future results. This Participant Advisory Report or its provider does not provide tax or legal advice. Please consult your tax and/or legal advisor for such guidance. Estimated Monthly Payment assumes continued current contribution percent and salary levels, achieving at least a 12% annual return on 401(k) investment, retirement age of 65, and a fixed 25 years of payments.

18 Plan Participant Advisory Report PPAR C. Informed Participants Stay Alert with: The PPAR Report 1. Measures success / failure relative to each Participant's LDi-Index TM 2. Periodic PPPAR notices guide Participants to stay on track 3. PPAR Notice informs Participants if: a. Their required return has changed b. Action is needed, like saving more (Figure 3) 4. PPAR provides fiduciary record of all Participants notices PPAR Notice for John Smith The return needed to replace 70% of your pre-retirement income exceeds the return of our most aggressive portfolio LDi-12 TM. At your current contribution rate you are on track to replace 20% of your pre-retirement salary from your 401(k) account. You will be placed in the LDi-12 TM portfolio until your LDi changes due to contribution levels and/or account balance fluctuations (i.e. employer matching, loans taken, capital market value fluctuations, etc.). In any case, we encourage you to consult further with your plan, personal financial, or tax advisors for additional guidance. Figure 3: Alerts let Participants know If they re on track to reach their goal. 18

19 Plan Participant Advisory Report PPAR A. Source & Managed Account Program monitoring B. Participant Advisory Report Employee Census Data Alert: You have been assigned to a different Portfolio (CIF) due to a change in your LDi calculation. To view this change visit your account on your record keeper s website C. LDi Employee Census Processing provided by: 1. Fiduciary Benchmarks inc. employee census data collection 2. Balance Financial retirement account aggregations (optional) 19

20 a QDIA Managed Account Program Comparisons - Conventional Funds versus LDi Portfolios - QDIA Participant Approaches

21 LDi TM Comparison A. LDi TM Collective Investment Trusts or Model Portfolios LDi TM 3% LDi TM 5% LDi TM 7% LDi TM 9% LDi TM 11% Separate Managed Accounts, Mutual Funds & ETFs Mid Cap Bonds Large Cap International Emerging Markets Small Cap Liquid Alternatives 21

22 LDi TM Comparison (continued) B. Aggregate Fees 1. Economies of Scale a. Regressive Fee Schedule b. CIF Fees aggregated i. for all plans ii all Participant accounts iii. regardless of asset or account balance c. Separately Managed Account vs. Mutual Fund Cost Structure 2. ERISA Compliant a. Full Fee disclosure b. Complete transparency 22

23 LDi TM Comparison (continued) C. Participant-Directed decisions-making information Comparative Conventional 401(k) LDi TM 401(k) Basis of plan investing Investments selections Participant informed or uninformed decision Participant decision based on market risk & return perceived personal preferences Actuarial informed calculation Participant advice based on actuarial calculations & actuarial funding risk Type of investments Retail or maybe institutional mutual funds Low cost institutional CITs Reports to Participant's Quarterly account balance Quarterly account balance & annual statement with estimated success/failure of desired income at retirement Monitoring investments Evaluation of each asset class to index benchmarks Professional evaluations of each class and absolute return relative to LDi TM of CIF s targeted return Monitoring of contributions No monitoring for employee contribution Employee is notified & advised to multiple contributions scenarios to attempt meeting a targeted retirement income Retirement goal Asset allocation 23 No stated goal to Participant based on desired income at retirement Decided by Participant based on risk & personal preference or possible by age of Participant Stated goal is 70% (or other plan sponsor selected %) of final years salary at Participant retirement date Driven by Participants Liability Derived index to meet retirement objectives 23

24 E. Plan Participant Approach Customization Investment Objective Financial Status Target Date Funds None. All investors of a certain age are linked. Based on age. Irrelevant LDi Funds Always starts with identifying investors LDi TM, linking where they are today to where they need to be in the future Maximize the potential to meet or exceed the LDi return relative to the risk of falling below the LDi TM Age, retirement age, Income, deferral rate and account balance are essential Financial Needs Irrelevant Essential Risk Risk exposure aligned with the target end date of the fund Risk is failing to achieve the individual investor s Asset-Liability index referred to as LDi TM Flexibility Limited to pre-defined age based portfolios. Easily revised to Participant changes in salary, savings, current or future financial status Investment Choices Based on service providers platforms (i.e., proprietary funds) Five non-affiliated Asset-liability driven portfolios Investment Managers Usually proprietary mutual funds and ETFs Non-proprietary, well-diversified, highquality investment specialists Costs 1-3% portfolio expenses. Advice not included. Estimated half the expense of the average Target Date Fund 24

25 LDi TM Comparison (continued) D. Portfolio Construct Differences Target / Risk Based Funds Measure each manager against a single market index LDi TM Portfolios Measures each manager against his actual underlying style blend of indices Measure added value as beating a single index (Alpha) Measures added value as beating his actual underlying style blend LDi TM more accurate Alpha measurement Use only active managers Measure risk as market volatility or Beta which ignores the needed LDi TM Active management vehicles and Passive indexes vehicles (both capitalization and fundamentally constructed indices) Measures risk as failure to accomplish the Liability Derived index TM goal (Upside Potential/Downside risk) 25

