DC MARKET REVIEW: SEGMENTATION AND PLAN SPONSOR RELATIONSHIPS

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1 EXECUTIVE INSIGHT DC MARKET REVIEW: SEGMENTATION AND PLAN SPONSOR RELATIONSHIPS DECEMBER 2011 Strategic Insight is pleased to introduce its inaugural edition of the Defined Contribution Research Suite. SI is proud to offer this complimentary edition to provide our clients with a snapshot of our DC research capabilities. DC research topics for 2012 include: Addressing the Large Plan Markets DC Market Sizing & Outlook 2012 Investment Option Fee Analysis: Micro and Small Plans Recordkeeper Segmentation Analysis Gatekeepers: Consultant and Recordkeeper Due Diligence Teams Plan Sponsor Perceptions & Expectations More detailed information regarding the 2012 research agenda is available on the back cover of this report. Strategic Insight an Asset International Company 805 Third Avenue, New York, NY Tel: (212) , Fax: (212) Also available at 1

2 TABLE OF CONTENTS Introduction and Key Observations... 3 Methodology... 4 PLANSPONSOR DC Survey... 4 PLANSPONSOR Recordkeeper Survey... 4 Market Segmentation... 5 Comparisons: DC and US Employer Market... 5 Top Recordkeepers by Segment... 5 Plan Sponsor Relationships... 6 Plan Provider... 7 Length of Relationship... 7 Provider Evaluation... 8 DC Recordkeeper Turnover... 8 Fiduciary Role... 9 Financial Advisers & Consultants... 9 Areas of Influence... 9 Adviser Compensation Adviser and Consultant Turnover Investment Managers Investment Lineup QDIA Income Options Volatility Management & GTAA Investment Option and Manager Turnover Outlook Appendix: SI s DC Research Capabilities Simfund MF PLANSPONSOR and PLANADVISER Pathfinder

3 INTRODUCTION AND KEY OBSERVATIONS Our latest Executive Insight commentary provides a defined contribution market segmentation analysis and details plan sponsor relationships with recordkeepers, financial advisers/consultants, and investment managers. This complimentary and inaugural edition of the Defined Contribution Research Suite leverages the unique and proprietary survey data of our affiliate PLANSPONSOR and seeks to provide asset managers with insight into plan sponsors expectation of action over the coming year. Some of the key observations of this report include: The DC marketplace, as segmented by number of plan participants, mirrors the general US employment market (based on the last US Census). Micro plans (defined as having less than 100 participants) represent 89% of all DC plans by count, but only 23% of all DC plan assets. Inversely, plans with over 1,000 participants represent only 2% of DC plans by count, but control 55% of total DC plan assets. Overall, 40% of plan sponsors indicated that they ve been engaged with their current DC provider for over seven years, with another 16% saying they have been with their DC provider for five to seven years. Smaller plans tend to evaluate their provider more frequently than larger plans, therefore resulting in more frequent recordkeeper turnover and shorter relationships. In 2010, roughly 3% of plan sponsors indicated that they already changed their recordkeeper or planned to change it by year-end. This small percentage translated to an estimated $166 billion of potential money in motion. Nearly half (45%) of plan sponsors reported that financial advisers were the main source of insight in investment monitoring, while 29% of plan sponsors cited recordkeepers as the main source of insight. The most common form of adviser compensation is a percentage of plan assets, especially among smaller plans. Moving upwards in plan size, it becomes more common to compensate an adviser based on a flat monthly or annual retainer or based on projects, such as a vendor search or manager search. Roughly 5% of plan sponsors reported offering an in-plan guaranteed income option (a product that guarantees a monthly lifetime income in retirement) in In 2010, 14.5% of plan sponsors said they added new investment options or planned to add new investment options by year-end. Mid, large, and mega plans were the most likely to make changes to their investment option menu in 2010, which would have a significant dollar impact on investment manager s DC assets. Report Authored by: Bridget Bearden, BBearden@sionline.com, (212) Strategic Insight Editorial Board Avi Nachmany, avi@sionline.com, (212) Sonia Mata, sonia@sionline.com, (212) Loren Fox, lfox@sionline.com, (212) Dennis Bowden, dbowden@sionline.com, (212) Bridget Bearden, bbearden@sionline.com, (212)

