18 th National Pension and Institutional Investor Summit

18 th National Pension and Institutional Investor Summit Tuesday, November 27, 2012 Breakout: Corporate Plans Understanding Your Fiduciary Responsibilities - how and why? Moderator: Bradley S. Smith, CFA, CEBS - Partner, NEPC, LLC Panelists: Russell Chapman, Littler Mendelson, P. C. Frank W. Nessel, Vanguard David Phillips, CFA, EA, Russell Investments “Enhancing Returns, Managing Risk” Combining Risk, Governance, and Return

Corporate Plans – Understanding Your Fiduciary Responsibilities How and Why? November 27, 2012 Dallas, TX

Presented by: Russell Chapman, Esq. Littler Mendelson, P. C. 2001 Ross Avenue Suite 1500, Lock Box 116 Dallas, TX 75201 -2931 RChapman@littler. com Tel: (214) 880 -8177 November 27, 2012

ERISA What is ERISA? – The Employee Retirement Income Security Act of 1974 • Signed into law by President Gerald Ford on Labor Day, 1974 • Generally regulates employee benefits in the U. S. • Was considered revolutionary at the time • Imposed exclusive Federal regulation and jurisdiction of Federal courts over employee benefit plans and claims under such plans – General Principles • Mandatory reporting, disclosure, minimum participation, minimum vesting, funding, fiduciary responsibility, administration and enforcement for pension plans • PBGC insurance for underfunded defined benefit plans – Fiduciary Concepts • Draws on common law concepts but regulates with strict statutory provisions 4

ERISA Fiduciary Status of the Committee and Its Members What is a fiduciary? – A person who is required to act for the benefit of another person on all matters within the scope of their relationship, who owes the duties of good faith, trust, confidence, and candor. – One who must exercise a high standard of care in managing another’s money or property 5

ERISA Fiduciary Status of the Committee and Its Members Who is an ERISA fiduciary? Named fiduciaries: § Persons named in the plan or appointed pursuant to a procedure under the plan —Examples: Trustees, plan administrators, administrative committees, persons granted authority to appoint other fiduciaries or to delegate fiduciary duties § ERISA requires every employee benefit plan to have a named fiduciary § If a plan administrator is not named in the plan or appointed, the plan sponsor is the plan administrator by default 6

ERISA Fiduciary Status of the Committee and Its Members Who is an ERISA fiduciary? Functional definition: § Persons who have discretionary authority over the management or administration of an ERISA-covered plan or its assets, or who have authority or control over plan assets, are ERISA fiduciaries. § Not based on title or position – what the person does or has the power to do makes them a fiduciary or not. § Members of a committee to which ERISA fiduciary responsibilities have been delegated. § The Board of Directors or committee responsible for appointing members of a committee to which ERISA fiduciary responsibilities have been delegated. § Persons who provide investment advice to the plan for a fee – or who have authority to do so (e. g. , investment managers). 7

ERISA Fiduciary Considerations § Understand role and obligations § ERISA is process, not results, oriented § Use appropriate tools and resources to assist in performing your obligations § Breach of duty can result in personal liability, criminal penalties, removal as fiduciary (up to 6 year statute of limitations) § In cases of conflicting interests or prohibited transactions, liability may exist even if plan profited from the transaction 8

Corporate (Settlor) Role § Employer is responsible for design, establishment, amendment, termination and legal compliance of corporate benefit plans and, as such, is the plan sponsor – “Settlor function” – it does not involve fiduciary role § Employer, as plan sponsor, is responsible for either: – managing the operation of the benefit plans and, as such, the Employer is a plan fiduciary – appointing other fiduciaries to manage the operation of the plan and, as such, the Employer is an appointing fiduciary – these functions to involve fiduciary role § Corporate role is effected by employer’s board of directors, making each individual member a plan fiduciary § Appointing fiduciaries must monitor the activities of persons appointed to serve as plan fiduciaries § Corporate official may wear “two hats” – but only one at a time. – When acting as a plan fiduciary, may consider only the interests of participants and beneficiaries in terms of maximizing benefits under the plan 9

Questions & Answers

DISCLAIMER The information and materials provided by Littler are designed to be authoritative in regard to the subject matter of the training without implied warranties. We strongly encourage you to consult legal counsel of your choice on specific matters involving employment law, and important personnel policies and practices prior to adoption or implementation.

