Navigating The Perfect Financial Storm Identifying Dealing with

Navigating The “Perfect Financial Storm” Identifying & Dealing with Fiduciary Liability in 401(k) Investment Programs

The “Perfect Financial Storm” Key Forces Coming Together • Baby Boomers » Looking for financial security as retirement approaches. » Home equity value no longer a “given” anymore. • Financial Markets » Volatile equity markets and low yields on fixed income assets. » Recession / inflation worries. » Liquidity “crunch” for commercial / mortgage borrowers. • Fiduciary Scrutiny Increasing » ERISA lawsuits on the rise. » Fee transparency on the horizon • What Should Plan Sponsors Do? 2

The “Perfect Financial Storm” Fiduciary Risk Increasing • One plaintiff’s firm, Schlichter, Bogard & Denton, brought 11 class action cases against major corporations regarding service provider compensation. • Large Plan Sponsors Are Being Sued • Bechtel • Boeing • Catepiller • Deere • Excelon • General Dynamics • International Paper • Kraft • Lockheed Martin • Northrop Grumman • United Technologies • Unisys • Tobacco, Guns and… 401(k) Plans? Source: Groen Law Group 3 “We are nearly completed with litigation against tobacco companies. We are just beginning the major litigation against gun companies, and the next big area for litigation - after guns - is going to be suing 401(k) and 403(b) plan sponsors. ” - Anonymous Litigation Attorney

The “Perfect Financial Storm” Fiduciary Risk Increasing: » US Supreme Court ruled in “La. Rue vs De. Wolf “ that individual employees can sue plan administrators for fiduciary breach. “My sense is this will end up producing a tremendous amount of litigation” - Mary Ellen Signorille, Esq AARP Foundation “This opens the door to a variety of worker lawsuits, including challenges to the fees workers are charged to administer their savings plans. ” - Ed Ferrigno, VP Profit Sharing/401(k) Council of America Source: WSJ 4

Setting the Course Dealing With Fiduciary Status: • Identifying / Understanding Who is a Responsible Fiduciary in YOUR Plan • Documenting the Selection & Monitoring of Plan Investments 5

Navigating The “Perfect Financial Storm” Know Your Fiduciary Responsibilities • DOL has launched a national education campaign: “Getting It Right – Know Your Fiduciary Responsibilities” emphasizing the obligation of plan sponsors and other fiduciaries to: » Understand the terms of their plans; » Select and monitor service providers carefully; » Make timely contributions to fund benefits; » Avoid prohibited transactions; and » Make timely disclosures to workers and their beneficiaries and reports to the government “Strong fiduciary oversight and protecting workers’ benefits is our highest priority. ‘Getting it Right, ’ however, can be challenging. This is particularly true for small and medium-sized employers who have limited time, resources and access to professional help with benefit programs. ” – Secretary of Labor Elaine L. Chao 6

Navigating The “Perfect Financial Storm” “Fiduciary” Defined: • Plan Sponsor/Employer • Trustee • Anyone who… » Exercises any discretionary authority/control over the plan or the management/disposition of its assets » Provides investment advice regarding plan assets for a fee (direct/indirect) » Has any discretionary authority/responsibility in the administration of the plan 7

Navigating The “Perfect Financial Storm” Who are the Responsible Fiduciaries? • Am I a fiduciary? • What are my fiduciary responsibilities? • How do I fulfill those duties under the law? Who is a Fiduciary? “ 401(k) Committee” Members Officers Principals Board of Directors Remember – the appointment of a fiduciary is, in itself, a fiduciary act 8

Navigating The “Perfect Financial Storm” Duties of the “Fiduciary”… The Fiduciary must: • Manage the Plan with the “Best Interest” of Participants & Beneficiaries • Diversify Investment Portfolio to Minimize Loss of Principal • Monitor Investments Over Time to Ensure a Competitive Investment Menu • Incur Reasonable Costs to Deliver Investment Management and “The Fiduciary should act with the ‘care, skill, prudence, Plan Services and diligence under the circumstances than prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims. ’” – ERISA, § 404(a)(1)(B) 9

Navigating The “Perfect Financial Storm” What’s At Stake… Potential Remedial Actions Include: • Fiduciaries are Personally Liable for Breaches of Duty • Must Disgorge Any Profits • Must Make up Any Plan Losses • Must Make up Any Lost Opportunity Costs • Must Pay Participants’ Attorneys’ Fees • Subject to Stiff DOL Civil Fines • Subject to Criminal Fines and Incarceration 10

Navigating The “Perfect Financial Storm” How Many Funds are Enough? Number of Funds Offered As Your Plan Adds More Options Additional Monitoring Requirements Increase Selection Risk Rises More Education Necessary For Plan Participation Source: CRA Rogers. Casey, Spectrem Group 11

Navigating The “Perfect Financial Storm” Selecting Mutual Funds “The Past Does Not Accurately Project The Future” 12

Navigating The “Perfect Financial Storm” February 2000 Ten for 2000 February 2 0 0 0 2 r o Ten f Focuses on ten of the top performing fund managers in the United States who talk about how they have beat the markets for years and how they plan to continue their streaks into the 2000’s.