4 METHODOLOGY This report analyzes proprietary data aggregated in two annual surveys conducted by Strategic Insight s affiliate, Asset International s PLANSPONSOR. These two surveys are the most representative of their kind. PLANSPONSOR DC SURVEY The PLANSPONSOR DC survey is an annual survey of DC plan sponsors, gauging a variety of DC-related factors and sentiments from QDIAs to expectations of action. The survey is generally conducted during the third quarter and has become one of the DC industry s leading benchmarking tools for plan sponsors. In 2011, over 7,000 plan sponsors participated in the survey. For comparison, Vanguard s How America Saves 2011 represented 2,000 qualified plans, 1,700 of which were Vanguard clients. PSCA s 54 rd annual survey, reflecting the 2010 experience, represented approximately 800 plan sponsors. Participants in the annual PLANSPONSOR DC survey receive a complimentary benchmarking report. PLANSPONSOR RECORDKEEPER SURVEY The PLANSPONSOR recordkeeper survey is an annual survey of DC recordkeepers, entering its 14 th year in The survey gauges recordkeeper DC business activity, requesting plan segmentation breakouts of DC business in addition to other DC-related questions. Each survey is conducted in the first quarter after year-end, and has come to represent the lion s share of DC assets. For example, for year-end 2010, recordkeeper survey participant s total DC assets represented a self-reported $4.126 trillion representing 677,192 plans and 83 million participants. For comparison, the ICI estimated $4.486 trillion in DC assets as of year-end Form 5500 data from the Department of Labor are the basis of ICI s estimates of DC assets, with the year-end 2008 being the latest Form 5500 data incorporated. 4

5 : MARKET SEGMENTATION The defined contribution business can be broken down into a number of different segments based on industry classification, geographic location, plan demographics, and plan size, among others. SI s analysis of DC plan segments is based on each plan s number of participants, to conform to already established segments of the US labor force as defined by the US Census. Other leading retirement research organizations that analyze the DC marketplace by number of participants include the ICI and EBRI. COMPARISONS: DC AND US EMPLOYER MARKET The DC marketplace, as segmented by number of plan participants, mirrors the general US employment market (based on the last US Census). Exhibit 1 Comparing the DC Plan and US Employer Markets DC Plan Market Segmentation by Participant Count < ,000-4,999 5,000-9,999 >10,000 % of DC Assets 23% 12% 9% 15% 9% 32% % of DC Plans 89% 8% 1% 1% 0.2% 0.3% US Employer Market Segmentation by Employee Count < ,000-4,999 5,000-9,999 >10,000 % of Payroll 30% 14% 5% 14% 7% 31% % of Firms 98% 2% 0.2% 0.1% 0.0% 0.0% Source: PLANSPONSOR Recordkeeper Survey, 2011 and US Census 2008 Micro plans (defined as having less than 100 participants) represent 89% of all DC plans by count, but only 23% of all DC plan assets. Inversely, plans with over 1,000 participants represent only 2% of DC plans by count, but control 55% of total DC plan assets. Even though micro businesses (<100 employees) reflect the majority (98%) of US employers by sheer count (based on the last US Census, 2008), they represent just 30% of US annual payroll. At the other end of the spectrum, firms with over 1,000 employees represented 0.2% of all US employers but 51% of US annual payroll. Micro and small businesses have the most opportunity in the number of potential plans, but large and mega companies have the most asset gathering opportunity. TOP RECORDKEEPERS BY SEGMENT Each plan provider approaches the DC marketplace in a unique way, and provides different services based on plan sponsor and plan participant needs. It follows that recordkeeper leadership varies across plan segments as measured by participants. Understanding the competitive positioning of business partners can beneficial for both sides of the relationship. 5