18 th National Pension and Institutional Investor Summit Tuesday, November 27, 2012 Breakout: Corporate Plans Understanding Your Fiduciary Responsibilities - how and why? Moderator: Bradley S. Smith, CFA, CEBS - Partner, NEPC, LLC Panelists: Russell Chapman, Littler Mendelson, P. C. Frank W. Nessel, Vanguard David Phillips, CFA, EA, Russell Investments “Enhancing Returns, Managing Risk” Combining Risk, Governance, and Return

Fiduciary Responsibility for DB Plans Case Study: Investing to Fulfill Duty to Participant David W. Phillips, Senior Investment Strategist NOVEMBER 27, 2012 THIS MATERIAL IS FOR FINANCIAL PROFESSIONAL USE ONLY AND NOT FOR DISTRIBUTION TO CURRENT OR POTENTIAL INVESTORS

Important Information Please remember that all investments carry some level of risk, including the potential loss of principal invested. Although steps can be taken to help reduce risk it cannot be completely removed. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. Russell Investments is the owner of the trademarks, service marks, and copyrights related to its respective indexes. Copyright© Russell Investments 2012. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty. Russell Investment Group, a Washington USA corporation, operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company. The Russell logo is a trademark and service mark of Russell Investments. Date of first use: November 2012 USI-15193 -5 -13 www. russell. com

Surplus Summary Risk Analysis Case study: XYZ Corporation As of December 31, 2010 Sources: The above analysis is based primarily on Russell’s Capital Markets Forecasts and data from Bloomberg and Fact. Set. Please see Page 9 of this report for additional details on the analysis provided. 16 Case study provided discussion purposes only. Individual client results Sampleforreport provided for illustrative purposes only. will vary based on individual circumstances and market events. There is no guarantee that all clients will experience the same results.

Surplus Summary Risk Analysis As of December 31, 2010 17 Case study provided discussion purposes only. Individual client results Sampleforreport provided for illustrative purposes only. will vary based on individual circumstances and market events. There is no guarantee that all clients will experience the same results.

Surplus Summary Risk Analysis As of December 31, 2010 18 Case study provided discussion purposes only. Individual client results Sampleforreport provided for illustrative purposes only. will vary based on individual circumstances and market events. There is no guarantee that all clients will experience the same results.

Surplus Summary Risk Analysis As of December 31, 2010 19 Case study provided discussion purposes only. Individual client results Sampleforreport provided for illustrative purposes only. will vary based on individual circumstances and market events. There is no guarantee that all clients will experience the same results.

Surplus Summary Risk Analysis As of December 31, 2010 20 Case study provided discussion purposes only. Individual client results Sampleforreport provided for illustrative purposes only. will vary based on individual circumstances and market events. There is no guarantee that all clients will experience the same results.

Takeaways from this example › Given the relative size of the pension, the 1 in 20 event would be quite serious › In periods of elevated volatility, the 1 in 20 would likely be fatal › While the portfolio appears diversified, the vast majority of the risk is coming from long equities and short duration / credit › There is a strong investment case for both bets, but can you see it through? › Don’t count on the diversification benefit in left tail scenario › Be particularly vigilant of an increase in ambient risk 21 Case study provided for discussion purposes only. Individual client results will vary based on individual circumstances and market events. There is no guarantee that all clients will experience the same results.

About this risk analysis p. 22

18 th National Pension and Institutional Investor Summit Tuesday, November 27, 2012 Breakout: Corporate Plans Understanding Your Fiduciary Responsibilities - how and why? Moderator: Bradley S. Smith, CFA, CEBS - Partner, NEPC, LLC Panelists: Russell Chapman, Littler Mendelson, P. C. Frank W. Nessel, Vanguard David Phillips, CFA, EA, Russell Investments “Enhancing Returns, Managing Risk” Combining Risk, Governance, and Return

Fiduciary Trends and Developments in Defined Contribution Plans Frank W. Nessel, Esquire Senior ERISA Consultant Vanguard Strategic Retirement Consulting November 2012 Recommendations and portfolio analysis provided by Vanguard Advisers, Inc. , a registered investment advisor. Vanguard Marketing Corporation, Distributor to Vanguard Advisers, Inc. and Vanguard Marketing Corporation, Distributors. For institutional use only. Not for public distribution. Client-specific data is considered CONFIDENTIAL.

Fee disclosure to retirement plan fiduciaries • Must be provided by three categories of covered service providers: – Fiduciaries or investment advisers – Recordkeepers and brokers – Other service providers receiving indirect compensation • Requires fiduciary review of services and compensation and an assessment that fees are “reasonable” • A description of the services to be provided • All direct and indirect compensation to be received by the service provider and its affiliates • “Unbundling” of recordkeeping fees (even when no explicit charge for recordkeeping services is identified in the arrangement) • Failure to review – may result in a determination that fees were not reasonable. Fiduciary breach – prohibited transaction? • Vanguard position paper on determining reasonableness of plan fees is located here: www. vanguard. com/fees For institutional use only. Not for public distribution. 25

Participant fee disclosure final regulations Two broad categories of required disclosure • Plan-related information – General information (e. g. , how to give investment instructions, the fund lineup) – Administrative expense information that may be charged (e. g. , recordkeeping fees) – Individual expense information that may be charged (e. g. , loans, QDROs) • Investment-related information (DOL provided a model comparative chart) – Type or category of the investments – Performance data (e. g. , 1 -, 5 -, and 10 -year rates of return on mutual funds) – Benchmark information (e. g. , mutual funds) – Fee and expense information (e. g. , expense ratios, redemption fees) – Glossary of terms + Internet address for those seeking additional information Failure to provide = violation of ERISA Section 404(a) – breach of fiduciary duty • Investment of plan assets is a fiduciary act • Requires fiduciaries to act prudently and solely in the interest of plan participants/beneficiaries • Requires the disclosure of certain plan and investment-related information to participants/beneficiaries For institutional use only. Not for public distribution. 26

