Investment Policy Statement State of California Savings Plus Program

Transcription

1 Investment Policy Statement State of California Savings Plus Program Revised April2015

2 Investment Polley Statement State of California -Savings Plus Program Contents Program Objectives and Background Purpose of the Investment Policy Statement Roles & Responsibilities Program Investment Structure Investment Option Profiles Investment Option Performance Standards Acknowledgement of Approval

3 State of California- Savings Plus Program 1 Program Objectives and Background The Savings Plus Program (the "Program") consists of voluntary defined contribution plans and mandatory retirement plans established by the State of California Department of Human Resources ("CaiHR") for the benefit of participating employees and their beneficiaries. The Program contains the following plans: An eligible nonqualified 457 plan for eligible employees ("457 Plan") A qualified 401 (k) plan for eligible employees ("401 (k) Plan") An eligible nonqualified 457 plan for eligible part-time, seasonal, and temporary employees, the Part-time, Seasonal, and Temporary Employees Retirement Program ("PST Program") A qualified 401 (a) plan for eligible new State employees hired between August 11, 2004 and June 30, 2013, the Alternate Retirement Program ("ARP") The 457 Plan was established under Chapter 4, Section of the California Government Code and was first established in The 401 (k) Plan was established in 1985 under Chapter 9, Section of the California Government Code and was first implemented in The PST Program was established under Chapter 8.5, Section of the California Government Code and was implemented in The ARP was established under Chapter 8.6, Section of the California Government Code and was implemented in All of the above plans are intended to satisfy the requirements of sections 457(b) or 401 (a) of the Internal Revenue Code, as applicable. 457 Plan and 401 (k) Plan The 457 Plan and the 401 (k) Plan are voluntary. These plans allow eligible State employees the opportunity to defer a portion of their current compensation tax-deferred and after-tax as a Roth option to supplement their future retirement income. Subject to State law, CaiHR or its authorized designee(s) (collectively, the "Plan Sponsor") has the sole authority to establish the overall design of the 457 Plan and the 401 (k) Plan and to select and periodically review the investment options available under these plans. Participants in the 457 Plan and the 401 (k) Plan generally have complete discretion to decide their contribution levels and to direct the investments within their accounts among the investment options available under the respective plan. No fiduciary of the 457 Plan or the 401 (k) Plan, including but not limited to the Plan Sponsor, the Investment Committee, and the Program, will be liable for any loss resulting from a participant's investment directions. 1

4 State of California- Savings Plus Program PST Program and ARP The PST Program and the ARP are mandatory programs for eligible State employees. Both programs provide for automatic tax-deferred contributions of a portion of the covered employees' current compensation. Effective July 2015, ARP contributions will cease to be collected; roughly two years later this program will cease to exist. Subject to State law, the Plan Sponsor has the sole authority to establish the overall design of the PST Program and the ARP. In addition, the Plan Sponsor has sole authority to invest the assets under the PST Program and the ARP. Investment Committee The Plan Sponsor maintains an Investment Committee (the "Committee") to periodically evaluate and make recommendations to the Plan Sponsor regarding the investment options available under the 457 Plan and the 401 (k) Plan and the investments under the PST Program and the ARP, as well as other investment related matters. The Plan Sponsor appoints the Committee members. Committee members shall serve at the will of the Plan Sponsor and may be removed as the Plan Sponsor deems appropriate. 2

5 2 Purpose of the Investment Policy Statement This Investment Policy Statement (the "Policy") defines the objectives of the Program and establishes policies and procedures for meeting those objectives in a manner that is consistent with the applicable requirements of California law and other governing laws. This Policy outlines guidelines and requirements in three functional areas: Planning Define the Program's objectives and link those to the Program's investment structure Establish guidelines for the investment of the Program's assets Document the responsibilities of Program fiduciaries responsible for the oversight and management of the Program's assets and the responsibilities of non-fiduciaries Operations Outline criteria and procedures for the ongoing operation of the Program's investments Establish investment performance standards Control Monitor results, including investment performance Describe ways to address investment options that fail to satisfy established standards In general, this Policy is intended to incorporate sufficient flexibility to accommodate current and future economic and market conditions and changes in applicable accounting, regulatory, and statutory requirements. As recommended by program staff and/or investment consultant(s), the Committee intends to review this Policy at least annually and, if appropriate, recommend amendments to the Plan Sponsor to reflect changes in the capital markets, the Program's objectives, or other factors relevant to the Program. 3

