Focus on Results and Value: A practical guide to 401(k) plan fees

1. Focus on Resultsand Value:A practical guide to 401(k) plan fees Laura Ann Bartlett, CEBS Senior Vice President

2. Agenda • Putting the issue in perspective • Current legislative/regulatory environment • Factors that should be reviewed and evaluated • Nomenclature of fees and expenses • Conclusion

3. Analogy: Sticker shock • Brand, make, model? • Automatic, standard, hybrid? • Front-wheel, rear-wheel, all-wheel drive, 4-wheel drive? • Standard equipment, fully equipped, custom? Service warranty?

4. Ongoing service Investment lineup Personalized education Participation rate Multi-location/multi-plan ERISA challenges Testing issues Fees What “features” are most important to your buying decision? • Performance • Status • Control • Gas mileage • Safety • Seating/cargo room • Warranty • Price/financing

5. Service guarantee Oil change Routine services Timing belts Spark plugs Brake pads Loaner car Do I have a trusted mechanic? Relationship manager Participant Service Testing/5500 filing Plan amendments Distribution/loan fees Education materials Employee meetings Do I have a trusted advisor? What about ongoing serviceand fees?

6. The ultimate: a vehicle that serves your needs at a competitive cost • The features, not gadgets, you demand • A trusted relationship with a professional who understands your history and needs • Ongoing service at a reasonable cost • Dependability • Upgrades when or before you need them • Pricing you understand, including all essential services

7. Plan sponsor issues with401(k) fees • Lack of understanding • Unable to assess value for services provided • Multiple different sources of fees • Lack of disclosure • Confusion or indifference

8. Why are fees such a big issue now? • Size of market* • $4.5 trillion in DC plan assets • $3.1 trillion dollars in 401(k) plan assets • Shift to DC as primary retirement savings vehicle • Fiduciary concerns • Sole benefit of participants and their beneficiaries • Legislative environment • Litigious environment • Regulatory developments • 5500 Section C • 408(b)(2) • Disclosure requirements starting with the 2009 plan year * Source: Investment Company Institute, April 2008 Research Fundamentals, data through Q3 2007.

9. Form 5500/Section C • Form 5500 is used to report plan service provider compensation • 5500 is a plan sponsor requirement, so these rules are ultimately imposed on plan sponsors

10. Form 5500/Section C (cont.) • Reporting rules expanded in two primary ways: • Service providers to funds in which the plan invests are now considered to be service providers to plans. This means that fees charged by investment options, such as mutual funds, will be subject to more detailed disclosure and reporting. • The types of reportable fees and compensation have been expanded to include, among other things, indirect compensation paid by one service provider to another service provider; non-monetary compensation, such as float, soft dollars, and even business dinners; and transaction-related costs such as brokerage commissions on transactions at the plan level or within investment options such as mutual funds. • Rules are final and effective for the 2009 plan year

11. 408(b)(2) Rule • Service provider compensation disclosure to avoid prohibited transaction status • Requirements fall mainly on service providers, rather thanplan sponsors • Rules require disclosures of compensation, fees, and potential conflicts of interest prior to entering into service contract andover time • Rules require specific representations and commitments to be included in service contracts, with amendments over time to reflect material changes • Failure to comply means that service relationship is a prohibited transaction, subject to potential unwinding, penalties,and fiduciary ramifications • Rules are proposed, but not yet final

12. Fee overview • Out-of-pocket vs. revenue-based fees • Direct vs. indirect fees • Evaluating fees • Fees vs. value • DOL standard is “reasonable in light of the level and quality of services provided”

13. Factors that service providers review • Average account balance • Total assets • Number of participants • Average annual cash flow • Including matching contributions • Plan design complexity • Number of loans and distributions annually • Company stability • Growth prospects • Source of fees, manner of payment

14. Factors plan fiduciariesshould review

15. Out-of-pocket or hard dollar fees • Paid directly by plan sponsor, plan, or plan participant • Per ERISA, fees must be reasonable forservices provided • Generally, smaller plans are more likely to incurhard dollar fees

16. Questions to ask regarding your hard dollar fees • Can you please break down our hard dollar fees by line item? • Are we billed for active accounts or all participant accounts? • When was the last time our fees were reviewed and adjusted? • Are any fees being paid from our forfeiture account? • How and when will our fees be reduced?

17. Other fee types • Fund-level fees, such as fees reflected in mutual fund expense ratios • Fees among service providers, such as sub-TA fees • Other payment arrangements, such as wrap charges and variable asset charges

18. Mutual fund fees • Share classes vary widely in nomenclature, expense level, and what is charged • A, B, C, R, I, K, M, Y, Admin, Institutional • Know what you are buying • Get the ticker symbol or CUSIP number • Review the prospectus • Provider may provide some details * For illustration only.

19. Indirect fees • Sub-transfer agent fees • A payment that is made to another plan service provider (i.e., recordkeeper) • Covers costs for shareholder/participant servicing • Varies between fund families and service providers/ recordkeepers • Disclosure or availability of information varies by provider

20. Sample disclosure

21. Other types of fees • Mortality and expense (M&E) charges • Additional asset-based fee charged by insurance products • Variable asset charges • Levied by insurance companies • May incorporate other additional benefits • Typically found on smaller plans • Normally paid indirectly by the participant • Wrap fees • Provide additional revenue to service provider to support the plan • Typically expressed as a percent of assets • Additional expense to underlying mutual fund expense • Normally paid indirectly by the participant

22. Other types of fees (cont.) • Market value adjustments • Apply to fixed accounts or GICs • Triggered when there is a request to either liquidate or transfer • Formulas vary by provider • Limits liquidity of participant investments • Restricts plan portability • Surrender charges • Typically apply to group annuity arrangements or B-share mutual fund arrangements • Levy a declining charge to move investment funds • May be based on the original contract date or the date of contribution • Back-end loads • Spreads on GIC funds

23. Other services/accessories • Self-directed brokerage account • Collective trusts • Managed accounts • Online/call center advice

24. Reasonable vs. Average? What is “reasonable”? • No standard readily available • Basis should be services provided and results delivered What is “average”? • Based on 401(k) Averages Book • $25M/500 participants: 1.2% of plan assets • $50M/1,000 participants: 1.14% of plan assets • $100M/2,000 participants: 1.09% of plan assets Source: 2007 401(k) Averages Book.

25. Conclusions • Defined contribution plan fees can be complex • Consultants and advisors who specialize in the DC business are the best source of assistance in evaluating reasonableness • Consultants and advisors can also be invaluable in effectively negotiating fee arrangements for you • Purchasers of the services (plan fiduciaries) have a duty to understand and determine reasonableness • Fiduciaries should use and demonstrate care, skill, and the diligence of a prudent expert in evaluating fees • Now is the time to become familiar with these issues, prior to regulatory requirements for the 2009 plan year

26. Putnam offers a wealth of education resources for plan sponsors • Fiduciary Toolkit • Fiduciary checklist • 404(c) checklist • Sample investment policy statement • Evaluating Stable Value Funds: The 4 things you need to know • The “We” Generation: When retirement and family needs collide • DC Plans: Missing the Forest for the Trees? • QDIA Options for DC Plans: Plan sponsors gain greater protection • Pension Protection Act Summary

27. FOR PLAN SPONSOR USE ONLY Putnam Retail Management www.putnam.com 7/05 Printed on 3/12/2014