Target Date Funds: Debating To Versus Through

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2 Target Date Funds: Debating To Versus Through Glenn Dial, Sr. VP, Head of Retirement Product Business Development, Allianz Global Investors Distributors LLC Scott Brooks, Head of US Retail Client Relations and Business Development, RREEF Steve Bleiberg, President and Chief Investment Officer, Legg Mason Global Asset Allocation John Keefe, Contributing Editor, PLANSPONSOR

3 Fundamentals of To Versus Through Glenn Dial, Sr. VP, Head of Retirement Product Business Development, Allianz Global Investors Distributors LLC

4 PARTICIPANT DEMOGRAPHICS High Fiduciary Adviser Traditional Investment Lineup Level of Participant Knowledge QDIA Professionally Managed Accounts Risk-based, Balanced Funds Fiduciary Adviser Low Target Maturity, Age-Based, Life-Cycle Funds QDIA Source: fi 360 Low Level of Participant Involvement High

5 Prevailing Circumstances of Target Date Funds Number of funds available 1. Five years ago with a three-year track record? 7 2. Three years ago with a three-year track record? Today with a three-year track record? 33

6 QDIA Framework Guide A QDIA must be diversified as to minimize the risk of large losses Target Date Funds As of Ann. Standard Deviation % Equity Source: Morningstar. Diversification does not assure a profit or protect against loss.

7 Determining To versus Through The industry has NOT agreed upon a standard definition 1. Age that glidepath reaches a plateau? 2. Percent of equity at age 65? 3. Amount of risk taken at age 65?

8 Determining To versus Through Questions plan sponsor should ask themselves: 1. What is the purpose of the DC Plan? 2. What action do you want your participants to take upon retirement? Can your recordkeeper support your goal? 3. What will participants actually do with their DC assets when they retire? (Leave in plan, or take a distribution?) 4. Does your recordkeeper have the ability to provide income to retirees? 5. Do most of your participants have the investment acumen to set up a retirement withdrawal plan? 6. Do most participants have the ability to handle Market Sequencing Risk? 7. Are other retirement plans offered? For Investment Professional Use Only Not to be Shown or Distributed to the Public

9 To versus Through: Longevity risk and regulatory perspectives Scott Brooks, Head of US Retail Client Relations and Business Development, RREEF

10 RREEF: A Leading Real Estate Investment Manager Organizational Structure 100% owned by Deutsche Bank Separate from Deutsche Bank s corporate and investment banking RREEF can leverage Deutsche Bank s global footprint 1, which creates opportunities and provides broad support Key Statistics A 40-year investment heritage More than $59 billion in assets under management More than 600 employees in 22 locations around the world Over $3.1 billion capital raised globally in 2011 year to date Deutsche Bank Tier 1 capital ratio of 13.4% A+ rated by Standard & Poors Established in 72 countries worldwide Corporate & Investment Bank Corporate Investments Private & Business Clients Private Clients & Asset Management Asset Management Private Wealth Management Seattle San Francisco Walnut Creek Costa Mesa Boston Chicago New York Dallas New Jersey Maryland Atlanta Paris London Madrid Warsaw Frankfurt Milan Beijing Seoul Hong Kong Tokyo DB Advisors Institutional asset management DB Private Equity Private equity fund of funds unit Infrastructure Infrastructure asset management Deutsche Insurance Asset Management Insurance asset management RREEF Real estate asset management DWS Investments Retail asset management Europe 39% Sydney Real Estate & Infrastructure Securities Private Real Estate Opportunistic Investments 1 Subject to applicable laws, and internal policies and procedures. As of March 31, Americas 53% RREEF Global AuM Asia Pacific 8%

11 RREEF: A Leading Real Estate Investment Manager Riverfront Office Park - Boston, MA

12 What Does Washington Think? Securities and Exchange Commission (SEC) Conducted an analysis of the 2008 performance of 2010 Target Date Funds and found an average loss of 25% with losses running as high as 41% Changes to the advertising rules to clarify and provide more information on the glidepath design Department of Labor (DOL) Issued QDIA notice updates for target dates Illustration of the glidepath Disclaimer that the fund may lose money after retirement Relevance of target date in name Fiduciary checklist to help establish best practices Congress and Executive Branch Focused on improving the transparency of target date and other default retirement investments Senate Special Committee on Aging

13 What s Missing? Alternative Assets in To and Through Models A Look at Public and Corporate Pension Plans Typically have Approximately 20% in Real Estate and Alternative Investments

14 What s Missing? Alternative Assets in To and Through Models The Typical Target Date Fund has Virtually no Exposure to Real Estate and Alternative Asset Classes Source : Investment Company Institute

