The structure of retirement plan investment menus continues to evolve, from "more choice is better" to "less is more". Many fiduciaries initially sought protection under ERISA §404(c) by offering a wide array of investment choices to their participants, but participants found themselves overwhelmed by the task of evaluating and selecting from amongst so many managers. Plan sponsors soon realized that less could be more, and built menus that offered a few fixed income options and a diverse set of a dozen or more stock funds, but in the bear market of 2008, many of those plans saw similar declines across their investment menu. With an increasing number of plans utilizing automatic enrollment and QDIA, just providing adequate choice is no longer enough. Fiduciaries are again asking, what does an effective investment menu look like? In this presentation, we cover: Incorporating the science of behavioral finance into your investment menu design; Selecting appropriate asset classes; Whether a tiered structure could be right for your plan; Passive versus active investment options; Options for low risk investments; and When to use target date funds.

1. Improving Participant Outcomes Through Investment
Menu Design
©2003 – 2013 Multnomah Group, Inc. All Rights Reserved.

2. Scott Cameron, CFA
Scott is the Chief Investment Officer for the Multnomah Group and a Founding
Principal of the firm. In that role, Scott leads Multnomah Group’s Investment
Committee, is responsible for the development of the firm’s investment
research methodology, and conducts investment manager due diligence. Scott
also consults with plan sponsors on investment menu design, investment
manager selection, fiduciary governance, and vendor fees/services.
Scott is a member of the CFA Institute, the CFA Society of Portland, the
Investment Management Consultants Association, and the Portland Chapter of
the Western Pension Benefit Conference.
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3. Agenda
• Evolution of Defined Contribution Plans
• Plan Sponsor Best Practices
• Target Maturity Investment Products
• Options for Low Risk Investors
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4. DC Investment Lineups: Old Paradigm
• All participants are active investors
• More choices lead to better portfolios
• Fiduciary focus on 404(c) protection
• Focus on investment products/manager analysis High Risk
• Vendors compared on features
Specialty
Intl Equity Funds
(i.e.
U.S. REITs)
Equity
Core
Bond
Money Market /
Stable Value
Low Risk
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5. Is the Old Paradigm Effective: the Evidence
Participant Type How
Participants
Self-Identify
Delegators 69%
Do-It-Yourselfers 30%
Self-Directed Sophisticates 1%
Source: J.P. Morgan Retirement Plan Services
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6. Is the Old Paradigm Effective: the Evidence
Impact of Choice on P a r t i c ip a t i on Rates
Source: Iyengar, Sheena S.; Jiang, Wei; Huberman, Gur “How Much Choice is Too Much?: Contributions to 401(k) Retirement Plans”
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7. Investors Fail to Track the Market
Annualized Returns for the 20 Years Ended 12/31/2010
10.00%
9.14%
9.00%
8.00%
6.89%
7.00%
6.00%
5.00%
3.83%
4.00%
3.00% 2.57%
2.00%
1.01%
1.00%
0.00%
Avg. Equity Investor S&P 500 Index Avg. Fixed Income Investor
Barclays Agg Bond Index Inflation
Source: Dalbar, Inc. 2011 Quantitative Analysis of Investor Behavior
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8. DC Investment Lineups: New Paradigm
• Not all participants are the same
• Incorporate behavioral finance
knowledge into retirement
programs
• Fiduciary focus on participant
outcomes
Tier One
• Focus on menu construction
• Vendors compared on solutions
Tier Two
Tier Three
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9. The Paradigm is Shifting
• Pension Protection Act of 2006
• Automatic enrollment
• Qualified Default Investment Alternatives (QDIA)
• J.P. Morgan – “Focus your AIM: Innovating the Defined Contribution Core
Menu to Help Increase the Odds of Participant Success”
• Manning & Napier – Two-Tier Menu Design
• Schwab Retirement Plan Services Inc. - Launches Schwab Index Advantage
• Vanguard – “Converging Trends Drive Sponsors to Change Plan Lineups”
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10. Plan Sponsor Best Practices
Develop Fiduciary
Governance
Program
Communicate to Analyze Employee
Employees Demographics
Determine
Select Investment
Objectives for the
Managers/Products
Plan(s)
Select Asset Decide Investment
Classes Menu Structure
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11. Analyze Employee Demographics
• Relevant Information • Methods
• Age • Anecdotal/Experience
• Income • Vendor Demographic Reports
• Tenure • Payroll Data
• Financial Literacy • Participant Surveys
• Participant Opinions • Focus Groups
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12. Determine Plan Objectives
• Retirement Readiness
• Income Replacement is Best Measure
• General rule of thumb is 70%-80% of final year’s salary
• Can vary based on lifestyle, income, etc.