6 Exhibit 2 Top 5 Recordkeepers by Plan Participant Size Segment (ranked by YE 2010 AUM) <100 participants participants participants Fidelity Investments Fidelity Investments Fidelity Investments Prudential Retirement TIAA-CREF TIAA-CREF John Hancock Principal Financial Group Vanguard ING Great-West Retirement Services Wells Fargo Principal Financial Group ING Principal Financial Group 1,000-4,999 participants 5,000-9,999 participants >10,000 participants TIAA-CREF Fidelity Investments Aon Hewitt Vanguard TIAA-CREF ING Wells Fargo Vanguard Vanguard Fidelity Investments ING TIAA-CREF Charles Schwab T. Rowe Price JPMorgan Source: PLANSPONSOR Recordkeeper Survey, 2010 While some recordkeepers clearly dominate across plan sizes, several recordkeepers have found a niche among a certain market segments. For example, Aon Hewitt operates only in the mega plan market as an unbundled recordkeeper, while the financial adviser distributed bundled businesses of Prudential and John Hancock show their strength in the micro market. Vanguard advantages are evidenced in its presence among the larger plan market segments, as compared to Principal Financial Group who successfully serves the smaller plan markets. TIAA-CREF holds an enviable position across most market segments, but notably most of these assets reside in 403(b) plans. Exhibit 3 Top 10 Recordkeepers by Overall DC Assets ($B), 2010 Total Rank Recordkeeper DC 401(k) Assets Assets 1 Fidelity Investments $940 $821 2 TIAA-CREF $352 $2.3* 3 Aon Hewitt $297 $263 4 ING $292 $214 5 Vanguard $274 $234 6 Wells Fargo $158 $108 7 Prudential Retirement $153 $112 8 Great-West Retirement Services $147 $70** 9 J.P. Morgan Retirement Plan Services $119 $99 10 Principal Financial Group $113 $78 *$263 billion resides in 403(b) plans, **$49 billion resides in 457 plans. Source: PLANSPONSOR Recordkeeper Survey, 2011 PLAN SPONSOR RELATIONSHIPS The PLANSPONSOR DC survey provides invaluable insight on how plan sponsors perceive their vendors and what potential actions they may take in the coming months. Three relationships are explored in the following analysis: the relationship with the plan provider; the relationship 6

7 with the financial adviser or investment consultant; and the relationship with the investment manager. PLAN PROVIDER The plan provider is perhaps the most important relationship the plan sponsor has. The plan provider drives nearly every facet of the participant s experience: from initial education and enrollment, to investment option lineups, ongoing communications and online account access, through loans, withdrawals and rollovers. Length of Relationship Relationships with DC providers are generally well-established. Overall, 40% of plan sponsors indicated that they ve been engaged with their current DC provider for over seven years, with another 16% saying they have been with their DC provider for five to seven years. Micro and small plans generally have shorter relationships with recordkeepers than large and mega plans. For example, 22% of plans with less than 500 participants have DC provider relationships of less than three years, while only 10% of plans with over 5,000 participants have been with their current provider for less than three years. On average, small plans generally have shorter relationship lengths due to higher DC provider turnover among smaller plans, and increasing number of small businesses offering DC plans. The longer relationships of larger plans are partly a result of the complexity of recordkeeper conversion in terms of time, money, and resources it is often more effective to renegotiate plan administration services, including costs, with the existing provider. Exhibit 4 Length of Relationship with DC Provider: by Plan Participant Size 70% Percent of Plan Sponsors 60% 50% 40% 30% 20% 10% 0% Less than ,000-4,999 5,000-9,999 10,000 or more Plan Participant S ize All Plans Less than 1 year 1-3 years 3-5 years 5-7 years More than 7 years Source: PLANSPONSOR DC Survey,

8 Provider Evaluation Smaller plans are more likely to evaluate the relationship with their DC provider (recordkeeper) more frequently than larger plans. Generally, smaller plans evaluate their provider on an annual basis while larger plans evaluate their provider every three to five years. Small plans conduct more frequent evaluations of providers, in part, because advisers continuously present new attractive alternatives. Some advisors attempt to win new plan business by searching for a new recordkeeper offering same services at lower plan costs. Larger plans evaluate their DC providers less frequently. At times, a deterrent is the additional project fee charged by the investment or benefits consultant for a vendor search. Exhibit 5 Length of Relationship with DC Provider: by Plan Participant Size Percent of Plan Sponsors 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Less than ,000-4,999 5,000-9,999 10,000 or more Plan Participant S ize All Plans Annually Every 1 to <2 years Every 2 to <3 years Every 3 to <5 years Every 5+ years Never Source: PLANSPONSOR DC Survey, 2010 DC Recordkeeper Turnover In 2010, roughly 3% of plan sponsors indicated that they already changed their recordkeeper / provider or planned to change it by year-end. This small percentage translated to an estimated $166 billion of potential money in motion (using ICI s year-end 2010 assets as a base). The segment that is traditionally associated with long, established recordkeeping relationships the mega plan segment represented an important share of that potential money in motion. In 2010, approximately 5% (or an estimated $70 billion) of the mega plan segment (10,000+ participants) reported that they already changed or planned to change their recordkeeper by year-end. In 2011, 5.7% of plan sponsors indicated that they changed their recordkeeper or planned to change their recordkeeper by the end of Replicating the methodology of the 2010 DC Money in Motion figures, SI will provide an update on what this 2011 executed and planned provider turnover translates to (in dollar terms) when PLANSPONSOR s 2011 DC Recordkeeper survey is completed in early

