Benchmarking Target Date Portfolios October 22, 2008 Ronald W. Jackson II Investment Consultant

1. Benchmarking Target Date Portfolios October 22, 2008 Ronald W. Jackson II Investment Consultant This document is incomplete without the accompanying discussion; it is confidential and intended solely for the information and benefit of the immediate recipient hereof.

2. Agenda • What Are Target Date Funds • Why Are They So Popular • Considerations • Benchmarking and Performance Monitoring This document is incomplete without the accompanying discussion; it is confidential and intended solely for the information and benefit of the immediate recipient hereof.

3. What Are Target Date Funds • Also known as lifecycle or target retirement funds • Criteria • Diversified portfolio of investment assets based on year of retirement • Gradually shifts from aggressive to conservative investment mix • General purpose: growth and then preservation of capital • Professionally managed • Automatically rebalanced • Actively or Passively managed

4. Why Are They So Popular • A significant number of US defined contribution plan sponsors have added Target Date funds to their plan’s investment structure • Service providers effectively marketed their own funds • 404(c) default choices for auto-enrollment plans include Target Date and risk-based life style funds as one of three protected Qualified Default Investment Alternative (“QDIA”) choices • Balanced funds and managed accounts are the other two QDIA options • Money market and stable value funds are no longer viewed as a “safe” default choice because they are not considered appropriate long-term investment options for the general employee population

5. Sample Target Date Asset Allocation as of March 31, 2008 Aggressive Conservative

6. LIFE-CYCLE MANAGERS ON AN ADMINISTRATOR’S PLATFORM Fund Manager Strategy Vehicle AllianceBernstein active mutual fund AllianceBernstein active collective trust AllianceBernstein passive collective trust AllianceBernstein (customized) custom collective trust American Century active mutual fund American Funds active mutual fund Barclays passive collective trust Barclays enhanced collective trust Barclays enhanced mutual fund Capital Guardian active collective trust Fidelity active mutual fund Franklin active mutual fund Goldman Sachs active mutual fund Hartford active mutual fund JPMorgan active collective trust JPMorgan active mutual fund Manning & Napier active mutual fund Manning & Napier active collective trust Mellon enhanced collective trust MFS active mutual fund Northern Trust passive collective trust Northern Trust enhanced collective trust Principal active mutual fund Putnam active collective trust Putnam active mutual fund Pyramis passive collective trust Pyramis enhanced collective trust Pyramis active collective trust Riversource active mutual fund Schwab active collective trust Schwab active mutual fund Seligman ETF mutual fund SSgA passive collective trust SSgA Dow Jones passive collective trust T. Rowe Price active mutual fund Vanguard passive collective trust XTF ETF mutual fund Wellington active collective trust Wells Fargo Advantage passive collective trust Sample Target Date Options Available on a Vendor Platform

7. Target-Date Fund Penetration Source: PSCA’s 51st Annual Survey of Profit Sharing and 401(k) Plans

8. Common Structures Source: PSCA’s 51st Annual Survey of Profit Sharing and 401(k) Plans

9. Common Structure Source: PSCA’s 51st Annual Survey of Profit Sharing and 401(k) Plans

10. Once a plan sponsor elects to add Target Date Retirement funds to an investment lineup, the objectives of this option need to be determined before an investment manager is selected. Among the considerations should be the following: Risk level (e.g., tracking error) or alpha generation Fee considerations Glide Path - Equity exposure up to and post retirement Asset allocation Complexity versus simplicity of structure Appropriate benchmarking and performance monitoring Considerations

11. Target-Date Fund Structure — Asset Allocation Path Equity glide paths of the largest target maturity fund families

12. Target-Date Fund Structure — Asset Allocation Path Asset allocation decision has profound implications on participant experience

13. Overall, asset allocations among providers varies for any given target fund. Target-Date Fund Structure — Asset Allocation Path

14. Fund companies have flocked to the growing target-retirement market, each trying to present a differentiated product; as a result, deciding on a target date program is far more complex than investing in one. Considerations