6 3 Roles & Responsibilities Program Participants The 457 Plan and the 401 (k) Plan allow participants to direct the investment of their account balances. Accordingly, participants in those plans bear the responsibility of developing and monitoring a strategy for the investment of their accounts, including the following : Determine the amount to contribute to the 457 Plan and to the 401 (k) Plan within the limitations set by those plans and the Internal Revenue Code Allocate account balances and deferrals to the available investment options based on individual circumstances, which may change over time, including time horizon, goals and objectives, and risk tolerance Rebalance account balances to the participant's desired allocation due to market movements and account activity The PST Program is a mandatory retirement savings program authorized by federal law for employees who are not covered by a retirement system or by Social Security. The Program administers the PST Program for California State employees and California State University employees. The employer deducts a portion of the participant's wages and deposits the money in a PST Program account for the participant. The PST Program is set up as a 457 Plan. The ARP is a mandatory retirement savings program in which certain State employees were automatically enrolled from August 11, 2004 through June 30, It is an "alternate" retirement program because it provides two years of retirement savings in lieu of two years of retirement service credit under CaiPERS. For two years from initial hire (or from CaiPERS membership eligibility), the employer deducts a portion of the participant's wages and deposits the money in an account for the participant. As stated above, ARP contributions are expected to end in July The Program administers the ARP, which is set up as a 401 (a) Plan. Plan Sponsor & Committee The Plan Sponsor and the Committee act in the sole interest of Program participants and their beneficiaries for the exclusive purpose of providing benefits to the participants and their beneficiaries, and defraying the reasonable expenses of administering the Program. Furthermore, the Plan Sponsor and the Committee must comply with and fulfill all aspects of the established guidelines under the Internal Revenue Code and other governing rules and regulations that relate to the administration and investment of the assets under the plans. Plan Sponsor The Plan Sponsor performs the following in conjunction with Program and statutory provisions: Comply with all applicable rulings, regulations, and legislation Act in accordance with the provisions of trust and/or custodial agreements 4

7 Act as fiduciary of the Program Appoint Committee members Monitor Committee actions Approve or disapprove Committee recommendations Committee The Committee or its designee is responsible for the following tasks: Establish and maintain this Policy Periodically evaluate the Program's investment performance and the costs to participants Vote on investment options, portfolio design, and manager changes based on recommendations from the Program's Investment Consultants Recommend to the Plan Sponsor investment portfolio design and investment strategies Investment Consultants The Investment Consultants are responsible for the following tasks: Make recommendations regarding investment portfolio design, investment and performance objectives, guidelines, and this Policy Conduct Investment Manager searches Conduct periodic due diligence visits with Investment Managers Develop quarterly investment evaluation reports Perform investment monitoring functions Assist with implementation of new investments and investment related products/services Report to the Committee and/or its designees on current investment trends and issues The Investment Consultants acknowledge that each is a fiduciary with respect to these services that consist of investment advice as defined by ERISA as being fiduciary in nature. As of the date of the adoption of the May 2006 Policy, any new contract for an Investment Consultant(s) must require disclosure of any conflicts of interest that exist with any providers or potential providers supplying services to the Program. Investment Managers The Investment Managers selected by the Plan Sponsor are responsible for making investment decisions consistent with the approach stated in relevant contracts, Investment Manager Agreements, fund declarations and prospectuses. Investment Managers are also responsible for reporting investment results on a regular basis as determined by the Committee. Annually each Investment Manager is expected to meet with the Committee and/or its representative(s) to provide at least: A verbal and written review of their investment performance and portfolio structure A synopsis of their key investment decisions, their underlying rationale, and expected future implications Strategy, team, and organizational updates Contract compliance Expenses Investment Managers and/or the Third Party Administrator (TPA), as may be so designated by the Plan Sponsor, are responsible to vote all proxies and corporate actions in the best interest of Program participants and their beneficiaries. In accordance with their contract, Investment Managers are also required to notify the Committee (or its designees) and the Investment Consultant(s) in writing of changes in investment strategy, operation, and personnel that has material impact to the investment strategy. 5

8 Custodian Bank The Custodian Bank is responsible for performing the following, as well as other agreed-upon activities, in conjunction with the Program and statutory provisions: Fulfill all the regular fiduciary duties of a custodian, as required by ERISA and other pertinent state and federal laws Provide an effective relationship management and client service approach that ensures necessary attention and resources are devoted to the Program to meet service expectations and requirements Protect Program assets, ensure timely settlement of security transactions, credit all income and principal realizable by the Program in a timely manner Provide a sweep of uninvested cash assets in Investment Manager accounts into a suitable cash management vehicle daily, and calculate and report the net asset value for unitized accounts timely and accurately Maintain accurate reporting systems which provide information on all monies received or paid on behalf of the Program and on all securities under the custody contract including all unsettled securities transactions Deliver Program assets to a successor custodian or as otherwise directed by the Plan Sponsor or its designee with proper instructions within a reasonable time period of termination Distribute promptly all proxy materials or other corporate actions received by the Custodian Coordinate asset transfers as requested by the Committee or its designee(s). Provide fund accounting for investment options. Services include, but are not limited to, calculating net asset value (NAV), maintaining a working interface for trading and reconciliation with the Third Party Administrator, posting securities trades, and analyzing funds relative to target allocations Provide compliance monitoring services for the Program's separate accounts Third Party Administrator The TPA is responsible for performing the following, as well as other agreed upon activities, in conjunction with Program and statutory provisions: Provide an effective relationship management and client service approach that ensures necessary attention and resources are devoted to the Program to meet service expectations and requirements Provide and maintain relationship staffing at all levels including relationship management, onsite plan representative, operations, processing, technology, and other categories necessary to achieve agreed-upon service expectations and requirements Provide and maintain a recordkeeping system and operating environment that is compliant with government regulations, statutory provisions, and the specific requirements of the Program related to all aspects of Program administration and event processing Maintain and update a participant database, which includes participant data, plan participation data, fund elections, account balances, and any other data required by the Plan Sponsor Update participant database and other demographic details through effective file transmission activity (inbound and outbound) with centralized and non-centralized payroll sources Through a working interface for trading and reconciliation maintained with the Custodian, reconcile all contributions to deposits; reconcile Program level, investment option level, and individual account balances with the balances in the trust, as displayed on the trustee's reports Ensure deposits are properly allocated to specific investment options according to participant elections Provide individual participants with access to statements detailing beginning balances, all transactions, income credited, and ending balances as required by governing regulations Calculate participant distributions based on governing regulations, Program rules, participant 6