26 a QDIA Managed Account Program Features / Highlights Summary

27 Features/Highlights Summary A. Asset-Liability Approach for Plan Participant account management: 1. Personalized DB-ized simulated Participant Advice 2. Each Self-Directed Participant's Account tailored to a LDi-Index TM based on 5 personal data points: a. Participant's age b. Plan s designated or mandatory retirement age c. salary d. salary deferral contribution rate e. Participant's account balance 3. Periodic account updates & rebalancing to suitable LDi-Index TM portfolio a. Changing Participant dynamics (5 data points above) b. Changing capital market dynamics 4. Best of Both DB & DC Plan features 5. Increased probability of retirement readiness goal success Sophisticated Simplicity 27

28 Features/Highlights Summary B. Hands-Free Operation: 1. PPPAR Periodic Notices Participant Communications 2. No Employer nor Employee educational expertise or efforts required 3. Increases productivity 4. LDi TM CITs sub-advised by Registered Investment Advisor (R.I.A.) 5. Qualified Default Investment Alternative (QDIA) a. Meets QDIA qualifying requirements b. Attorney John Carl and Robert Rafter Legal Opinion Letter c. LDi Certified LDi-C Advisors available C. Seamless Plan Integration: 1. LDi integrates into existing plan investments & providers 2. No disruption to existing retirement plan or Participant accounts 28

29 Features/Highlights Summary D. Impartial Fiduciary Advice 1. Rigorous PMPT portfolio construction methodology a. Optimal blending of Active & Passive Investment strategies b. No proprietary product c. Unbiased open architecture platform 2. PPAR Advisory Service is independent & objective 3. Full transparent CIF fees a. Fees based transactions no commission, mark-up/mark down trading b. CIF fees are fully identifiable 4. No conflicts of interest 29

30 Features/Highlights Summary E. Affordability: 1. Competitive Institutional Consulting, Trustee & Asset Management fees 2. CITs internal expenses include PPAR Plan Participant Advisory Services 3. CITs low expense structure 3. Passive ETFs further lower asset mgt. expenses 4. All-Inclusive CIF fees include active mgt. trading expenses 5. No additional Plan Sponsor fees or expenses 6. Regressive fee schedule a. Declining fee arrangement b. Lower than most other managed account, target date, life-cycle, risk-based QDIA options 7. Fully Transparent and Disclosed Fees 30

31 Questions? 31

32 a QDIA Managed Account Program Portfolio Construction Framework - Post Modern Portfolio Theory - Conditional Value at Risk (CVaR) - Liability Derived intelligence LDi Methodology

33 PMPT Portfolio Construction Framework: A. Concept - Balancing the Balance Sheet Approach 1. Asset-Liability Modeling 2. Liability Derived intelligence TM 3. Participant's LDi Cash Flow Need B. LDi Advanced Portfolio Theory Construction 1. Optimal Active Manager Mix 2. Optimal Active & Passive Blend 3. Assuring Asset Allocation Adherence Missing Link 33

34 PMPT Portfolio Construction Framework: C. Upside Potential / Downside Risk Optimization 1. Conditional Value at Risk (CVaR) Framework 2. Beta constrained to each LDi-Index TM Portfolio Return Targets 3. Identify Liability Derived Index LDi-Index 4. Maximize Potential to Exceed the LDi-Index Subject to Risk of Falling Below that LDi-Index 34

35 PMPT Portfolio Construction Framework: D. Different Needs = Different Portfolios Participant A GOAL: Retire with dignity AGE: 35 RETIRES: 65 SALARY: $60,000 DEFERRALS: $5K/year ASSETS: $35,000 Participant B GOAL: Retire with dignity AGE: 35 RETIRES: 65 SALARY: $60,000 DEFERRALS: $5K/year ASSETS: $0 LDi-3 Portfolio LDi-5 Portfolio LDi-9 Portfolio LDi-11 Portfolio Sample: Illustration Purposes Only Source: Sortino Investment Advisors,

36 PMPT Portfolio Construction Framework: E. Linking Assets to Liabilities LOWER THE LDi Liabilities R E T U R N LDi 7% Assets RAISE THE LDi T I M E Liability Derived intelligence LDi is designed to help you achieve YOUR retirement replacement ratio. 36

37 PMPT Portfolio Construction Framework: F. Case Study: Liability Derived index (LDi) Scenario S & P I N D E X LDi7 $700M 5/31/07 SPY=1425 LDi9 $614M LDi11 $513M LDi9 $625M LDi7 $746M 2/28/11 SPY= % Source: LDi LLC, 2011 Sample: Illustration Purposes Only 37

38 G. Case Study: Account Balance - LDi Portfolios vs. S&P 500 Index 60% equity LDi7 60% equity LDi7 LDi9 76 equity% 76% equity LDi9 85% equity LDi11 LDi