9 Exhibit DC Money in Motion: Recordkeeper Turnover Percent of Plans that Changed or Planned to Change Recordkeeper in ,000-5,000 - All < ,999 9,999 >10,000 Plans % of Plans 2% 3% 5% 4% 4% 5% 3% Total Plan Segment Assets ($B) $1,052 $533 $420 $660 $399 $1,422 $4,486 Plan Segment Assets in Motion $19 $16 $20 $23 $18 $70 $166 Source: PLANSPONSOR DC Survey 2010, PLANSPONSOR Recordkeeper Survey 2011, ICI, "The U.S. Retirement Market, Second Quarter 2011" Of the 2011 plan sponsor survey participants that indicated they changed recordkeepers in the past twelve months, the most common reasons cited for changing were for better participant servicing or better sponsor servicing. Just 16% of plan sponsors indicated that they changed recordkeepers because of plan administration or investment option costs. Fiduciary Role The DOL s enhanced requirements for fee and services disclosure, combined with potential legislation that would require all plan advisers be subject to ERISA fiduciary requirements, have led to plan providers more actively marketing their fiduciary services to both advisers and plan sponsors. For example, in the adviser-sold plan market, Lincoln Financial recently introduced a new program called Lincoln Alliance featuring rigorous fiduciary and compliance support services. Another recent instance of this was the June 2011 introduction of an ERISA Fiduciary Program for qualified financial advisers from John Hancock. As of 2010, half of DC plan providers offered the option of acting as co-fiduciary on a DC plan, while approximately one-third of providers offer some sort of fiduciary warranty or guarantee. ERISA allows for varying definitions of co-fiduciary with the main difference between each relating to the transferability of fiduciary responsibilities between parties. Fiduciary warranties offered by providers generally provide plan sponsors with added assurance in their in investment menu. Warranties provide that investment menus achieve three objectives: offer a broad range of investment alternatives, are appropriate for long-term investors, and investment options are selected in accordance with ERISA prudent man requirements. FINANCIAL ADVISERS & CONSULTANTS Financial advisors and consultants are influential gatekeepers in the DC marketplace. Over half (62%) of plan sponsors report using an adviser, with the most common form of adviser compensation being an asset-based fee. Areas of Influence Identifying the main source of insight in investment monitoring helps to determine the level of influence this gatekeeper will have over future plan design. Nearly half (45%) of plan sponsors reported that financial advisers were the main source of insight in investment monitoring, while 29% of plan sponsors cited recordkeepers/providers as the main source of insight. Who a plan sponsor defers to for investment insight varies by plan size smaller plans are more likely to use 9

10 financial advisers and recordkeepers while larger plans are more likely to use investment consultants and investment managers. Exhibit 7 Sources of Insight for Investment Monitoring: Micro Plans vs. Mega Plans Percent of Plan Sponsors 60% 50% 40% 30% 20% 10% 0% 10% 43% 50% 21% 30% 12% Consultant Financial Advisor Recordkeeper/ Provider 3% 14% Underlying Investment Managers 7% Other 10% Less than 100 participants 10,000 or more participants Source: PLANSPONSOR DC Survey, 2011 Adviser Compensation The most common form of adviser compensation is a percentage of plan assets, especially among smaller plans. In 2011, over 70% of the plan sponsors that reported compensation as a percentage of plan assets had a participant base of 500 or less. Moving upwards in plan size, it becomes more common to compensate an adviser based on a flat monthly or annual retainer or based on projects, such as a vendor search or manager search. Market volatility and uncertainty over the stability of equity and bond prices may catalyze advisers to consider alternative compensation structures, such as flat or project-based fees. Despite plan sponsors being aware of how their adviser is compensated, few plan sponsors actually do the math when it comes to adviser compensation. In 2011, just over one-third of plan sponsors reported that they calculated their adviser s fee from the prior year. Adviser and Consultant Turnover Overall, approximately 4% of plans indicated they had or would change their investment consultant by year-end Mid and large plans (1,000 4,999 in participants and 5,000-9,999 participants) were most likely to say they changed or planned to change their investment consultant in Approximately 7.4% of mid plans (or an estimated $44 billion of a $602 billion market) and 9.6% of large plans (or an estimated $35 billion of a $364 billion market) representing an estimated total of $79 billion, claimed they already did or would hire, fire, or change their investment consultant in

