Investment Strength and Flexibility Principal Trust SM Target Date Funds The Principal Trust SM Target Date Funds (Target Date Funds) are designed to capitalize on the growing popularity of Do-It-For-Me investment options in the defined contribution marketplace. Launched in July 2009, the Target Date Funds provide retirement plan participants with access to a series of target date funds that invest in more passively managed underlying assets than do the Principal LifeTime portfolios. The Target Date Funds are well-diversified funds that automatically shift to traditionally more conservative underlying assets over time to reduce key financial risks as each fund s time horizon decreases. Our proposition is that the Target Date Funds can offer meaningful benefits to many investors by capitalizing on the competitive strengths of the Principal Financial Group (The Principal ) a strong retirement heritage combined with a high-quality approach to institutional asset management in one investment option. The Target Date Funds are a series of target date collective investment funds developed for qualified retirement plans. They are managed over time toward a particular target horizon, which is the approximate date the participant expects to start withdrawing money. Each Target Date Fund reflects what Principal Trust Company SM (Principal Trust) believes to be an optimal asset class mix a combination of actively and passively managed equity, fixed income and real estate for the respective target date. The Target Date Funds consist of distinct funds staged in five-year increments. Like other target date (lifecycle) offerings, each Target Date Fund gradually becomes more conservative by increasing its exposure to traditionally more conservative underlying investment options and reducing its exposure to more aggressive underlying investment options as the target date nears. The Target Date Funds are maintained and managed by Principal Trust. Principal Management Corporation provides nondiscretionary investment advisory services to Principal Trust. Principal Management Corporation, a member of the Principal Financial Group, is a leader in the target date portfolio marketplace, with over $20 billion in target date assets currently under management and more than 1 million participants. Source: Principal Management Corporation, December 31, 2011 Principal Trust SM Target Date Funds March 2012
Principal Trust SM Target Date Funds March 2012 2 Investment Philosophy and Process The Target Date Funds embrace a multi-asset class, multi-style and multi-manager strategy while providing broad diversification and an institutional-quality investment approach. The Target Date Funds have the following key attributes: Extensive diversification across core and specialty asset classes. A structured investment strategy, with disciplined risk management at each stage of the process. Multiple underlying investment managers representing a range of asset classes and investment styles. More passively managed underlying investment options than utilized within the Principal LifeTime portfolios. The philosophies that guide the asset allocation, rebalancing and underlying asset selection processes are instrumental to the success of the Target Date Funds. These philosophies are best described as strategic since they are based on the long-term equilibrium relationships between investment return and risk. Four-Step Investment Process Step 1: Asset Class Selection Step 2: Glide Path Structure Step 3: Portfolio Construction Step 4: Disciplined Rebalancing Step 1: Asset Class Selection The first step in the investment process is the selection of asset classes and corresponding benchmarks. Every asset class used in the Target Date Funds must meet certain eligibility requirements, such as: Risk premiums are commensurate with the asset class risk profile. The asset class provides incremental diversification benefits. Suitable implementation vehicles exist that permit efficient access to the asset class (e.g., open-ended mutual funds, insurance company separate accounts, affiliated and/or unaffiliated mutual funds, unaffiliated collective trust funds). Not FDIC Insured May Lose Value Not a Deposit No Bank Guarantee Not Insured by Any Federal Government Agency
Every asset class also has a clearly defined role in the asset allocation strategy, such as: Capital appreciation Income generation Diversification Inflation hedge Capital preservation Liquidity Within this framework, the Target Date Funds utilize eight primary asset classes: U.S. Equities, Developed Non-U.S. Equities, Global Emerging Markets Equities, Real Estate Securities, High-Yield Fixed Income, Core Fixed Income, Inflation-Protected Fixed Income and Short-Term Fixed Income. ASSET CLASS SELECTION Principal Trust SM Target Date Funds March 2012 3 Emerging Equities Real Estate CORE U.S. Equities Fixed Income Short-term Fixed Income High Yield Inflation Protected Non-U.S. Equities More passively-managed More actively-managed The Target Date Funds are benchmarked against a custom blended index, rebalanced annually, that consists of three broad indexes: Russell 3000 Index, MSCI EAFE Index and Barclays Capital Aggregate Bond Index. Within these primary asset classes, the Target Date Funds are generally style-neutral to the blended index. Asset allocation/diversification does not guarantee a profit or protect against a loss.