• Be Careful of Measurement Issues
• No one is “average”
• Shortfall risk is important
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13. Decide Investment Menu Structure
• Tiered Methodologies are Preferable
• Simplifies Decision-Making
• Employee communication is clearer
• Decision-making is easier
• Offers Meaningful Choices to Participants
• Acknowledges participants are different
• No one-size-fits-all choice is available
• Participants want different options
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14. Index Tier Option
• Ability to Build Globally Diversified
Index Portfolio
• Low Cost
• Broad Diversification Asset Allocation Funds (i.e. Target
Maturity, Target Risk, etc.)
• Style Specific Actively Managed
Funds for Active Participants
• Optional Self-Directed Brokerage
Core Index Funds
Account for Most Active
Participants
Active Style Funds
(Optional) Self-Directed Brokerage
Account / Mutual Fund Window
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15. Sample Index Tier
Tier 1: QDIA
Tier 2: Core Index Array
Stable Principal Fixed Income U.S. Equity International Equity
Intermediate
Money Market U.S. Stock International Stock
Bond
Tier 3: Core Active Array
Stable Principal Fixed Income U.S. Equity International Equity Specialty Funds
Active
Intermediate
Bond
Large Cap Value Large Cap Growth Large Cap Value Large Cap Growth
Fixed Annuity Inflation REIT
Protected
Bond
Global Bond Small Cap Value Small Cap Growth International Small Cap
Tier 4: Self-Directed Brokerage Account
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16. Multi-Manager Core Tier Option
• Core Array Consisting of Multi-
Manager Portfolios
• Money Market/Stable Value
• Equity
Asset Allocation Funds (i.e. Target
• Fixed Income Maturity, Target Risk, etc.)
• (Optional) Other Categories
• Core Strategies Incorporate
Multiple Sub-Asset Classes
• Small Cap
Core Multi-Manager Strategies
• REITs
• Emerging Markets
• High Yield
• Global Bond
• Core Strategies Incorporate Open (Optional) Self-Directed Brokerage
Account / Mutual Fund Window
Architecture Managers
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17. Tier 1 – Asset Allocation Strategies
• Tier 1 is Typically the QDIA or
QDIA-Type Option
• Target maturity or target risk Growth of Target Maturity Products
$400,000,000,000
• Fund or model portfolio
• Target Maturity Funds are Most $350,000,000,000
Common $300,000,000,000
• Simplicity in design
$250,000,000,000
5 Year Annualized Returns (Period Ending 12/31/2010) $200,000,000,000
Percentile Single Target- Managed All Other
Date Fund Account Participants
$150,000,000,000
Mean 3.93% 3.65% 3.76%
5th 3.62% 2.20% -0.02% $100,000,000,000
25th 3.62% 3.08% 2.66%
50th 3.90% 3.66% 3.80% $50,000,000,000
75th 3.90% 4.22% 4.64%
$0
95th 4.65% 5.06% 8.09%
Source: Vanguard 2011 “Participants During the Financial Crisis: Total Returns 2005-
2010”
Source: Morningstar Direct
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18. Target Maturity Selection Criteria
Investment Management Firm
Capabilities
Equity Glide Path
Costs
Asset Class
Selection
Portfolio
Management
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19. Select Core Asset Classes
• Objectives
• Provide participants with the ability
to create a diversified portfolio
tailored to their specific risk
tolerance and time horizon
•
16
Allow participants to diversify their
holdings among a number of 14
different asset classes with 12
different risk and return profiles
• Utilize low correlated asset classes 10
to minimize the amount of risk at
Return, %
8
any given return profile
• Constraints
6
•
4
Minimize opportunity for
participants to select undiversified 2
portfolios with unrealistic return
0
and risk expectations 0 2 4 6 8 10 12
Ris k (StDev Rtn), %
14 16 18 20 22
• Avoid narrowly defined “asset Frontier Cas h S&P 500 Index Small Cap Stoc ks Mid Cap Stoc ks REITs Intl Stoc ks Corporate Bonds
classes” with risks that are difficult
to identify
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20. Global Market Capitalization
$31.7 Trillion as of December 31, 2011
Source: Dimensional Fund Advisors; In US dollars. Market cap data is free-float adjusted from Bloomberg securities data. Many small nations not displayed. Totals may not equal
100% due to rounding. For educational purposes; should not be used as investment advice. 1. An example large cap stock provided for comparison.
