Fred Reish, Esq. R EISH & R EICHER FredReish@Reish linkedin/in/fredreish October 2009

1. More Laws, Regulations & Changes:Top 403(b) Issues Fred Reish, Esq. REISH & REICHER FredReish@Reish.com www.linkedin.com/in/fredreish October 2009

2. Agenda • Legal issues and fiduciary responsibility • Participant investing and QDIAs • Disclosures to plans and participants • Distributions for a lifetime

3. Exclusive Purpose and Adequacy of Benefits The focus is shifting to the results plans are producing. In addition to the responsibility for investments, fiduciaries should be looking at: • The expenses and revenue sharing. • The level of benefits being produced. • Distribution of benefits. • The quality of participant investing. • The plan’s level of participation. • The rates of deferral. Note: Legal requirements and best practices.

4. Legal and Regulatory Update • Litigation • Legislation • Regulation

5. While ERISA fiduciaries are held to the standard of a hypothetical knowledgeable investor, the law “does not impose a rule that fiduciaries be ‘experts’ on all types of investments they make.” Risk Management Through Prudent Process

6. The DOL has stated “Unless they possess the necessary expertise to evaluate such factors, fiduciaries would need to obtain the advice of a qualified, independent expert. In Liss v. Smith, the court said: “where the trustees lack the requisite knowledge, experience and expertise to make the necessary decisions with respect to investments, their fiduciary obligations require them to hire independent professional advisors.” The keys to a prudent process: advice and data, including benchmarking. Risk Management Through Prudent Process

7. ERISA’s “portfolio” perspective. Possible increasing responsibility for participant investing. Safe harbor for use of defaults. Automatic enrollment as a risk management tool. Risk Management for Participant Investing

8. Recent Congressional and DOL activity has created a fiduciary safe harbor for defaults into “multi-asset class” investments (QDIAs). Participant Investing Explicit and implicit protection Implicit expectations

9. Where are we going? The “safe harbor” investments are expanding the use of defaults: Safe Harbor Default Investment • Traditional defaults • Automatic enrollment defaults • Conversion defaults • Existing plans: re-enrollment plan mergers

10. The QDIA safe harbor does not relieve plan sponsors from their duty to prudently select and monitor all plan investments, including the QDIA investments. However, fiduciaries do not need to engage in a prudent process to select one category of QDIA over another. Participant Investing

11. “The selection of a particular qualified default investment alternative (i.e., a specific product, portfolio or service) is a fiduciary act and, therefore, ERISA obligates fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries. A fiduciary must engage in an objective, thorough, and analytical process that involves consideration of the quality of competing providers and investment products, as appropriate.” The Starting Point The preamble to the QDIA regulation says:

12. The fiduciary process for selecting target date investments involves: The Fiduciary Process • The qualitative and quantitative analysis generally used for investments, including reasonableness of expenses. • An analysis of asset allocation. • An analysis of the glide path. • An analysis of its manager and its abilities and limitations. • An analysis of the needs of the plan and the needs and abilities of the participants. Note: Benchmarking issues Open architecture.

13. The courts have embraced the need for fiduciaries to assess the needs of a plan in making decisions regarding plan investments: Needs of Plan and Participants “Failure to investigate the needs of a plan or to ascertain the particular requirements or restrictions of a plan, and failure to invest in accordance with the best interest of plan participants . . . constitutes a breach of fiduciary duties imposed by ERISA.”

14. Asset Allocation and Glide Path: Focus on Older Participants “It is in the glide path where we see the most fundamental differences between fund families. For instance, do the managers believe their job is to boost retirement account balances through aggressive growth strategies, or do they believe their job is more accurately stated by the Hippocratic paraphrase, ‘First, lose no money?’ ” --Popping the Hood II, An Analysis of Target Date Fund Families, by Turnstone Advisory Group LLC. Note: Focus on final 10 years.

15. The Fiduciary Breach “The Committee’s investigation found that there are significant differences in the asset allocation of target date retirement funds, with firms’ 2010 target date funds’ equity holdings ranging anywhere from eight to 68 percent. . . . Yet, one 2010 target date retirement fund with such holdings lost over 40 percent in 2008. A loss of this magnitude simply should not occur in a financial product that was designed and is specifically advertised to limit risk and volatility as one nears retirement.” Letter from Senator Kohl to Chairman of the SEC, February 24, 2009.

16. Target Date Investments Senator Kohl, Chair of the Senate’s Special committee on Aging, held hearings earlier this year . . . then urged the SEC and DOL to follow up. On June 18th, the DOL and SEC held a joint hearing, focusing on the following questions: • How TDF managers determine asset allocations and changes to asset allocations (including glide paths) over the course of a TDF’s operation; • How they select and monitor underlying investments; • How the foregoing, and related risks, are disclosed to investors; and • The approaches or factors for comparing and evaluating TDFs.