9 State of California -Savings Plus Program account balances, and/or participant requests Provide monthly reconciliations of clearing account, expense account, disbursement accounts, and other administrative accounts within the Program's trust Develop, implement, monitor, and review a comprehensive communications and marketing strategy in conjunction with the Program 7

10 State of California -Savings Plus Program 4 Program Investment Structure PST Program and ARP The investment goal for assets in the PST Program and in the ARP is to maximize total return consistent with capital preservation by investing in short-duration securities. PST Program assets and ARP assets are invested in the Short Term Investment -PST and Short Term Investment -ARP respectively. 457 Plan and 401 (k) Plan The appropriate investment strategy for any individual participant to accumulate retirement savings or achieve other savings objectives is a function of multiple personal factors, including but not limited to age, income, time horizon, risk tolerance, return expectations, accumulation objectives, and other assets outside of the Program. To allow participants to establish savings and investment strategies that meet their individual needs, the Program provides a variety of investment options in which participants may invest and diversify their account balances. The 457 Plan and the 401 (k) Plan currently allow participants to direct their account balances to a variety of investment options providing broad capital market access. 8

11 457 Plan and 401 (k) Plan Investments by Tier This chart provides a visual of the 457 Plan and 401 (k) Plan investment options and how they are categorized within tiers. High c ~ u l! :l.:.. c.. u ~.. Q. a "' >.. _, lr."emo">onll U>d Funcr ~P FunCI Brokerage Account T~erJ Hewitt Financial Services SDBA Active Core s - Tier 2 (B) large ~p FunCI SI>On Term lnves~~ SI>On High Level of Risk Low Chart Definitions Level of Participant Interaction: The amount of ongoing interaction required by an individual participant to successfully manage a given investment. o For example, the structures and allocations of the Target Date s are administered by the Program in consultation with the Investment Consultant(s}, and thus require little to no involvement by the participant. Conversely, the self-directed brokerage account requires a high degree of ongoing monitoring and management by the participant, as the investment profile and structure is completely determined by the participant. Level of Risk: The amount of volatility expected in a given investment. Each investment option available under the 457 Plan and the 401 (k) Plan is intended to fill a primary savings and investment role consistent with the Program's objectives and to address the risks that participants face. The Program considers factors such as participant investment knowledge, participant risk tolerance, liquidity needs, and plan size. Participants who fail to give investment instructions regarding either their balance or future contributions to the 457 Plan or the 401 (k) Plan are invested in the Qualified Default Investment Alternative ("QDIA") selected by the Committee in accordance with DOL Reg c-5. The program investment structure was developed in consultation with the Investment Consultant(s). The analysis identified the appropriate asset categories that cover the overall risk/return spectrum offered by the Program and determined the investment options to be 9