Principal Trust SM Target Date Funds March 2012 4 Step 2: Glide Path Structure The second step in the investment process is the design of the glide path for the Target Date Funds. To develop its glide path recommendation to Principal Trust, Principal Management Corporation analyzes several investing and spending scenarios using proprietary capital market assumptions and a variety of optimization and stochastic modeling tools (i.e., Monte Carlo simulations, mean/variance optimization and downside risk analysis). This analysis was organized using a life stage framework that divides a person s financial lifespan into four segments: Early Career, Prime Career, New Retiree and Senior Retiree. The glide path ultimately decided upon by Principal Trust reflects what Principal Trust believes to be an optimal asset allocation mix that balances various financial risks throughout the time horizon of the Target Date Funds. These key risks are defined as savings shortfall risk, market risk, inflation risk and longevity risk. Each risk is managed differently, depending on the time horizon for each of the Target Date Funds. The resulting framework encompasses a total investment time horizon of roughly 80 years, including up to a 50-year working career and more than 25 years in retirement. The following chart depicts the asset class targets and overall glide path for the Target Date Funds. Note: For all Target Date Funds the retirement age is assumed to be 65 years of age. Allocations are based on current asset allocation targets. They will change over time. Neither the principal nor the underlying assets of the Principal Trust Target Date Funds is guaranteed at any time, including the target date. Investment risk remains at all times. Asset allocation/diversification does not guarantee a profit or protect against a loss.
The glide path is not linear during the accumulation or spending phases because the rate of risk reduction is not constant through time. In the early accumulation years, the rate of risk reduction is modest since higher equity allocations are intended to maximize growth. During the later accumulation years, the glide path slope becomes much steeper, which suggests the rate of substitution is accelerating. This acceleration reflects the belief that equity allocations should fall more rapidly as mid-life savers become increasingly more sensitive to market risk, as their asset balances may have grown and their retirement date also is approaching. In later post-retirement years, the capital preservation attributes of cash and fixed income strategies become more desirable. Accordingly, the rate of risk reduction declines again and the equity glide path becomes flat. Accumulation Phases Early Career and Prime Career The most important investment risk for Early Career savers (usually those in their 20s and 30s) is shortfall risk, which is defined as the risk of failing to save and invest aggressively enough to adequately fund retirement spending. Despite a long investment horizon, Early Career savers are also subject to market risks and may adjust their retirement plans due to short-term market volatility. To properly balance shortfall and market risk, the asset allocation mix is diversified across equity, fixed-income and real estate portfolios. A small, yet strategic, allocation to high yield and real estate securities allows for proper diversification to help minimize large losses, with the goal of adding incremental yield. Prime Career savers (typically early 40s through early 60s) are subject to the same risks as Early Career savers. However, Principal Trust believes their true level of market risk aversion is higher than that of Early Career savers because, by this time, most Prime Career savers may have accumulated substantial assets and their retirement date is rapidly approaching. Therefore, Principal Trust believes Prime Career savers seek balance between continued wealth accumulation and a desire to avoid significant capital losses in the years remaining until retirement. To address shortfall and market risk during these years, the slope of the Target Date Funds glide path becomes steeper, which suggests a greater level of change within the equity and fixed-income asset classes. Inflation protection securities are also introduced at this stage to help minimize losses and to help preserve real purchasing power. The most important investment risk for Early Career savers is shortfall risk: the risk of failing to save and invest aggressively enough to adequately fund retirement spending. Principal Trust SM Target Date Funds March 2012 5