11 Exhibit 8 Advisor Compensation Type: by Plan Participant Size 60% Percent of Plan Sponsors 50% 40% 30% 20% 10% 0% Less than ,000-4,999 5,000-9,999 10,000 or more Plan Participant S ize All Plans Performance: Investments Percent of Plan Assets Per Participant M onthly/annual Retainer Project-Based Source: PLANSPONSOR DC Survey, 2011 INVESTMENT MANAGERS The DC channel offers significant opportunity for both investment-only asset managers as well as those with a proprietary recordkeeping business. A recordkeeping product does not, however, guarantee sales into proprietary investment options, as most plan sponsors associate a broad range of investment alternatives with open-architecture. While asset manager/recordkeepers may have proprietary fund requirements, the plan sponsor s perception of potential fiduciary liability will continue to necessitate a minimum level of open architecture. According to the ICI, net flows into Hybrid funds (as defined by mixed equity/bond funds) have captured the lion s share of total DC net flows since Most target date and target risk funds, two types of QDIAs, reside in ICI s classification of Hybrid. Equity net flows have been slow to return to substantial positive territory since bottoming in 2008 with $61 billion in net redemptions, while Bond funds continued to attract net new assets through the first half of Exhibit 9 Estimated Net Flows ($B) to Mutual Funds in DC by Fund Type H2011 Equity Hybrid Bond Money market (*) Total Source: ICI, "The U.S. Retirement Market, Second Quarter 2011" * Hybrid funds invest in a mix of equities and fixed-income securities. The bulk of lifecycle and lifestyle funds is counted in this category. (*) Less than$ 1 million 11

12 Since 2006, Strategic Insight has conducted an annual survey on the gross sales activity of leading asset managers selling mostly through financial advisors, broken down by broad distribution channel. The most recent survey, conducted in April 2011 reflects the 2010 sales experience of 40 asset managers representing $4.4 trillion in long-term fund assets as of year-end 2010, or 56% of total industry-wide U.S. open-end stock and bond fund assets. Sales via the Investment Only Defined Contribution (IODC) channel accounted roughly one-fifth of total sales in 2010 according to survey participants. Of these IODC sales, nearly 60% came through No Load share classes, while approximately one-quarter of sales came through A shares at NAV. Sales Survey data also indicates higher aggregate growth of IODC sales over the median growth of IODC sales in three out of the last four survey years. Sales survey participants reported that the aggregate growth rate from 2009 to 2010 of IODC sales was nearly double that of the median growth. This means that a handful of asset managers are driving a larger proportion of IODC sales growth than the majority of asset managers. What separates the high growth IODC managers from the median growth IODC managers is not immediately discernible. IODC gross sales among most Top-25 asset managers (by long-term AUM) ranged from approximately $1 billion to $6 billion. Exhibit 10 Investment Only DC Channel Sales Growth Annual Growth of Gross Sales 40% 30% 20% 10% 0% -10% -20% -30% 29% 28% 12% 7% -7% -10% -8% -19% '06-'07 '07-08 '08-09 '09-10 Aggregate Growth M edian Growth Source: SI Sales Survey, 2011 Investment Lineup In 2011, plan sponsors reported that the median number of investment options on a DC plan was 16. Two-thirds of plan sponsors reported offering a target-date series. With a target date series 12

13 representing anywhere from six to 10 funds, (depending on whether the 5-year or 10-year increments are offered) standalone investment options generally make up the remaining alternatives. In regards to specialty strategies, in 2011 just about 19% of plan sponsors offer real estate investments; 3% offer alternative investments, including hedge funds and private equity; and 1% offer ETFs (outside of a self directed brokerage window). QDIA Over half (54%) of plan sponsors reported that a target date fund (either active, index or custom) was the QDIA for auto-enrollment in Another 21% of plan sponsors reported using a riskbased lifestyle fund or a balanced fund as the QDIA. Even though plan sponsor tilt towards the use of target-dates and balanced funds as QDIAs, the level of confidence in the appropriateness of these investment options could be improved. Plan sponsors were asked which product they felt was the best QDIA option for their employee population: balanced funds, managed accounts, target dates, not sure, or other. As seen in Exhibit 11, 40% of plans with less than 100 employees were not sure which QDIA option was best for their employee population. This large percentage of plan sponsors with smaller participant bases that were not sure demonstrates the need for increased plan sponsor education. The level of confidence in best QDIA grows moving up market in terms of plan size (and towards target-date as well). One quarter of micro plans perceive target-dates as the best QDIA as compared to 73% of mega plan sponsors. Exhibit 11 Perception of Best QDIA for Employee Population Percent of Plan Sponsors 8% 9% 11% 9% 6% 11% 22% 17% 11% 5% 5% 40% 64% 76% 73% 45% 54% 26% 10% 16% 7% 3% 4% 5% 5% 17% 15% 12% 7% 6% Less than ,000-4,999 5,000-9,999 10,000 or Plan Participant Size more 8% 26% 43% 7% 15% Grand Total Balanced fund Managed account Target-date fund Not sure Other* *Includes Target Risk, Stable Value, and other open-ended responses Source: PLANSPONSOR DC Survey, 2011 Plan sponsors were asked to rank a variety of factors by level of importance when it comes to their QDIA selection: Low Fees, Investment Transparency, Investment Allocation, Quality of 13