12 offered through both active and passive management. Participants bear the full risk of investment results from their investment directions. The Program offers the following investment options under both the 457 Plan and the 401 (k) Plan: Target Date s- Tier 1 (QDIA) Small Cap - Tier 2(B) (Active) Small Cap Index - Tier 2(A) (Passive) International - Tier 2(B) (Active) International Index - Tier 2(A) (Passive) Mid Cap - Tier 2(B) (Active) Mid Cap Index - Tier 2(A) (Passive) Large Cap - Tier 2(B) (Active) Large Cap Index - Tier 2(A) (Passive) Socially Responsible - Tier 2(B) (Active) Diversified Real Return - Tier 2(B) (Active) Bond - Tier 2(B) (Active) Bond Index - Tier 2(A) (Passive) Short Term Investment - Tier 2(B) (Active) Short Term Investment -Cash - Tier 2(B) (Active) Self-Directed Brokerage Account - Tier 3 The Plan Sponsor, through a recommendation from the Committee and/or outside Investment Consultant(s), or both, may replace or hire additional managers within an investment category at any time. The investment options, along with their benchmarks, descriptions, and performance evaluation measures, may be changed as recommended by the Committee and approved by the Plan Sponsor. While each of the defined contribution plans under the Program are governmental plans, as defined in Section 3(32) of Title I of the Employee Retirement Income Security Act of 1974 (ERISA), as amended, and are therefore not subject to the provisions of that Title, including the fiduciary requirements, the Plan Sponsor intends to generally follow the fiduciary best practices of ERISA. Self-Directed Brokerage Account (SDBA) Participants can make their own investment decisions and have full discretion over the menu of investment options available to them on the brokerage platform. Participants assume all responsibility for their investment decisions in the SDBA. Participant investment elections through the SDBA option will be subject to the Investment Guidelines provided by the brokerage account provider. Participant investment elections through the SDBA are not otherwise covered under this Policy. Excessive Trading Policy The Investment Committee adopts a policy on excessive trading by plan participants as deemed necessary by the circumstances. Excessive trading (also known as frequent trading or market timing) is the practice of buying and selling investments frequently in an attempt to profit from 10

13 discrepancies between a fund's unit price and the value of the underlying holdings. This practice increases fund expenses, which results in higher fees and adversely affects fund performance for all shareholders invested in the fund. Current Policy- effective July 1, 2014 Designed to protect our participants from the potential negative impacts of market timing, the excessive trading policy imposes a 2.5 percent redemption fee on the sale of securities in the Savings Plus International funds (Active and Index) if the sale occurs within 30 calendar days of purchase. Proceeds from such fees will flow directly back into the unit value of the fund to compensate the other participants for the effects of the frequent trading behavior. 11

14 5 Investment Option Profiles The Program intends to offer participants a diversified selection of investment options from which to invest their assets. The following pages outline the specific roles and characteristics of each investment option under the Program. The investment vehicles included in each of the investment categories may consist of mutual funds, commingled investment trusts, and separate account(s). Investments made through mutual funds and commingled investment trusts are governed by the fund's investment guidelines outlined in the prospectus and trust agreement, respectively. An Investment Management Agreement (IMA) is established for each separately managed account to specify investment guidelines and objectives for the separate account. The IMA is maintained as an exhibit to the Standard Agreement entered into by and between the State and the Investment Manager. The Committee may seek outside experts to assist in the establishment and maintenance of an IMA. 12

15 Tier 1 - Target Date s Management Objectives Manager Structure Primary Investments Target Date s Active and Passive The Custom Target Date s are a series of diversified portfolios designed to simplify the asset allocation process for participants and provide an option to accumulate wealth based on their expected retirement/separation date through a single investment option. The date in each fund name represents the approximate year the participant is anticipated to begin withdrawing their account assets, and is referred to as the "target date." As a fund's target date approaches, the allocation to the underlying investment strategies automatically shifts to a more conservative mix in order to preserve the accumulated balance. However, the principal value of the fund is not guaranteed at the target date or any other time. The Program, with the assistance of an Investment Consultant, shall have discretion over the Investment Manager structure of the investment funds. The target allocations are reviewed annually for appropriateness and adjusted to de-risk the portfolio as the target date draws closer. This reflects the need for reduced investment risks as the target date approaches and the need for a lower volatility portfolio, wh ich may represent a significant source of income after retiring. The Custom Target Date s contain allocations to a diverse set of assets that are intended to provide capital appreciation, capital preservation, and protection against inflation. Each of the funds seeks to provide capital growth and income consistent with its current asset allocation, which will change over time, automatically increasing its allocation to fixed income while decreasing its allocation to equities. For example, the 2060 begins with an asset allocation of 80% invested in equities, 10% in fixed income, and 10% in inflation protection strategies. Over time the equities allocation decreases while the fixed income allocation increases. In the year 2060, th is same 2060 will have a target allocation of 25% in equities, 70% in fixed income, and 5% in inflation protection strategies. At any given time, actual allocations among the underlying strategies may vary somewhat due to market movements and portfolio cash flows. Interest and dividend income Capital appreciation/(depreciation) 13

16 Tier 1 -Target Date s Expected Risk 1 Target Date s Expected return will vary from low to high depending on the underlying asset allocation. The Income is expected to provide a lower rate of return given the lower volatility expectations of the 's target asset allocation. Contrary, the 2060 is expected to provide a higher rate of return given the higher volatility expectations of the 's target asset allocation. However, the emphasis for the Target Date series is not necessarily on optimizing expected return, but rather on maximizing the income replacement capabilities of the median Savings Plus participant during retirement. Expected risk will vary from low to high depending on the underlying asset allocation. The Income is expected to exhibit a lower level of risk given the lower volatility expectations of the 's target asset allocation. Contrary, the 2060 is expected to exhibit a higher level of risk given the higher volatility expectations of the 's target asset allocation. The expected risk profile of the Target Date series is designed with a focus on capital appreciation for funds with a long investment horizon (e.g., 2060 ) and with an emphasis on capital preservation through risk minimization of accumulated balances as the target date nears. 1. Risk is defined as standard deviation of quarterly returns. 14