15 What Do I Do Now? Custom Target Date Funds McKinsey & Company has projected these funds to be much more broadly adopted by 2015 with 10% of large and mega sized plans using a customized solution. Enhanced diversification is seen as a primary driver of this trend. Defined Contribution Institutional Investment Association - Considerations for Implementing a Custom Target Date Approach: A Guide For Defined Contribution Plan Sponsors Off The Shelf Target Date Funds Target Date Funds version 2.0 are gaining tractionin the small and mid-sized plan marketplace: Next Step Open-architecture, multi-manager structure Embrace real estate and alternative asset classes Enhanced investment manager oversight Review Your QDIA /Target Date provider to see if they are following best practices in institutional asset allocation Source: McKinsey, Defined Contribution Institutional Investment Association

16 Re-thinking the To Philosophy Steve Bleiberg, President and Chief Investment Officer, Legg Mason Global Asset Allocation

17 Through versus To Some investors view Target Date funds as an investment to get them to retirement, at which point they will move their assets elsewhere, perhaps to an annuity. Other investors view Target Date funds as an investment to carry them through retirement; they will leave their assets in the fund when they retire. Should these investors follow different glide paths in the years before retirement?

18 What are the implications of following a more conservative glide path? We simulated 10,000 periods of 75 years (age 25 to age 100) for the glide path in the Legg Mason Target Retirement funds, as well as for a glide path with 10% less equity exposure all along the way ( the conservative glide path ), using the same expected risk and return assumptions that we used in deriving the efficient frontier on which the asset allocation in the funds is based. Other assumptions: employee starts saving at age 25, with a salary of $45,000. Salary rises by 4% per year (2.5% inflation plus 1.5% real increase). Employee saves 6% of salary in first year, rising by 0.5% per year until reaching 10%. Company matches 3%. Employee retires at age 65, and spends 75% of final year s salary each year, rising by 2.5% per year. For illustrative purposes only. Past performance is no guarantee of future results.

19 Range of Simulated Outcomes at Age 65: Original Conservative Glide Path Glide Path Difference Best case $15,750,479 $10,899,118 $4,851,361 95th Percentile $5,829,724 $4,521,472 $1,308,252 75th Percentile $3,743,396 $3,182,825 $560,572 Median $2,804,189 $2,529,721 $274,468 25th Percentile $2,113,923 $2,021,541 $92,382 5th Percentile $1,439,901 $1,470,682 ($30,780) Worst Case $684,133 $761,069 ($76,936) Source: Legg Mason Global Asset Allocation, LLC as of June For illustrative purposes only. Past performance is no guarantee of future results.

20 What Are To Investors Really Worried About? Investors who plan to move their assets at retirement are worried that their portfolios will experience a sharp downturn in the years immediately prior to their retirement, just as they are preparing to withdraw their money from the fund. And because they plan to withdraw from the fund at retirement, they will not have chance to recover those losses. But rather than make the entire glide path more conservative, why not instead simply focus on downside risk management in those last few years before retirement? A dynamic risk management process (such as CPPI Constant Proportion Portfolio Insurance) can protect a fund from severe losses in the years just before retirement, without the investors having to sacrifice higher expected returns in the earlier decades.* *There is no guarantee that this objective will be met.

21 Conclusions Theoretically, the right glide path should be independent of whether the fund is thought of as through or to. Practically, though, participants who think of their investment in a target date fund as a to investment will worry about downside risk in the last years before the target date. The goal for managers should be to find a way to manage that downside risk in the years leading up to the target date without surrendering too much upside along the way for both kinds of investors.

22 Endnotes Before investing, carefully consider a fund s investment objectives, risks, charges and expenses. You can find this and other information in each prospectus, which is available at Please read it carefully. Equity securities are subject to price fluctuation and possible loss of principal. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. Fixed income securities involve interest rate, credit, inflation, and reinvestment risks; and possible loss of principal. As interest rates rise the value of fixed income securities falls. High yield bonds possess greater price volatility, illiquidity, and possibility of default. In addition to the Fund's operating expenses, you will indirectly bear the operating expenses of the underlying funds. Each underlying fund may engage in active and frequent trading, resulting in higher portfolio turnover and transaction costs. The fund may engage in active and frequent trading, resulting in higher transaction costs and increased investor liability. Derivatives, such as options and futures, can be illiquid, may disproportionately increase losses, and have a potentially large impact on fund performance. The model used to manage a fund s assets provides no assurance that the recommended allocation will either maximize returns or minimize risks. There is no assurance that a recommended allocation will prove the ideal allocation in all circumstances. The views expressed are those of the portfolio manager as of June 15, 2011 and are subject to change based on market and other conditions. These views may differ from the views of other portfolio managers or the firm as a whole, and they are not intended to be a forecast of future events, a guarantee of future results, or investment advice. charts shown in this document are for illustrative purposes only and do not represent the performance of any specific investment. Investors should not use this information as the sole basis for investment decisions. While we can speculate, there is no way to be certain as to how markets will perform in the future. The information provided herein is intended solely to describe the manager s investment strategies and asset allocation process and does not have regard to the specific investment objectives, financial situation and particular needs of any specific person who may receive it. Legg Mason Investor Services, LLC and Legg Mason Global Asset Allocation, LLC (LMGAA) are subsidiaries of Legg Mason, Inc. Legg Mason Investor Services, LLC, member FINRA/SIPC.