Risks Associated with Company Stock Investment Company stock represents the greatest element of risk associated with retirement plans • “Stock-drop” cases prevalent since 2001 (post-Enron) – Over 100 stock-drop cases since that time • Significant settlements in class-action lawsuits • Risk to plan fiduciaries – personal liability for fiduciary breach – Fiduciary can be held personally liable if company stock is determined to be an imprudent investment For institutional use only. Not for public distribution. 27

Risk Mitigation Tools for Plans with Company Stock • Change contribution design to follow participant investment allocation – No requirement that match be made in company stock • Immediate diversification – Participant can provide instruction to immediately diversify into another investment • Determine if percentage restriction is an appropriate plan design change – Example- 20% restriction with grandfathering of current company stock fund holdings – No impact to participant current company stock investment • Implement diversification solutions – Advice products (e. g. Financial Engines), managed account program • Communication should strongly encourage diversification – Targeted mailing/communication to those with more than 20% of account balance invested in company stock For institutional use only. Not for public distribution. 28

Governance In addition to investment performance, each quarterly committee meeting should focus on one of the following: • Advice services provided to plan participants (first quarter) – DOL regulation requires diligence in prudent selection and ongoing monitoring • Fee disclosure (second quarter) – DOL regulation – fiduciaries must determine reasonableness of fees, based on services – Pay attention to fees associated with frozen/acquired plans – often less oversight by committees • Compliance with coverage, nondiscrimination, reporting requirements (third quarter) – Reporting requirements = Form 5500 and plan audit – Required to maintain tax-qualified status of plan • Planning for the next year (fourth quarter) – Education/communication initiatives – Determining responsibility for distribution of required notices (QDIA; Safe-harbor 401(k) notices; participant fee disclosure notices) For institutional use only. Not for public distribution. 29

18 th National Pension and Institutional Investor Summit Tuesday, November 27, 2012 Breakout: Corporate Plans Understanding Your Fiduciary Responsibilities - how and why? Moderator: Bradley S. Smith, CFA, CEBS - Partner, NEPC, LLC Panelists: Russell Chapman, Littler Mendelson, P. C. Frank W. Nessel, Vanguard David Phillips, CFA, EA, Russell Investments “Enhancing Returns, Managing Risk” Combining Risk, Governance, and Return

Understanding Your Fiduciary Responsibility Consultant’s Perspective November 2012 Bradley S. Smith, CFA, Partner

Investment Responsibilities • Develop investment policy, objectives and guidelines consistent with the needs of the plan • Determine appropriate asset allocation and/or investment options – Diversification • Evaluate and select investment managers, consultants and other service providers • Monitor compliance with the investment policy • Review and monitor investment performance • Document decisions November 2012

Delegation of Responsibilities • Fiduciaries my delegate responsibility with respect to management of plan assets • Must exercise reasonable prudence in delegating responsibilities – Due diligence in selecting providers – Document decision making process • Should monitor activities of appointed fiduciaries November 2012

Limiting Liability • Be aware of other fiduciaries – Potentially liable for actions of co-fiduciaries • Ways to limit liability (primarily DC related): – Provide broad range of investment options – Provide sufficient information to make informed decisions – Allow for investment instructions at least once a quarter, and perhaps more often if an investment is volatile – Default to QDIA election – Deposit employee contributions as soon as practicable – Hire experts: 3(21) vs. 3(38) fiduciaries • Both have fiduciary responsibility, but 3(38) fiduciaries who exercise control over plan assets have greater liability • Parties handling plan assets should be covered by a fidelity bond – Document decisions – Ensure fees are “reasonable” November 2012

Limiting Liability • Avoid self-dealing and conflicts of interest • Avoid transactions with prohibited parties (parties in interest) – Employer – Union – Plan fiduciaries – Service providers – Statutorily defined owners, officers and relatives of parties in interest • Avoid other prohibited transactions: – Employer stock in DB plan at time of purchase < 10% of plan assets • No limit to employer stock in DC plan if documents so provide November 2012

Roles of Investment Consultant • Investment policy and plan design review • Manager evaluation and recommendations • Monitor compliance with investment policy • Review and monitor investment performance • Provide relevant, timely education on investment topics • Identify best practices • Periodic fee and service analysis • Offer proactive advice on how to react to market conditions • Provide experienced personnel and resources • Guide plan sponsors through an ever evolving landscape November 2012

18 th National Pension and Institutional Investor Summit Tuesday, November 27, 2012 Breakout: Corporate Plans Understanding Your Fiduciary Responsibilities - how and why? Moderator: Bradley S. Smith, CFA, CEBS - Partner, NEPC, LLC Panelists: Russell Chapman, Littler Mendelson, P. C. Frank W. Nessel, Vanguard David Phillips, CFA, EA, Russell Investments “Enhancing Returns, Managing Risk” Combining Risk, Governance, and Return