17 Tier 2(A) - Passive Core Options State of California- Savings Plus Program Management Objectives Small Cap Index Passive Replicate the return of the Russell 2000 Index Primary Stocks with market capitalizations that are in-line with the Russell 2000 Investments Index are used to achieve the 's objective. The may employ a sampling technique to build a portfolio with similar characteristics to the Russell 2000 Index. The may also use futures and/or options to manage risk and to equitize dividends and cash flows. Expected Risk, Management Objectives Dividend income Capital appreciation/(depreciation) Very High Very High International Index Passive Replicate the return of the MSCI ACWI Ex-U.S. Investable Market Index (IMI) Primary Investments Expected Risk 1 Foreign stocks of both developed and emerging countries with market capitalizations that are in-line with the MSCI ACWI Ex-U.S. IMI are used to achieve the 's objective. The may employ a sampling technique to build a portfolio with similar characteristics to the MSCI ACWI Ex-U.S. IMI. The may also use futures and/or options to manage risk, manage currencies and to equitize dividends and cash flows. Dividend income Capital appreciation/(depreciation) High High 1. Risk is defined as standard deviation of quarterly returns. 15

18 Tier 2{A) - Passive Core Options State of California -Savings Plus Prog ram Management Objectives Mid Cap Index Passive Replicate the return of the S&P Mid Cap 400 Index Primary Stocks with market capitalizations that are in-line with the S&P Mid Cap 400 Investments Index. The may employ a sampling technique to build a portfolio with similar characteristics to the S&P Mid Cap 400 Index. The may also use futures and/or options to manage risk and to equitize dividends and cash flows. Dividend income Capital appreciation/(depreciation) High Expected Risk 1 High Management Objectives Primary Investments Expected Risk 1 Large Cap Index Passive Replicate the return of the S&P 500 Index Stocks with market capitalizations that are in-line with the S&P 500 Index. The may employ a sampling technique to build a portfolio with similar characteristics to the S&P 500 Index. The may also use futures and/or options to manage risk and to equitize dividends and cash flows. Dividend income Capital appreciation/(depreciation) High Moderate/High Management Objectives Primary Investments Expected Risk 1 Bond Index Passive Replicate the return of the Barclays U.S. Aggregate Bond Index Fixed income securities that have characteristics in-line with the Barclays U.S. Aggregate Bond Index. The may employ a sampling technique to build a portfolio with similar characteristics to the Barclays U.S. Aggregate Bond Index. The may also use futures and/or options for the purpose of managing risk and to bondize cash flows. Interest income Capital appreciation/(depreciation) Moderate Moderate 1. Risk is defined as standard deviation of quarterly returns. 16

19 Tier 2(8) - Active Core Options Small Cap Management Active Objectives High total return Provide active management with exposure to multiple investment styles Manager Structure The Program, with the assistance of an Investment Consultant, shall have discretion over the Investment Manager structure of the. The investment structure wi ll be reviewed periodically and the manager allocations will be tested monthly. Primary Investments Domestic stocks with market capitalizations that are in-line with stocks found in Russell 2000 Index. The total portfolio consists of predominately actively managed strategies, which include value, growth and core investment styles, as well as a passively managed index sleeve, which closely tracks the Russell2000 Index. The investments should exhibit characteristics, including price/earnings and price/book ratios, that are in-line with the Russell 2000 Index. Dividend income Capital appreciation/(depreciation) Very High Expected Risk 1 Very High Management Objectives Manager Structure Primary Investments 1 Expected R1sk International Active High total return Provide non-u.s. equity (developed and emerging markets) exposure Provide active management with exposure to multiple investment styles The Program, with the assistance of an Investment Consultant, shall have discretion over the Investment Manager structure of the. The investment structure will be reviewed periodically and the manager allocations will be tested monthly. Foreign stocks of developed and emerging market countries with market capitalizations diversified across the size spectrum (Large, Mid, and Small capitalizations). The total portfolio consists of predominately actively managed strategies which include value, growth and core investment styles, as well as a passively managed index sleeve which closely tracks the MSCI ACWI Ex-U.S. IMI. The investments should exhibit characteristics, including price/earnings and price/book ratios, that are in-line with the MSCI ACWI Ex- U.S. IMI. Dividend income Capital appreciation/(depreciation) High High 1. Risk is defined as standard deviation of quarterly returns. 17