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21. Style Boxes ≠ Asset Classes
Calendar Year Returns (2008)
Large
0.00%
-5.00%
-10.00%
-15.00%
-20.00%
-25.00%
Mid
-30.00%
-35.00%
-40.00%
-45.00%
-50.00%
Small
Large Value Large Blend
Large Growth Mid Cap Value
Mid Cap Blend Mid Cap Growth
Small Value Small Blend
Value Blend Growth
Small Growth
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22. Diversification is Tricky
Correlation to the S&P 500 Index (Rolling 60 Month)
1.0
Correlation
0.0
-1.0
Dec -82 Dec -85 Dec -87 Dec -89 Dec -91 Dec -93 Dec -95 Dec -97 Dec -99 Dec -01 Dec -03 Dec -05 Dec -07 Dec -09 Mar-12
Small Cap Stoc ks Mid Cap Stoc ks REITs Intl Stoc ks Corporate Bonds
Small Cap Stocks = Russell 2000 Index; Mid Cap Stocks = Russell MidCap Index; REITs = Dow Jones US Select REIT Index; Intl Stocks = MSCI EAFE; Corporate Bonds = BC Corporate Idx
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23. Select Investment Managers/Products
• Pre-Determine Investment Manager’s Role in the Menu
• Understand the Investment Manager’s Investment Philosophy
• Source of Value-Added
• Types of Market Environments That Create Headwinds/Tailwinds
• Evaluate Historical Performance in the Context of Investment Philosophy
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24. Manager Performance Does Not Repeat
100%
90%
25% 25%
80%
35%
70%
25% 23%
60%
23%
50%
40% 23%
25% 13%
30%
20%
25% 29% 29%
10%
0%
1996-2000 2001-2005 2006-2010
Source: Morningstar; 190 funds with 15 year track records
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25. Communicate to Employees
• Benefits • Challenges
• Demonstrates meaningful choices • Standard vendor communications
to participants don’t always support tiered
• Minimizes “choice overload” investment menus
• Simplifies participant decision- • Vendor websites are not structured
making to support tiered investment menus
• Tiered menu communications are
usually tailored for proprietary
investment products
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26. Low Risk Investment Options
Option 1 Option 2 Option 3 Option 4
Money Money Money
Stable Value Market Market Market
Fund
Short Term
Ultra Short Short Term
Government
Term Bond Bond
Bond
Intermediate
Bond Intermediate Intermediate Intermediate
Bond Bond Bond
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27. Stable Value Funds Face Market Pressure
• Consolidation of stable value • Back to the future
providers
• Use of more traditional
• Higher costs/lower capacity will GICs/separate account GICs with
continue to squeeze providers
synthetic GICs portfolios
• More expensive wrap insurance will
bring new entrants into the market • Bundling of wrap insurance with
investment management
• Low interest rate environment
• Increased usage of traditional GICs
• Improved MV/BV ratios
and separate account GICs by plan
• Stable value funds have only existed sponsors
during a period of steady, declining
interest rates
• Increasing rate environment will put
pressure on MV/BV ratios
• May also cause higher levels of
participant transactions as
participants try to arbitrage return
differentials
• Money market funds react more
quickly to yield changes (may
outperform stable value for a period of
time)
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28. Questions?
Scott.Cameron@MultnomahGroup.com
(888) 559-0159
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29. Disclosures
Multnomah Group, Inc. is an Oregon corporation and SEC registered investment
adviser.
Investment performance and returns are based on historical information and are not
a guarantee of future performance. Investing contains risk. Some asset classes
involve significantly higher risk because of the nature of the investments and the
low liquidity/high volatility of the securities.
Any information and materials contained herein or on our website are provided for
general informational purposes only and are not intended to be comprehensive for
any particular subject. Multnomah Group utilizes information from third party
sources believed to be reliable but not guaranteed, and as a result, information is
provided to you "as is." We do not represent, guarantee, or provide any warranties
(either express or implied) regarding the completeness, accuracy, or currency of
information or its suitability for any particular purpose. Multnomah Group shall not
be liable to you or any third party resulting from any use or misuse of information
provided.
Receipt of information or materials provided herein or on our website does not
create an adviser-client relationship between Multnomah Group and you.
Multnomah Group does not provide tax or legal advice or opinions. You should
consult with your own tax or legal adviser for advice about your specific situation.
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