15. Market Trends • Plan sponsors have a choice between actively managed and passively managed funds. Actively Managed Target-Date Funds • Performance influenced by manager skill • Complexity of structure varies widely • Some funds consist of 25+ components • Others fund families include seven and possibly fewer funds • More structural changes are expected with increased number of funds • Structure affects monitoring efforts; difficult to evaluate risk vs. benchmark • Higher costs • More volatile relative to benchmark Passively Managed Target-Date Funds • Performance more consistent with benchmark • Simple structure is easy to understand, communicate and monitor; facilitates meeting fiduciary responsibility • Lower likelihood of changes to fund components • Low probability of needing to be replaced • Best suited for asset mapping and as a low-risk “default fund,” where no 404(c) protection is provided to Plan fiduciaries • Lower fees

16. Market Trends • Now, plan sponsors may have a choice between mutual funds and commingled trusts. Mutual Funds • Registered SEC pooled assets • Collective investment vehicle used by a fund manager to trade securities whereby gains or income generated is passed onto investors via dividend or interest • Daily valued • Transparent • Typically higher costs than commingled trusts or separate accounts • More commonplace Commingled Trusts • Institutional tax-exempt retirement pools, exempt from SEC regulations • Collective investment vehicle maintained by a bank or trust company for the pooling of retirement plan assets • Can be valued daily • Less transparent • Fees are typically lower than mutual funds • Recently available

17. Market Trends • Plan sponsors have a choice between complex or simple structures. Complex Structure • Diversification via high number of underlying mutual funds • Often employs multiple managers for a mandate • May entail post-retirement participation • Typically relies on manager skill to add incremental value • Exposure to non-traditional assets and strategies • Entails higher level of active risk • Higher costs Simple Structure • Small number of investment options, i.e. 10-year increments • Low number of underlying mutual funds • Underlying funds tend to be very broad market portfolios or indices without style bias or sub-asset classes • Emphasis on broad market coverage as opposed to relative performance • Given low number of underlying funds, individual fund performance highly critical; typically employed in passively managed plans • Lower fees

18. Market Trends • Now, plan sponsors should understand the implications of the glide path. Glide Path Philosophy • Level of equity exposure that changes over time • Biggest differentiator among providers • Typically high equity allocation that gradual lowers as participant reaches retirement age • Different risks to consider: • Opportunity cost • Inflationary risk • Longevity risk Customization • Ability of provider to customize glide path for your plan’s demographic • Ability of provider to utilize current plan options to construct target retirement plan • Ability to offer Best-in-class funds • Minimize plan size requirements

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20. Overall, asset allocations among providers varies for any given target fund. Target-Date Fund Structure — Asset Allocation Path Equity glide paths of the largest target maturity fund families Fund companies have flocked to the growing target-retirement market, each trying to present a differentiated product; as a result, deciding on a lifecycle program is far more complex than investing in one. Asset allocation decision has profound implications on participant experience

21. Comparative Illustration of Target Retirement Structures Franklin Active Fidelity Complex Principal Active JPMorgan Active Pyramis Active Hartford Active Wells Fargo Passive Wellington Active Northern Trust Enhanced Schwab Active Putnam Goldman Sachs Active T.Rowe SSgA Dow Jones Passive American Century Active Overall Fund Structure BGI Passive BGI Enhanced Alliance Bernstein Active Pyramis Enhanced Northern Trust Passive XTF Active SSgA Passive Cap Guardian Active RiverSource Active Vanguard Mellon Enhanced Seligman Active MFS Active M&N Active Pyramis Passive Simple Active Passive Investment Management (Level of Market Risk) Note: Excludes customizable Plans.

22. Illustrative diversification among peers * While not invested at present, they are also able to invest in international fixed income and TIPs ** Fidelity’s current EME allocation consists of an investment in the Southeast Asia fund *** Includes an allocation to the Fidelity Strategic Real Return fund The peers shown are a number of the largest providers in the target date fund industry. Fund information from prospectus’ located on each company's website as of 9/30/2006: www.fidelity.com, www.barclays.com, www.trowe.com, www.vanguard.com www.alliancebernstein.com, www.cstcfunds.com

23. Considerations • Structure and Philosophical Decisions: • History: Does a track record matter? • Management philosophy: Active or Passive? Custom? • Investment vehicle: Mutual funds versus collective trusts. • Plan structure: Simple or Complex • Aggressive or conservative glide path? • Any consideration to allow post-retirement participation in the plan?