20 Tier 2(8) - Active Core Options Mid Cap Management Active Objectives High total return Provide active management with exposure to multiple investment styles Manager Structure The Program, with the assistance of an Investment Consultant, shall have discretion over the Investment Manager structure of the. The investment structure will be reviewed periodically and the manager allocations will be tested monthly. Domestic stocks with market capitalizations that are in-line with stocks found Primary in Russell Midcap Index. The total portfolio consists of predominately Investments actively managed strategies which include value, growth and core investment styles, as well as a passively managed index sleeve which closely tracks the S&P Mid Cap 400 Index. The investments should exhibit characteristics, including price/earnings and price/book ratios, that are in-line with the Russell Midcap Index. Expected Risk, Dividend income Capital appreciation/(depreciation) High High Large Cap Management Active Objectives High total return Provide active management with exposure to multiple investment styles Manager Structure The Program, with the assistance of an Investment Consultant, shall have discretion over the Investment Manager structure of the. The investment structure will be reviewed periodically and the manager allocations will be tested monthly. Primary Domestic stocks with market capitalizations that are in-line with stocks found Investments in the Russell 1000 Index. The total portfolio consists of predominately actively managed strategies which include value, growth, and core investment styles, as well as a passively managed index sleeve which closely tracks the S&P 500 Index. The investments should exhibit characteristics, including price/earnings and price/book ratios, that are in-line with the Russell 1000 Index. Expected Risk, Dividend income Capital appreciation/(depreciation) High Moderate/High 1. Risk is defined as standard deviation of quarterly returns. 18

21 Tier 2(8) -Active Core Options State of California -Savings Plus Program Management Objectives Socially Responsible Active Long-term capital appreciation and current income by investing in companies that meet certain environmental, social, and governance criteria, resulting in a total investment return consistent with a balanced investment approach. Primary Investments Expected Risk 1 The Socially Responsible invests in stocks, bonds, and money market instruments to provide a complete investment portfolio of socially responsible investments. The tactically alters the allocation of assets between stocks and bonds based on the Investment Manager's assessment of the market outlook and the relative attractiveness of the underlying asset categories in order to optimize portfolio return and reduce portfolio risk. The generally holds 60% stocks and 40% bonds; however, the allocation of stocks can range from 45% to 75%. The invests primarily in highquality, large and mid-capitalization equity securities, as well as investmentgrade bonds. A small portion (up to 15%) of the equity allocation may be invested in foreign stocks. Dividend income Capital appreciation/(depreciation) High Moderate/High 19

22 Tier 2(8) -Active Core Options State of California -Savings Plus Program Management Objectives Diversified Real Return Active and Passive Hedge against inflation risk by investing in assets that offer protection against movements of inflation while also providing low correlation to traditional asset categories. Total return that outpaces inflation (CPI) + 3.0% return premium Manager The Program, with the assistance of an Investment Consultant, shall have Structure discretion over the Investment Manager structure of the. The investment structure will be reviewed periodically and the manager allocations will be tested monthly. Primary Investments The total portfolio consists of three underlying real return strategies: Treasury Inflation-Protected Securities (TIPS) Index, Global Real Estate Investment Trusts, and a multi-asset class inflation hedge strategy. Asset allocations to the three underlying real return strategies will vary due to market movements and portfolio cash flows. Expected Risk, TIPS Bond Index Segment: The TIPS segment shall be invested proportionally in treasury securities comprising the Barclays U.S. TIPS Index. Global Real Estate Investment Trust Segment: The Global Real Estate Investment Trust segment shall be invested in a portfolio of securitized real estate securities including equity securities of real estate companies, real estate investment trusts (REITS), and real estate operation companies (REOCS). Multi-Asset Class Inflation Hedge Segment: The multi-asset class inflation hedge segment is comprised of a multistrategy fund investing in inflation sensitive equities, treasury inflation protected securities, and commodities. Interest income Capital appreciation/(depreciation) Moderate/High Moderate/High 1. Risk is defined as standard deviation of quarterly returns. 20

23 Tier 2(8) - Active Core Options Management Objectives Manager Structure Primary Investments Expected Risk 1 Bond Active Modest total return that outpaces inflation. The Program, with the assistance of an Investment Consultant, shall have discretion over the Investment Manager structure of the. The investment structure wil l be reviewed periodically and the manager allocations will be tested monthly. Government, corporate, mortgage-backed, and asset-backed fixed income securities with an average portfolio duration generally between three and six years; high-yield and international issues will be utilized. Derivatives may be used for hedging or non-hedging purposes. The total portfolio consists of a combination of intermediate duration fixed core investment styles along with global markets, and should exhibit characteristics, including effective duration, maturity, and average portfolio quality, that are in-line with the custom benchmark consisting of 60% Barclays U.S. Aggregate Bond Index and 40% Barclays Global Aggregate Bond Index (Unhedged). Interest income Capital appreciation/(depreciation) Moderate Moderate Management Objectives Short Tenn Investment Active Total return equal to or greater than inflation Manager The Program, with the assistance of an Investment Consultant, shall have Structure discretion over the Investment Manager structure of the. The investment structure will be reviewed periodically and the manager allocations wi ll be tested monthly. Primary Investments Expected Risk, Government, corporate, mortgage-backed fixed income securities, and money market instruments with average portfolio duration between one and three years. The total portfolio consists of short duration core fixed income investment styles and should exhibit fixed income characteristics, including effective duration, maturity and average portfolio quality, that are in-line with the Barclays U.S. 1-3 Year Government/Credit Bond Index. Interest income Capital appreciation/(depreciation) Low Low 1. Risk is defined as standard deviation of quarterly returns. 21