Principal Trust SM Target Date Funds March 2012 6 Spending Phases New Retiree and Senior Retiree As they transition into their early retirement years (typically mid 60s to late 70s), New Retirees face the delicate task of balancing market risk with longevity and inflation risk. Longevity risk is the chance of outliving assets, while inflation risk is the risk of losing real purchasing power to inflation over time. New Retirees are most vulnerable to longevity risk at retirement because this is when the potential spending horizon is the longest. Therefore, various annual spending rates (4 percent, 5 percent and 6 percent) were analyzed for the glide path formation. The dominant risk for Senior Retirees (typically, age 80+) is market risk because a large percentage of their savings has usually been depleted and the remaining balance is needed to fund their continued spending. Thus, the equity portion of the glide path flattens and the asset class mix favors capital preservation. Using this framework along with its dynamic asset allocation model, Principal Management Corporation is able to evaluate and incorporate into its recommendation to Principal Trust each of the key risks simultaneously within each of a participant s four life stages. The asset allocation targets are further refined to help ensure the Target Date Funds would land on the efficient frontier. 1 Step 3: Portfolio Construction The third step in the investment process is the selection and monitoring of the Target Date Funds underlying investment options and investment managers. Principal Management Corporation provides advice to Principal Trust with respect to the glide path design and portfolio construction of the Target Date Funds and also recommends the asset allocation guidelines to Principal Trust. Principal Management Corporation then implements the guidelines and monitors each Target Date Fund to ensure it remains within the guidelines established by Principal Trust. The Target Date Funds are invested in underlying investment options having a combination of different investment managers. As a result, they are classified within the industry as multiple manager target-date funds. The majority of the underlying investment options used within the Target Date Funds are passively managed. The investment strategy is to use passively managed underlying investment options in the generally more efficient asset classes and investment 1 The efficient frontier is a curved line plotted on a risk/return graph that represents the optimal portfolios as determined from a risk/reward analysis. The optimal portfolios plotted along the curve are expected to potentially deliver the highest return possible for the given level of risk. The efficient frontier for the Target Date Funds is generally representative of the potential long-term risk/return relationships of the Target Date Funds with their current asset allocation. Note: The asset allocation of the Target Date Funds will change over time and there is no guarantee that future risk/return performance will be consistent, especially over shorter time periods. No portfolio has zero risk, and none guarantees any specific reward.
styles such as U.S. equities and core fixed income and actively managed underlying investment options in less efficient market segments (e.g., developed non-u.s. equities, global emerging markets, real estate and high-yield bonds). Step 4: Disciplined Rebalancing The final step in the investment process is rebalancing. Rebalancing is a risk management service; the primary focus of rebalancing is on controlling and managing systematic risks, not forecasting short-term market trends. Principal Management Corporation provides advice to Principal Trust with respect to rebalancing and recommends guidelines. Principal Management Corporation then monitors each Target Date Fund and implements the rebalancing guidelines as necessary to ensure the Target Date Fund remains within the guidelines established by Principal Trust. The systematic (or rules-based) rebalancing process is characterized as strategic since it utilizes target ranges for each asset class and investment manager. The rebalancing ranges established around each target reflect an effort to achieve optimal balance between excess transaction costs (which can occur when ranges are too narrow) and policy drift (which can occur when ranges are too wide). Principal Trust SM Target Date Funds March 2012 7 The minimum and maximum ranges for total equity exposure are static limits, and rarely will the asset class exposure extend beyond these limits. Should any asset class or underlying asset exceed its minimum/maximum limits, the allocation will be rebalanced back to its target. At the direction of Principal Trust, Principal Management Corporation continuously monitors the relative positions and risk exposures within the Target Date Funds and makes rebalancing recommendations to Principal Trust, which makes final rebalancing decisions. Summary The goal of the four-step investment process used to construct the Principal Trust SM Target Date Funds is a well-diversified, institutional-quality target-date fund constructed to help investors over their entire lives. The combined experience and complementary skills of Principal Management Corporation as the nondiscretionary investment adviser to Principal Trust provide the Principal Trust SM Target Date Funds with a competitive edge in terms of strategic asset allocation, investment manager selection and monitoring, and systematic rebalancing.