24. Benchmarking and Performance Monitoring • Evaluating the performance of a Target Date fund can be difficult: • Given the long-term nature of these investments and their very short history, it is too early to say definitively whether or not they meet their objective – providing a participant with sufficient income to live on in their retirement; • Differing glide paths and asset allocations also make comparisons difficult; and, • Plan demographics and participant needs are unique, making peer group comparisons exceedingly difficult and possibly misleading. • However, some benchmark(s) are needed to assess and monitor performance…

25. Benchmarking and Performance Monitoring • What is a benchmark? • Simply, it is a standard against which the performance of a security, mutual fund or investment manager can be measured. • Currently, there isn’t an agreed upon benchmark or standard; however there are several common methods that have been utilized to evaluate performance of Target Date funds: • An index, S&P 500 Index • Composite fund of funds, i.e. Weighted average of assets • An absolute return target, i.e. CPI +3% • An average of returns of similar profiled Target Date programs • None of these individually may be appropriate but a combination of methods may provide better insight for more informed decision making

26. Risk vs. Return: Income Target Date Funds 36 Months Ending March 31, 20xx 14 12 10 8 Total Annualized Return (%) 6 4 2 0 0 2 4 6 8 10 12 Total Annualized StdDev (%) Annualized Return to date, % Annualized StdDev to date, % Information Ratio to date Total Total Total Plan A 6.19 3.56 1.74 Plan B 3.35 3.37 1.00 Plan C 6.51 3.81 1.71 Plan D 5.95 2.88 2.07 Plan E 6.59 2.97 2.21 Plan F 6.59 3.17 2.08 Plan G 4.34 0.49 8.79 Income Common Benchmark 6.26 2.98 2.10 Income/Maturity Target Allocation Funds Total Risk vs. Total Return

27. Risk vs. Return: 2015 Target Date Funds 36 Months Ending March 31, 20xx 14 12 10 8 Total Annualized Return (%) 6 4 2 0 0 2 4 6 8 10 12 Total Annualized StdDev (%) Annualized Return to date, % Annualized StdDev to date, % Information Ratio to date Total Total Total Plan A 7.41 4.35 1.70 Plan B 4.26 5.76 0.74 Plan C 7.71 6.80 1.13 Plan D 6.44 5.67 1.14 Plan E 8.08 5.33 1.51 Plan F 7.27 4.75 1.53 2015 Common Benchmark 7.10 5.13 1.38 2015-Target Date Funds Sample Total Risk vs. Total Return

28. Risk vs. Return: 2045 Target Date Funds 36 Months Ending March 31, 20xx 14 12 10 8 Total Annualized Return (%) 6 4 2 0 0 2 4 6 8 10 12 Total Annualized StdDev (%) Annualized Return to date, % Annualized StdDev to date, % Information Ratio to date Total Total Total Plan A 8.87 8.11 1.09 Plan B 5.38 10.62 0.51 Plan C 8.02 8.94 0.90 Plan D 7.64 8.44 0.91 Plan E 8.96 8.10 1.11 Plan F 7.94 8.96 0.89 2045 Common Benchmark 8.23 8.65 0.95 2045-Target Date Funds Sample Total Risk vs. Total Return

29. Actively Managed Asset Allocation

30. Actively Managed Retirement Date Trusts Total and Excess Returns

31. Actively Managed Retirement Date Trusts Total and Excess Returns

32. Passively Managed Asset Allocation

33. Passively Managed Target Retirement Funds Total and Excess Returns

34. Passively Managed Target Retirement Funds Total and Excess Returns

35. Investment philosophy and methodology • Investment time horizon • Ending at retirement • Post –retirement participant participation Sources of return • Active management • Passive management • Enhanced indexing Risk profile • Glide path over time • Information Ratio / Tracking error Diversification • Traditional asset classes • Non-Traditional asset classes • Alternative strategies Performance • Benchmark Relative • Areas of Out/Under Performance Investment tactics • Manager selection • Proprietary funds • Open architecture (“Best-in-class”) Portfolio monitoring • Dedicated target-retirement strategy team • Quantitative optimizers • Methodology for benchmark construction Product structure • Mutual funds • Commingled funds • Separate accounts Fee structure • Total expenses – Investment option • Expense ratios • Revenue sharing • Account minimums In Summary