39 PMPT Portfolio Construction Framework Summary: H. LDi Summary: Designed to guide the investor through financial and capital markets uncertainties to a successful long-term outcome Customized to an investor s financial profile, rather than a one size-fits-all answer Based on your objective needs versus subjective preferences Identifies the Liability Derived index - LDi needed to achieve each investor s goal Maximizes the potential to exceed the goal, subject to the risk of falling below the goal Seeks to Optimally Combine active and passive managers Responds to investor needs and capital market changes 39

40 a QDIA Managed Account Program Consortium of Partners and Distribution Channels Presented by: James Pupillo CIMA, CIMC Managing Director, Partner direct

41 LDi Consortium: Investment Management Consulting Services: Post Modern Portfolio Theory Portfolio Architecture & Construction Asset allocation & Portfolio Construction Trustee Services: 100 Year Old Trust Company Collective Trust Funds (CTFs) ModelxChange Platform ModelxChange Portfolios Platform Employee Census Data Processing: Plan Benchmarking Account Aggregation Data Collection & Distribution Data Collection Strategic Alliance Partners: 41

42 Trust Company Data Collection & Distribution Traditional Consulting Services PMC/Prima Active Manager Research Research/Asset Allocation EnvestNet UMA Platform Fidelity IWS Asset Custody Participant Advise Invesco / PowerShares Mid-Atlantic, PAI, DAC Platforms Insight Communications Third Party Administrators RIA 401(k) Advisors Blackrock i-shares Insurance Companies Corporate Trust Companies R-1, 2, 3 Share Classes LDi Collective Investment Trusts 4% 4% 6% 8% QDIA 401k Managed Account Program 10% 12+% Plan Design Optimization Plan Sponsor Level Plan Participant Level Process Participant Advisory Report -PPAR Census Data Collect Calculate GAP Analysis Distribute PPAR data HT 401(k) Institutional Advisors Fidelity, Schwab, Pershing, JPM Other Custodian Relationships Other Corporate Trust Companies Agnostic Fund Structure RIA, TPA, Vendor Friendly Other HT Strategic Partner s H-0, H-1 Share Classes Phase One: 06/2012 target Phase Two: 01/2013 target 42

43 Disclaimer fiduciaries This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be suitable for all investors. LDi LLC recommends that investors independently evaluate Particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a Particular investment or strategy will depend on an investor s individual circumstances and objectives. Tax laws are complex and subject to change. LDi LLC, its affiliates and its Financial Advisors do not provide tax or legal advice and are not (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise agreed to in writing by LDi for plan Participants with their entire self-directed 410(k) account fully enrolled in the LDi Managed Account Program. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their tax or legal advisors before establishing a retirement plan and to understand the tax, ERISA and related consequences of any investments made under such plan. Asset allocation and diversification do not guarantee a profit or protect against a loss in a declining financial market. Portfolio Management is an advisory program in which the client's Financial Advisor invests the client's assets on a discretionary basis in a wide range of securities. The views expressed herein are those of the author and do not necessarily reflect the views of LDi LLC or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results LDi LLC.. The Liability Derived index (LDi) managed account program are Participant advisory report not designed to be financial planning tools, nor are they to be used to assess an investor s risk/return characteristics. The Liability Derived index does not factor market volatility as a primary risk, nor does it sufficiently account for the investor s level of acceptable risk or risk tolerance. The determination of the Liability Derived index for the investor does not consider the investor s periodic payments, bonuses or commissions other than salary, nor does it take into consideration assets held outside of the plan or any other forms of external income sources such as social security or spousal support. The Liability Derived index Program does not take into consideration the investor s tax situation, debt or future changes in assets or income needs. The investor should evaluate their level of risk tolerance based on their own investment knowledge, experience, demographics and net worth, and consider either adjusting their portfolio risk, investigating alternative investment options, or consulting with an investment advisor to consider their specific situation and needs. The program assumes that the LDi is the underlying goal of the investor, and the possibility of the investor failing to reach the Liability Derived index accordingly is a primary investor risk. Investing in financial securities involves risk. The higher the Your Asset-Liability index, the greater the potential for significant loss of principle in your retirement account balance. Ignoring or underestimating the Liability Derived index increases the risk of not replacing a sufficient amount of pre-retirement salary. There is no assurances, implied or implicit, that the Liability Derived index assigned to each Participant will be achieved, nor, if achieved, will result in replacing a significant amount of pre-retirement salary. The Liability Derived index program should only be used as a starting point to assist in determining the requirements needed to replace a significant portion of pre-retirement salary at retirement. Past performance is no guarantee of future results. We, and its employees are not in the business of providing tax or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the "promotion or marketing" of the transaction(s) or matters(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer's Particular circumstances from an independent tax advisor. 43

44 LDi Conceptual Slogans List ADVANCING PORTFOLIO INNOVATION SIMPLY SOPHISTICATED PORTFOLIOS INTELLIGENT INVESTMENT PORTFOLIOS MINIMIZING INVESTMENT UNCERTAINTY SOPHISTICATED SIMPLICITY ADVANCING FINANCIAL INNOVATION ENGINEERED ALPHA