The Principal Title Page Conference Title and Date Tim Hollinger, CFP®, CEBS 401(k) Hot Topics & Trends

What got us here? Hot Topics & Trends

401(k) “Enhancements” Through the Years 1990’s 2000’s ? First 401(k) Plan Daily Valuation Plan Loans IVRS Fund of the Day Self Directed Brokerage Web Expertise/ Education Share Class Expense Disclosure Hot Topics & Trends

Investment Trends Hot Topics & Trends

Target Date Strategy What differentiates one target date fund from another? –Strategy of the fund Maximizing the upside Minimizing the downside –End point of the glide path Staying in the fund beyond retirement Taking money out at or before retirement Hot Topics & Trends

Investment Options Plans offer on average 19.5 investment options 1 Participants held an average of 5.3 investment options 1 Most common investment options –Actively managed domestic equity – 81.3% –Actively managed international equity – 78.5% –Indexed domestic equity – 70.2% –Actively managed domestic bond – 70% PSCA 52 nd Annual Survey, Hot Topics & Trends

Fiduciary Trends Hot Topics & Trends

Top 10 Fiduciary Mistakes Failure to: 1.Establish written policies and procedures 2.Follow policies and procedures 3.Do investment due diligence 4.Measuring and evaluating fees 5.Administer correctly, monitor periodically 6.Identify conflicts of interest 7.Differentiate between your corporate and your plan fiduciary roles 8.Appropriately manage company stock 9.Give employees the help they need 10.Take action “Top Ten Ways to Fail as a Fiduciary,” (Web) 2009 North American Professional Liability Insurance Agency, LLC. Hot Topics & Trends

Investment Monitoring Total 5 years or longer 2 to less than 5 years 1 to less than 2 years Never 100% 5% 20% 23% 13% 39% Within the last year When was the last time you replaced an investment option due to poor performance? Source: Deloitte Consulting, 2009 Phase out investment option over period of time Other Hasn’t happened Freeze investment option Add an additional investment option with the same investment style Continue to monitor 16% 5% 6% 17% 19% 55% 72% Replace investment option How do you handle an underperforming investment option? Note: Respondents could choose more than one answer. Hot Topics & Trends

Plan Design Trends Hot Topics & Trends

Auto Features Automation becoming standard practice Increased effort to lead employees to better long-term outcomes Auto Enrollment34%58% Auto Increase35%44% Auto Rebalancing42%47% Escalation and Auto Enrollment28%40% 2009 Hewitt Associates, “Trends and Experience in 401(k) plans.” Hot Topics & Trends

Plan Measurement Employers measure success by: –Investment performance 90% of plans offer investment education 84.8% of plans have a written investment policy statement 1 –If the plan is valued and appreciated by employees Increasing importance placed on retirement outcomes –81% of eligible employees participate –2/3 of employers report the 401(k) is the primary savings vehicle for employees –Replacement ratio studies 2009 Hewitt Associates, “Trends and Experience in 401(k) plans.” 1 PSCA 52 nd Annual Survey, 2009 Hot Topics & Trends

Participant Trends Hot Topics & Trends

Participant Behavior Worker Confidence in Having Enough Money to Live Comfortably Throughout Their Retirement Years Source: 2010 Retirement Confidence Survey, EBRI Very Confident 25%22%23%21%24%25%24%27%18%13%16% Somewhat Confident 47%41%47%45%44%40%44%43% 41%38% Not too Confident 18% 19%17%18%17% 19%21%22%24% Not at all Confident 10%17%10%16%13%17%14%10%16%22% Hot Topics & Trends

Retirement Outcomes 39% of employees are not confident they will have enough money 1 44% that have done a calculation used “the guessing method” 2 Calculations are effective at changing behavior: –44% changed their retirement planning 1 –59% started saving or investing more 1 1 EBRI Retirement Confidence Survey, EBRI Retirement Confidence Survey, Hot Topics & Trends

Roth Conversions PSCA 52 nd Annual Survey, 2009 Plan Size by Number of Participants ,000-4,9995,000+All Plans % of contributing participants Percentage of contributing participants who made Roth 401(k) contributions (when Roth is offered) Type of Plan Plan Size by Number of Participants ,000-4,9995,000+All Plans 401(k) Combination All Plans Percentage of plans permitting Roth 401(k) deferrals Hot Topics & Trends

Reaction to Market Turbulence Hot Topics & Trends # increased139,883158,822 % of participants19.9%19.2% # decreased40,75273,154 % of participants5.8%8.8% # stopped33,13963,893 % of participants4.7%7.7% Changes in participant behavior Data is specific to Salary Deferral Service clients number of participants — 702,255; 2008 number of participants — 829,156 # and % of participants that increased/decreased deferrals Retirement Plan Trends Report, The Total View Report, 2009.

Participant Benchmarking 52nd Annual Survey of Profit Sharing and 401(k) Plans, Profit Sharing Council of America (2009) Defined Contribution Participation Rate 78%80%76%77%84% 85%83% Average Deferral Rate 5.3%5.2% 5.4% 5.6%5.5% Hot Topics & Trends

Plan Sponsor Trends Hot Topics & Trends

Plan Sponsor Behavior Defined contribution-based world Voluntary benefits Consumer-directed healthcare Benefit providers asked to step up “guidance” Opening up the worksite for education and advice “Automate” features to simplify product choices Loosen requirements Nonqualified/deferred compensation Qualified/401(k) Health Savings Accounts but... Help them make good decisions and at the same time... Attract and keep quality workforce Shift responsibility and risk to employees Hot Topics & Trends

Top Five Concerns 1. Understanding legislation: 61% 2. Cost or Fees: 59% 3. Encouraging employees to participate: 54% 4. Degree to which participants will be ready for retirement: 41% 5. Ability of participants to make changes to their plan: 40%

Retirement Income Hot Topics & Trends

Retirement Income Planning 83% 1 72% 1 40% 1 15% 2 1 Retiree Income Solutions Survey from the Principal Financial Group, March (k) Participant Survey, The Principal Financial Group, Hot Topics & Trends

In-Plan Guarantees Hot Topics & Trends

Potential Solutions Hot Topics & Trends

Thank you! Hot Topics & Trends No part of this presentation may be reproduced or used in any form or by any means, electronic or mechanical, including photocopying or recording, or by any information storage and retrieval system, without prior written permission from the Principal Financial Group®. While this presentation may be used to promote or market a transaction or an idea, it is intended to provide general information about the subject matter covered and is provided with the understanding that The Principal is not rendering legal, accounting or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax or accounting obligations and requirements. Asset allocation does not guarantee a profit or protect against a loss. Investing in real estate, small- cap, international, and high-yield investment options involves additional risks. For use with financial professionals only. Insurance products and plan administrative services are provided by Principal Life Insurance Company, a member of the Principal Financial Group® (The Principal®), Des Moines, IA PQ /2010 – t b © 2010 Principal Financial Services, Inc., Des Moines, IA