Navigating The “Perfect Financial Storm” February 2001 Ten for 2001 Y FEBRUAR 2001 1 0 0 2 r o Ten f “Best mutual funds for 2001” None of the top 10 funds from 2000 Top List made this list. You now own 20 Funds.

Navigating The “Perfect Financial Storm” February 2002 3 9 9 1 Y 2 R 0 A 0 2 U R Y B R E A F U R B FE 2 ds 1 e n h u T F t s Be 00 T 2 o urnd 2 s Ffo w o N y u B “Nine funds that can weather tough times” None of the 20 funds previously listed are mentioned this year You now own 29 Funds

Navigating The “Perfect Financial Storm” February 2003 Best Funds for 2003 Y 2003 FEBRUAR s d n u F t s Be for 2003 “Ten all weather funds who can prosper in good and bad times” One of the 29 previous funds is mentioned this year. You now own 38 Funds.

Navigating The “Perfect Financial Storm” February 2004 BRUARY 2 FE t a e r G t Eigh Funds “Eight Great Funds from Companies you can trust” One of the 38 previously mentioned funds is mentioned You now own 45 different mutual funds.

Navigating The “Perfect Financial Storm” Review of Money Magazine Mutual Fund Recommendations “Best Fund List” for 2000 – 2004 47 Funds Made the list 45 Funds appear only once 2 Funds made the list twice (one is a bond index fund) 30 Different Fund Families have at least one fund on the list Source: Money Magazine 02/2000 – 02/2004 18

Navigating The “Perfect Financial Storm” Pension Protection Act 19

Navigating The “Perfect Financial Storm” PPA- Most Important Legislation Since ERISA Shift focus from teaching participants to doing it for them The new “DC” Plan will look like an old “DB” Plan Auto Enrollment Auto Deferred increase QDIAs Professional Investment Management Lifestyle / Lifecycle funds Managed Accounts 20

Navigating The “Perfect Financial Storm” Qualified Default Investment Alternative (QDIA) » Safe Harbor Protection provided to employer if employer defaults to eligible QDIA when participant fails to direct investments » Eligible QDIAs – Life. Cycle / Life. Style Funds – Balanced Fund – Managed Account 21

Navigating The “Perfect Financial Storm” Life. Cycle / Life. Style Funds » Generally two types of funds » Life. Cycle (age-based)-target maturity funds based on expected retirement date and are gradually rebalanced to achieve a more conservative allocation » Life. Style (risk-based)-funds that offer fixed risk exposure utilizing a static allocation approach 22

Navigating The “Perfect Financial Storm” Life Style vs. Life Cycle 23 Life Style Funds (Risk Based) Life Cycle (Age Based Target Funds) Risk Based vs. Age Based • Allows for an investor to choose a fund based on their risk profile/tolerance • Target date fund geared towards an investors retirement date Fund Labels • Typically use the words Conservative, Moderate or Aggressive in their name • Typically labeled with target year in title (2010, 2020, 2030) Investor Input • Investors determine risk tolerance by completing a questionnaire • No investor input required - Age & retirement date are driving factor Risk Based vs. Age Based • Funds maintain a predetermined risk level • Risk/return metrics remain constant • Lifestyle funds rebalance to keep a static mix of stock, bonds and cash • Participant may need to switch funds as time horizon changes • Assets are allocated based on a preset schedule for that date • Rebalance to reduce the level of risk in the portfolio over time • Funds change allocation to become progressively more conservative as target date approaches • No need for a participant to switch funds unless time horizon changes

Take the Helm…Navigate to Safety TOP TEN THINGS YOU CAN DO TO MITIGATE YOUR FIDUCIARY RISK EXPOSURE 1. DOCUMENT, DOCUMENT 2. Consider Auto-Enrollment/Auto Deferral Increases 3. Consider Life. Cycle/Life. Style Funds 4. Benchmark Plan Services/Fee Every 3 -5 Years 5. Identify All Fees Paid to Investment Funds/Service Providers 6. Evaluate Fund Performance Quarterly 7. Diversify the Investment Portfolio 8. Make Investment Portfolio 404(c) Compliant 9. Establish a Written Investment Policy Statement 10. Understand Your Fiduciary Responsibilities 24

Smooth Sailing Some Helpful DOL Publications: • Meeting Your Fiduciary Responsibilities • Understanding Retirement Plan Fees & Expenses • DOL Plan Fee Disclosure Form • Reporting & Disclosure Guide for Employee Benefit Plans • Selecting an Auditor for Your Employee Benefit Plan The US Department of Labor’s Employee Benefits Security Administration offers more information on its webstie: www. dol. gov/ebsa 25

Smooth Sailing Remember: • Knowing & Understanding YOUR Fiduciary Responsibilities Will Enable You to Take the Appropriate Steps to AVOID Many Problems Often Found in Qualified Retirement Plans • Set & Stay the Course to “Smooth Sailing” 26

Questions 27