17. Target Date Funds Fiduciaries are required by ERISA to: • prudently select and monitor all investments including TDFs—focus on four questions. • evaluate and consider the needs of their participants. • consideration of proprietary investments of recordkeepers.

18. TDF Distinctions • Aggressive versus conservative • Focus on last 10 years • Asset classes • Duration of glide path (“to” and “through”)

19. Your Equity Exposure Score 3 - 9 10 - 15 12 11 10 9 7 - 10 Diversification (number of asset classes) 8 7 Your Asset Class Diversification Score 6 2 - 6 5 35% 42.5% 15% 25% 50% 60% 70% Percent of equity at retirement Availabletoday with 3-year track recorddata as of June 30, 2009 Powered by Lipper, a Thomson Reuters Company. As of 6/30/09, 45 mutual fund companies offer funds categorized by Lipper as target date mutual funds. Old Mutual is excluded from the above chart as Lipper is currently unable to accurately assess their percentage of equity at retirement based upon publicly available data. Because they are ETFs, iShares and TDX Independence Funds are also excluded. Percentage of equity exposure at age 65: Strategic allocation to non-fixed income asset classes at target date, typically age 65. Asset class diversification: Determined by exposure, across each company’s suite of target date funds, to 12 separate asset classes as reported to Lipper through asset allocation, capitalization, credit quality, sector, region and country data as well as underlying fund categorization. The 12 asset classes include: Large Cap Equity, Mid Cap Equity, Small Cap Equity, Developed International Equity, Emerging Markets Equity, REITs, Commodities, U.S. Fixed Income, High Yield, TIPS/Inflation, International Fixed Income and Emerging Markets Debt. Please see the Target Date Compass Methodology booklet for additional information.

20. The trend towards full disclosure—at both the plan and participant level . . . disclosures about investments, services and conflicts: Disclosures • disclosure to fiduciaries and participants • disclosure by providers and advisers • disclosure of conflicts of interest • disclosure of costs • disclosure of compensation and revenue sharing (direct and indirect)

21. Expenses: DOL Activity • DOL activity: --Point-of-sale disclosure to fiduciaries for advisers and providers (408(b)(2) project). --Revisions to Form 5500, Schedule C (report). --Changes to 404(a) regulation (participants). • Proposed legislation by Rep. George Miller (H.R. 2989). Shifting responsibility to 403(b) industry.

22. The 401(k) Fair Disclosure and Pension Security Act of 2009 requires if the annual charges are $5,000 or more: Disclosures—Proposed Legislation • A “service disclosure statement” • Reasonably in advance of the arrangement • Specifies the services and provides the expected total annual charges

23. The future holds: Disclosures—Where are we going? • Written service arrangements, statements or agreements • Which describe: • services • compensation • conflicts

24. Expenses: What Should Fiduciaries Do? Recordkeeping & Compliance Investments Advice $ $ Notes: Compare to market data (benchmark). Recapture of excess revenues: ERISA accounts. Share classes.

25. The fiduciary concerns: Disclosures: Plan Sponsor Issues • Are the expenses reasonable? • Is the compensation for the services reasonable? • How do the conflicts impact the plan? The responsibility of the plan sponsor and the role of the adviser.

26. Distributions • The 4% draw-down • Need for guaranteed income • Life annuity option: 8%+ • Guaranteed income for life • Solutions: In-plan or outside-plan • Real people, real needs

27. Pre-retirement: There is the obvious and difficult issue of preserving benefits as participants approach retirement, but without giving up potential stock market gains. Guaranteed Income for Life

28. The concept of GMWB (guaranteed minimum withdrawal benefits) while participating: Guaranteed Distributions • benefit base • account value

29. GMWB during retirement: Guaranteed Income for Life • not an annuity • guarantee income • benefit base • account value

30. Cost of guarantee Quality of the underlying investments Rollover for retiring participants Financial viability of the provider Considerations

31. Distributions of retirement benefits is an emerging issue. Retirement plans need to have a defined strategy and, as a part of that, need to consider guarantees. The investment and insurance industries will continue to develop innovative products to enhance retirement payments. Distributions

32. Questions? Questions?

33. FRED REISH, ESQ. 11755 Wilshire Boulevard, 10th Floor  Los Angeles, CA 90025-1539 (310) 478-5656  (310) 478-5831 [fax]  (310) 776-7822 [direct fax] FredReish@Reish.com www.linkedin.com/in/fredreish www.reish.com