Insurance products and plan administrative services are provided by Principal Life Insurance Company. Principal mutual funds are part of the Principal Funds, Inc. series. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities sold or services offered by a Princor Registered Representative are offered through Princor Financial Services Corp, 1-800-547-7754, member SIPC and/or independent brokers/dealers. Principal Funds Distributor, Princor, Principal Trust Company, and Principal Life are members of the Principal Financial Group, Des Moines, IA 50392. Certain investment options may not be available in all states or U.S. commonwealths. Principal Funds Distributor, Principal Shareholder Services, Principal Management Corporation, and Principal Funds, Inc. are collectively referred to as Principal Funds. Investors should carefully consider a mutual fund's investment objectives, risks, charges, and expenses prior to investing. A prospectus, or summary prospectus if available, containing this and other information can be obtained by contacting a financial professional, visiting principal.com, or calling 1-800-547-7754. Read the prospectus carefully before investing. Delaware Charter Guarantee & Trust Company, conducting business as Principal Trust SM Company ( Principal Trust ) is a member of the Principal Financial Group. The Principal Trust SM Target Date Funds, is a series of collective investment funds maintained by Principal Trust, as trustee, under the Plan and Declaration of Trust of Principal Trust SM Target Date Collective Investment Funds, as amended from time to time ( Trust ). Principal Management Corporation ( PMC ), an affiliate of Principal Trust, provides nondiscretionary advisory services to Principal Trust with respect to the Principal Trust SM Target Date Funds. Principal Trust and PMC are fiduciaries subject to the Employee Retirement Income Security Act of 1974, as amended. PMC also manages portfolios of Principal Funds, Inc., ( Principal Funds ) a series mutual fund, which may be included as underlying investments in the Principal Trust SM Target Date Funds. PMC receives management fees from Principal Funds. The Principal Trust Target Date Funds may also include group annuity separate accounts ( Separate Accounts ) managed by Principal Life Insurance Company ( Principal Life ), an affiliate of Principal Trust. Principal Life receives management fees from the Separate Accounts. PMC, Principal Life, or other affiliates of Principal Trust may provide services with respect to Principal Funds or Separate Accounts and may receive fees for such services. Sub-Advisers to Principal Funds and Separate Accounts are monitored by the Principal Due Diligence Program SM. Principal Trust SM Target Date Funds are available only to qualified plans and governmental 457(b) plans. They are not mutual funds and are not registered with the Securities and Exchange Commission, the State of Delaware or any other regulatory body. Principal Trust Target Date Funds are not guaranteed by Principal Trust, PMC, any of their affiliates, the FDIC or any other governmental agency. The value of the Principal Trust SM Target Date Funds will fluctuate so that when redeemed, shares or units may be worth more or less than the original cost. Past performance is no guarantee of future results. Participation in the Principal Trust SM Target Date Funds is governed by the terms of the Trust and a Participation Agreement, the form signed by the retirement plan s fiduciary at the time the plan invests in the Principal Trust Target Date Funds. The retirement plan s fiduciary will also be provided with a Principal Funds, Inc. Institutional Class Shares Prospectus ( Prospectus ) before the plan invests in the Principal Trust SM Target Date Funds. The Trust, Participation Agreement, and Prospectus are available from Principal Trust or Principal Life. The Trust, Participation Agreement, and Prospectus contain important information about Trust fees and investment objectives, risks, and expenses of the underlying investments in the Principal Trust Target Date Funds and should be read carefully before investing. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Fixed-income and asset allocation investment options that invest in mortgage securities are subject to increased risk due to real estate exposure. Asset allocation/diversification does not guarantee a profit or protect against a loss. Investing in real estate, small-cap, international, and high-yield investment options involves additional risks. Additionally there is no guarantee this investment option will provide adequate income at or through retirement. WE LL GIVE YOU AN EDGE Principal Financial Group, Des Moines, Iowa 50392-0001, principal.com PQ10317-02 2012 Principal Financial Services, Inc. 03/2012 t12031904k8