Income Solutions

1. Income Solutions October 2, 2012

2. Today’s presenters James Veneruso, CFA Vice PresidentFund Sponsor ConsultingCallan Associates Inc. veneruso@callan.com Abigail Pancoast VP & Chief Counsel Retirement Plan Services Lincoln Financial Group abbie.pancoast@lfg.com

3. Income in Retirement: Driving Forces The Big Macro • Ten years of trauma: • Last decade saw the two largest bear markets since the depression • Recent recession was the longest and deepest since the 1930s • Increased correlations • Increased volatility, 2011 saw 61 days (nearly 1 in 4 trading days) where the S&P 500 moved by more than 2% • Ten years of trauma: • Property markets lack of stability…… • Oil prices rise…. • Europe completely implodes…… • US indebtedness and continued political paralysis/psychosis

4. Income in Retirement: Driving Forces • Micro factors • Longevity risk • Inflation risk • Drawdown rates • “Cognitive risk” • Sequence of return risk

5. G r o w t h o f a D o l l a r f o r a $ 1 M a n d a t e f o r 1 3 Y e a r s E n d e d J u n e 3 0 , 2 0 1 2 2 . 4 2 . 2 2 . 2 - B a r c l a y s A g g r e g a t e I n d e x 2 . 0 1 . 8 r a 1 . 7 - C A I T g t D t I d x 2 0 2 5 l l 1 . 6 o D a 1 . 4 f o h 1 . 3 - S & P : 5 0 0 t 1 . 2 w o r G 1 . 0 0 . 8 0 . 6 0 . 4 9 9 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 Income in Retirement: Is Volatility Here to Stay?

6. Product Offerings • Traditional Annuities Provide a guaranteed income stream. They can be tailored to fit various needs such as inflation-adjusted (COLA) or survivorship. They can be inflexible and costly. • Longevity Insurance Provides a safety net against longevity risk, but only receive a benefit if the insured lives beyond certain age. This provides a hedge against “cognitive risk” and longevity risk.

7. Product Offerings • Managed Payout A type of distribution system that provides no guarantee. Rather, based un the underlying investment options provides orderly regular payments. Participants retain control of their assets. • Guaranteed Minimum Withdrawal Benefits More complicated, costs vary

8. Income in Retirement: “GMWB” Basics Each year, on the participant’s date of birth, the income base is reset to the account value, if higher. Accumulation Period Income Period 50 55 60 70 65 Income Payment Begins Account Value Income Base

9. Income in Retirement: Prevalence

10. Income in Retirement: Prevalence With only 1.7% reporting that they are “very likely” to offer in-plan guaranteed income for life products in 2012, what other approaches are being explored? Source: 2012 Callan DC Survey

11. Income in Retirement: Why the Lack of Interest? Many considerations with offering any of the in-plan annuities that are currently available. • Insurer risk, counterparty risk • Cost • Portability • Recordkeeper support • Participant interest/difficulty communicating • Comfort with being early adopter/trend setter • Legal considerations

12. Income in Retirement: Legal Considerations The bad news • Current safe harbor for fiduciaries selecting annuity providers is too vague • No guidance on how to educate participants without providing investment advice • Burdensome annuity notice and consent rules • RMD rules inhibit use of longevity insurance

13. Income in Retirement: Legal Considerations The good news • DOL would like to make the annuity selection safe harbor easier • DOL considering expanding investment education guidance to include retirement income education • IRS guidance has clarified notice and consent rules for in-plan annuities; expect similar guidance for GMWBs • Service providers can assist with notice and consent administration • IRS has issued proposed rules to facilitate longevity insurance • DOL and Congress considering addition of retirement income illustrations to participant benefit statements ____________________________________________________ Bottom line--Congress and regulators are very interested in making it easier.

14. Income in Retirement: One Plan Sponsor’s Experience A plan sponsor is set to unroll an income guarantee as part of their custom target date strategy. Unique features include: • Multiple insurers (counter party risk, fiduciary selection risk) • Guaranteed insurance charge (cost) • Insurers compete on how much of the pie they guarantee, through the guarantee rate they offer (cost, fiduciary selection risk) • As with the custom target date fund, the guarantee piece is plug-and-play through a third party (i.e., not recordkeeper) who also provides a call center and communication program (portability) But issues still remain, the biggest being the lack of a workable safe harbor provision.

15. Income in Retirement: Next Generation of Offerings The next generation of offerings seek to address the aforementioned concerns. Some ideas currently in the offing include: • Managed account products with a guaranteed/managed payout scheme (Financial Engines) • Laddered bond products which seek to match payouts to participants with income received from underlying fixed income products (PIMCO) • Target date products with a guaranteed payout component introduced in the near retirement vintages (Alliance Bernstein and others) • Longevity insurance bundled with other drawdown solutions