14 Funds/Underlying Funds, Best Overall Performance, and Fiduciary Risk. Overall, plan sponsors informed us that the most important considerations in selection of a QDIA were Quality of Funds/Underlying Funds and Best Overall Performance, while Investment Transparency and Fiduciary Risk were among the least important considerations. However, a few segment-specific traits emerged with regard to QDIA selection. For example, micro plans (<100 participants) were more likely to cite Low Fees as the most important consideration, while mega plans (10,000+ participants) were most likely to cite Investment Allocation as the most important consideration. Segment-specific traits are also evident in the plan sponsor s perception of what the best QDIA option is for Best Overall Performance, Fiduciary Risk, and Correct Usage by Participants. Just under half (46%) of micro plan sponsors said they felt Balanced funds were the best QDIA option for Best Overall Performance as compared to only 16% of mega plans saying the same about Balanced Funds. Mega plan sponsors are generally stronger proponents of target date funds in terms of Performance, Fiduciary Risk and Correct Usage. These significant differences in perception may be attributable to a number of factors, such as comfort level and understanding of the product structure, employee demographics, product pricing and custom target date fund usage by the large plan market. Exhibit 12 Plan Sponsor Perception of "Best QDIA for..." by Participant Size Percent of Plan Sponsors 26% 22% 21% 27% 62% 31% 66% 43% 46% Best Overall Performance: <100 participants 16% Best Overall Performance: 10,000 participants 48% Fiduciary Risk: <100 participants 15% 14% 12% 19% Fiduciary Risk: 10,000 participants 43% Correct Usage by Participants: <100 participants 76% 12% Correct Usage by Participants: 10,000 participants Balanced Fund Target-Date Fund Target-Risk Fund Source: PLANSPONSOR DC Survey, 2011 Income Options Even though annuities for DC were introduced in the mid-2000s and gained attention from the media and industry, little traction ensued among plan sponsors, partly because of the issues dealing with fiduciary protection, portability and comparability. Fast forward to 2011 and it 14

15 appears that just incremental progress has been made. Last year the DOL and Treasury held joint hearings on lifetime income options to solicit industry, plan sponsor, and participant feedback, to which definitive rulings (on the addition/selection of an income option or fiduciary protection) have yet been issued. Even with the news of a Fortune 500 company, United Technologies, adding an income option to its 401(k) plan, few major plan sponsors have subsequently embraced the idea with implementation. Roughly 5% of plan sponsors reported offering an in-plan guaranteed income option (as defined by a product that guarantees a certain amount of monthly lifetime income in retirement) in Of the plan sponsor that did offer this option, nearly two-thirds (63%) represented plans of 500 participants or less. Less than 1% of plan sponsors offer an out of plan guaranteed income option, with smaller plans again driving the makeup. Volatility Management & GTAA The unprecedented and continuous market volatility has led to heightened interest in managing the risks associated with such an environment. Managers that have incorporated volatility management into target date funds include firms such as AllianceBernstein and PIMCO. In October 2011, Lincoln National introduced the Presidential Protected Profile target date in I, A, and C share classes. The fund s actively managed risk-management overlay would take short positions or buy futures contracts to lower overall volatility. Global tactical asset allocation (GTAA) strategies are also receiving increased attention from mutual fund product development groups. Funds that have gained presence on DC platforms and acceptance by plan sponsors include PIMCO All Asset (PAAIX), BlackRock Global Allocation (MALOX), and Ivy Asset Strategy (IVAEX). These types of strategies are being added as both standalone investment options and as sleeves in custom target date funds. Exhibit 13 Global Tactical Asset Allocation: Institutional Assets and Net Flows ($B) $160 $148 $10 Institutional Assets ($B) $140 $120 $100 $80 $60 $40 $77 $85 $71 $79 $103 $8 $6 $4 $2 $- Institutional Net Flows ($B) $20 $(2) $- 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011 $(4) Institutional AUM Institutional Net Flows Source: evestment Alliance Represents manager reported assets in GTAA strategies across investment vehicles that participate in evestment Alliance. 15