24 Tier 2(8) - Active Core Options State of California -Savings Plus Program Short Term Investment - Cash Management Active Objectives Principal preservation Current income Manager The Program, with the assistance of an Investment Consultant, shall have Structure discretion over the Investment Manager structure of the. The investment structure will be reviewed periodically and the manager allocations will be tested monthly. Primary Investments 1 Expected R1sk High-quality U.S. dollar-denominated short-term fixed income, money market instruments (U.S. Treasury bills, notes and bonds) of domestic and foreign issuers, repurchase agreements, and bank deposits/contracts. Contract income Interest income Capital appreciation/(depreciation) Low Low 1. Risk is defined as standard deviation of quarterly returns. 22

25 Tier 3 - Brokerage Account State of California- Savings Plus Program Management Objectives Primary Investments Expected Risk 1 Self-Directed Brokerage Account (SDBA) Not Applicable Provide participants with additional investment options beyond the Target Date s and Core s. Mutual funds and individual securities with varying risk/return characteristics accessed through a SDBA. Varies Varies Varies 1. Risk is defined as standard deviation of quarterly returns. 23

26 6 Investment Option Performance Standards Based on Investment Consultant analyses and observations, the Committee shall evaluate each investment option's performance quarterly, based on the quantitative and qualitative standards as outlined below. The Committee may retain an outside expert to assist in this process. Qualitative Standards The following qualitative standards will be used in the evaluation of each Investment Manager in the Program: Compliance with stated investment guidelines, contract terms, and/or state or federal laws and rules Adherence to stated investment style and philosophy Ownership stability and alignment of interests with investors Retention and attraction of key investment professionals associated with the management of the investment strategy Litigation and assessment of impact on future investment performance Disclosure of relevant information that may have an adverse impact on performance An Investment Manager that fails to satisfy any of the above (or combination of the above) criteria may be removed from the Program or placed on a watch list as further discussed below in Monitoring and Ramifications. Quantitative Standards The Committee adopted a fund-of-funds investment option structure. Each investment option offered to Program participants is constructed of separate and distinct investment strategies. The Committee intends to monitor performance at two levels; investment option and underlying component Investment Manager strategy. Performance results are measured by: 1) Investment Options: Total time-weighted rates of return net of investment management fees and all fund expenses including Program expenses (i.e., explicit costs paid for administration or other Program costs); 2) Underlying component Investment Manager strategy: Total time-weighted rates of return. Returns for separate account managers are gross of investment management fees and all fund expenses including Program expenses. Returns for mutual funds, commingled funds, and annuities are net of investment management fees; 24

27 3) Against a respective market index and universe median over rolling three-year" and five-year periods. Volatility is measured by the standard deviation of quarterly returns and should be comparable to each strategy's respective market index and in-line with respective universe averages. Strategies with greater volatility than the index are expected to earn a higher return than its respective index on a risk-adjusted basis. Monitoring and Ramifications The following pages identify the investment return objectives established for each investment option category. It is expected that the investment options designated for each investment category will meet or exceed these performance objectives. The manager universes are comprised of professionally managed funds of comparable peers. The Committee monitors fund performance relative to these standards. An active Investment Manager is expected to outperform its market index and manager universe median over the long-term - i.e. Quantitative Standards. At its discretion, the Committee may place an Investment Manager on the Watch List if the performance standard is not met for four consecutive quarterly observations of the trailing three-year and five-year periods. Significant portfolio management personnel or manager style changes are also cause for placement on the Watch List or for contract termination - i.e. Qualitative Standards. A passive Investment Manager is expected to satisfy its tracking error standards over the longterm. At its discretion, the Committee may place an Investment Manager on the Watch List if the tracking error standard is not met for four consecutive quarterly observations of the trailing threeyear and five-year periods. Significant portfolio management personnel or manager style changes are also cause for placement on the Watch List or for contract termination. Once an Investment Manager is placed on the Watch List, additional due diligence is performed by the Investment Consultant. The results of the Investment Consultant's findings are reviewed at each Committee meeting. The Investment Consultant's recommendation as to whether the Investment Manager should continue on the Watch List, should be taken off the Watch List, or terminated by defunding the mandate, is evaluated by the Committee. The Committee, by way of vote, will decide if the Investment Manager will remain on the Watch List, be removed from the Watch List, or be replaced if circumstances exist that would warrant such action. 25