16 evestment Alliance reports an increase in search activity (as measured by click throughs and the number of products reviewed) for Global Balanced and GTAA strategies by institutional investors and consultants. In January 2010, 76 Global Balanced and GTAA products the evestment database were reviewed. The number of products reviewed more than doubled, to 170, by September Similarly, institutional assets and net flows of GTAA products within the evestment database increased gradually through the second quarter of Investment Option and Manager Turnover In 2010, 14.5% of plan sponsors said they added new investment options or planned to add new investment options by year-end. Mid, large, and mega plans were the most likely to make changes to their investment option menu in 2010 which would have a significant dollar impact on investment manager s DC assets. One of five mid, large, and mega plan sponsors (plans representing an approximate $454 billion in DC assets) said they added or planned to add new investment options during the year. Even though these sizeable segments planned to add new investment options, a number of sponsors from the segments indicated removing investment options, albeit at a smaller rate. Approximately 5% of plan sponsors with 1,000 + participants indicated they removed or planned to remove investment options in These changes to investment menus are obviously driven by plan sponsor s anticipation of changing the current lineup. In 2010, large and mega plan sponsors were most likely to say they already acted or planned to act with regards to hiring, firing, or changing their investment manager OUTLOOK Despite the current economic uncertainty, the DC market generally offers gross sales stability through automatic enrollment and automatic contributions, in addition to new opportunities arising from recordkeeper and investment manager/option turnover. Looking beyond the present state and towards the medium term, the opportunities of the nearly $5 trillion DC market will continue to be attractive, particularly as the US economy improves. APPENDIX: SI S DC RESEARCH CAPABILITIES Strategic Insight has access to an abundance of defined contribution data afforded by our flagship Simfund MF database, affiliates PLANSPONSOR and PLANADVISER, and our innovative new recordkeeping RFP tool for retirement plan advisers, Pathfinder 2.0. SIMFUND MF Strategic Insight s flagship US mutual fund database, Simfund MF, captures assets and flows of DC mutual funds. In addition to mutual fund trends reflected in aggregate data, specific DC analysis can include R-shares and target dates, for example. R-share analysis provides insight into DC mutual fund asset and flow trends, as they have grown to represent 16% of DC mutual fund assets as of 2Q11, based on ICI assets. R-shares have demonstrated strong year-over-year 16

17 asset growth, as demonstrated in the chart below. Additionally, all 40 Act target date and target risk funds are represented in the database, across share classes. Exhibit 14 R-Shares as a Percent of Total DC Mutual Fund Assets ($T) DC Mutual Fund Assets ($T) $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $- $2.6 $2.5 $2.5 $2.2 $2.2 $1.9 $1.7 $1.7 $1.4 $1.3 $1.2 $ :Q2 30% 25% 20% 15% 10% 5% 0% Percent of DC MF Assets in R-Shares Total DC Mutual Fund Assets Percentage of DC Mutual Fund Assets in R-Shares Source: ICI "The U.S. Retirement Market, Second Quarter 2011", Simfund MF PLANSPONSOR AND PLANADVISER Launched in 1993, PLANSPONSOR magazine is the nation's leading authority on retirement issues and benefits programs. PLANSPONSOR.com provides comprehensive news and commerce services dedicated solely to helping employers and financial advisors navigate the complex world of retirement plans and benefit programs on behalf of their employees or clients. PLANADVISER.com is a leading online resource for advisers and consultants in the retirement plan space looking for practical information on the administration of retirement plans as well as features on practice management and business growth. PLANADVISER effectively reaches 35,000 plan sponsors, while PLANADVISER is read by more than 15,000 retirement plan advisers. PATHFINDER 2.0 Pathfinder 2.0 is the leading unbiased corporate retirement plan search platform used by Broker/Dealers, RIAs, Asset Managers/DCIO, and Individual advisers. With Pathfinder, advisers can conduct plan provider due diligence review, as well as provide a more efficient and comprehensive management of the request for proposal (RFP) process. Pathfinder contains from over 60 providers and research from the Asset International family of companies (PLANSPONSOR, PLANADVISER & Strategic Insight). Advisers can search from Pathfinder s extensive database of over 400 questions, weigh the importance of each search criteria and select finalists based on the results. Within Pathfinder, advisers can communicate with providers, collect plan-specific pricing and create customized client-facing reports. Pathfinder assists plan 17