28 Tier 1 & Tier 2 Investment Options State of California -Savings Plus Program Investment Options Comparative Manager Universe Median 3 and 5 Years Tier 1 - Target Date Options Relative Market Index 3 and 5 Years Each Will Be Evaluated Target Date s Not Applicable Compared to Customized Indices Based on Target Allocation Mixes 1 Small Cap Index International Index Mid Cap Index Large Cap Index Tier 2(A) - Passive Core Options Not Applicable Not Applicable Not Applicable Not Applicable Russell 2000 Index (Tracking Error+/- 0.30%) 2 MSCI ACWI Ex-U.S. IMI (net) (Tracking Error+/- 0.30%) 2 S&P Mid Cap 400 Index (Tracking Error+/- 0.30%) 2 S&P 500 Index (Tracking Error+/ %) 2 Barclays U.S. Aggregate Bond Index Not Applicable Bond Index (Tracking Error+/- 0.30%) 2 Small Cap International Mid Cap Large Cap Socially Responsible Diversified Real Return Bond Short Term Investment Short Term Investment - Cash Tier 2(8) - Active Core Options U.S. Small Cap Equity Mutual Universe Russell2000 Index Non-U.S. Equity Mutual Universe MSCI ACWI Ex-U.S. IMI (net) U.S. Mid Cap Equity Mutual Universe Russell Midcap Index U.S. Large Cap Equity Mutual Universe Russell10001ndex U.S. Balanced Universe 60% S&P 500/40% Barclays U.S. Aggregate Bond Index Not Applicable U.S. Core Fixed Income Mutual Universe U.S. Short Duration Fixed Income Mutual Universe Money Market Mutual Universe Consumer Price Index+ 3%/35% Barclays U.S. TIPS Index /15% FTSE EPRA NAREIT Dev. Real Estate Index/50% Multi-Asset Class Inflation Hedge Strategy Custom Benchmark 60% Barclays U.S. Aggregate Bond Index /40% Barclays Global Aggregated Bond Index (Unhedged) Barclays 1-3 Year Government/Credit Bond Index 90-day Treasury Bill Index 26

29 Underlying Component Strategies for Tier 2(8)- Active Core Options Underlying Component Strategy Small Cap Growth Equity Strategy Small Cap Value Equity Strategy International Small Cap Equity Strategy Comparative Manager Universe Median 3 and 5 Years U.S. Small Cap Growth Equity Institutional Universe U.S. Small Cap Value Equity Institutional Universe Non-U.S. Small Cap Equity Institutional Universe Relative Market Index 3 and 5 Years Russell 2000 Growth Index Russell 2000 Value Index MSCI EAFE Small Cap Index International Growth Equity Non-U.S. Growth Equity MSCI ACWI Ex-U.S.IM Growth Strategy Institutional Universe Index International Core Equity Strategy International Value Equity Strategy Mid Cap Growth Equity Strategy Mid Cap Value Equity Strategy Large Cap Growth Equity Strategy Large Cap Value Equity Strategy Non-U.S. Core Equity Institutional Universe Non-U.S. Value Equity Institutional Universe U.S. Mid Cap Growth Equity Institutional Universe U.S. Mid Cap Value Equity Institutional Universe U.S. Large Cap Growth Equity Institutional Universe U.S. Large Cap Value Equity Institutional Universe MSCI ACWI Ex-U.S. IMI MSCI ACWI Ex-U.S. IM Value Index Russell Midcap Growth Index Russell Midcap Value Index Russell 1000 Growth Index Russell1 000 Value Index Global Real Estate Investment Global Real Estate Mutual FTSE EPRA/NAREIT Developed Trust Strategy Universe Real Estate Index Multi-Asset Class Inflation Hedge Strategy Not Applicable Consumer Price Index+ 5% I Custom Benchmark Based on the Target Asset Allocation Mix of the Underlying Strategies TIPS Bond Index Strategy Not Applicable Barclays U.S. TIPS Index Market Duration Fixed Income U.S. Core Fixed Income Mutual Barclays U.S. Aggregate Strategy Universe Bond Index Short Duration Fixed Income 1-3 Year Fixed Income Barclays 1-3 Year Strategy Institutional Universe Government/Credit Bond Index 1 Target Date s will also be evaluated based on their target allocation mixes, ability to span the risk/return spectrum, and the underlying funds that comprise each target date fund. These investment options are intended for participants who are in need of default investment options based on personal factors, including age, income, time horizon, risk tolerance, return and accumulation objectives. 2 Tracking error is defined as the return of the minus the return of the relative market index. 27

30 Program State of California - Savings Plus 7 Acknowledgement of Approval The undersigned hereby acknowledges the foregoing Investment Policy Statement, which was originally adopted in March 2003 and previqusly revised in March 2006, April 2008, January 2012 and Apri12014, was approved_ on f1 n\ 3 0, Name: \2_\CA"?..ccl bllc, h2..._ Title: D\~~ r Signature: -:::::;:::> ~~ 28