18 sponsors in making better decisions on provider capabilities, fees and investments, along with helping to establish a record for fiduciary and auditing purposes. More information is available at Copyright 2011 Strategic Insight, an Asset International Company, and when referenced or sourced Morningstar Inc. and Lipper Inc. All rights reserved. The information, data, analyses and opinions contained herein (a) include confidential and proprietary information of the aforementioned companies, (b) may not copied or redistributed for any purpose, (c) are provided solely for information purposes, and (d) are not warranted or represented to be correct, complete, accurate, or timely. Past performance is no guarantee of future results. The aforementioned companies are not affiliated with each other. Reproduction in whole or in part prohibited except by permission. Any data or commentary in this report is for the internal use of client management companies only and is not to be disseminated to the general public and sales intermediaries in the form of regulatory or other reports, promotional material, or advertising without the prior written consent of Strategic Insight. This report has been prepared using information and sources we believe to be reliable; however, we make no representation as to its accuracy, adequacy or completeness, nor do we assume responsibility for any errors or omissions or for any results obtained from the use of this report, including any action taken with respect to securities referred to in this report. Our employees may from time to time acquire, hold or sell a position in securities mentioned herein. We may from time to time perform services for any company mentioned in this report. This report is not a prospectus or representation intended to use in the purchase or sale of any securities mentioned in this report. Strategic Insight is available by subscription and by single copy upon request to the publisher. 18

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20 INTRODUCING STRATEGIC INSIGHT S DEFINED CONTRIBUTION RESEARCH SUITE Strategic Insight is pleased to introduce the Defined Contribution Research Suite as a new subscription product in The DC Suite will offer a variety of in-depth reports covering topics vital to the execution of a successful DC strategy. Subscribers will benefit from insightful analyses derived from the synthesis of Asset International s unique and proprietary DC data set, including Simfund MF, PLANSPONSOR, and Pathfinder 2.0. In addition to these reports, subscription clients are entitled to 10 hours of customized defined contribution research and analysis PLANNED DC REPORTS Report Addressing the Large Plan Markets DC Market Sizing & Outlook 2012 Investment Option Fee Analysis: Micro and Small Plans Recordkeeper Segmentation Analysis Gatekeepers: Consultants and Recordkeeper Due Diligence Teams Plan Sponsor Perceptions & Expectations Description Institutional DC investment product analysis, by vehicle and asset class. Fee structure analysis will encompass all vehicles designed for the large and mega plan markets including separate accounts, collectives, R-6, and Inst l share classes. Custom funds, including targetdates, will be covered as well. Focus: Mid, large, and mega plan segments. Sources: Simfund MF, evestment Alliance, asset manager, recordkeeper and consultant interviews This report will provide short- and long-term forecasts for the DC market based on analysis of growth drivers and challenges, fee disclosure regulation and implications for stakeholders, participant demographics, and evolution in plan design theory. Focus: All plan segments. Sources: SI, DOL, EBRI Compares proposed investment lineups against incumbents in recordkeeper RFPs, on a Morningstar category share class level. Fee structure analysis will cover standard management and operating expenses, as well as distribution fees and offsets for plan costs of administration. Focus: Advisor-sold and smaller plan segments. Sources: Pathfinder 2.0, Simfund MF Based on historical annual recordkeeper data, this report will include recordkeeper league tables and growth rates by industry channel, plan type, and plan size (AUM and number of participant) segments. Focus: All segments. Sources: PLANSPONSOR Recordkeeper Surveys Examines the roles recordkeepers and institutional consultants play as gatekeepers to investment platforms. This report seeks to uncover the drivers of proposed investment lineups from recordkeepers during the mid, large, and mega plan RFP process, and manager search and selection as conducted by institutional consultants. Focus: Mid, large, and mega plan segments. Sources: PLANSPONSOR Recordkeeper Survey 2011, PLANSPONSOR Consultant Survey 2012, recordkeeper and consultant interviews Focusing in more detail on plan sponsor expectation of action, this report will be similar to the December 2011 DC report by analyzing plan sponsor relationships. Focus: All plan segments. Sources: PLANSPONSOR DC Survey 2012 For more information on subscription, please contact your regional Business Development representative..