CALLAN ASSOCIATES INC Knowledge for Investors May 8, 2008 Callan Associates Inc. 120 N. LaSalle St. Suite 2100 Chicago, IL Optimal Plan Design for Auto Enrollment Plans after PPA Lori Lucas, CFA Executive Vice President Callan Associates

CALLAN ASSOCIATES INC Knowledge for Investors 1 Forces at Work in Today’s DC Environment  Shift from DB to DC environment  Increased employer paternalism  The Pension Protection Act  Automatic enrollment incentives  Automatic enrollment safe harbor  Qualified default investment alternative regulations  Fee environment  Lawsuits  Pending regulation and legislation

CALLAN ASSOCIATES INC Knowledge for Investors 2 Has the DC Paradigm Changed?  The study: “The Impact of Employer Matching on Savings Plan Participation under Automatic Enrollment.” (Beshears et al)  Examined the impact of match structures on opt-out rates under automatic enrollment in 401(k) plans.  Conclusions:  The success of automatic enrollment in increasing participation in defined contribution plans is only marginally dependent upon whether the plan has a company matching contribution.  Moving from a typical matching structure of 50% on the first 6% of pay contributed to no match at all reduces savings plan participation under automatic enrollment by 5 to 11 percentage points.  Non-contingent employer contributions only weakly crowd out employee participation.

CALLAN ASSOCIATES INC Knowledge for Investors 3 New Company Contribution Paradigm  Under automatic enrollment, are there “better” ways to deploy employer monies:  Create an employer-sponsored retirement “floor” for all employees.  Reduce or eliminate participant-paid DC fees.  Enhance other benefits.

CALLAN ASSOCIATES INC Knowledge for Investors 4 “Old” Forces Still in Play  Some of the traditional forces that made matching programs attractive to employers are still at play:  Match viewed as means of attracting and retaining employees.  Extra percentage points of participation may make the difference between passing and failing non- discrimination testing.

CALLAN ASSOCIATES INC Knowledge for Investors 5 New DC Paradigm Has the DC paradigm changed in other ways?

CALLAN ASSOCIATES INC Knowledge for Investors 6  Loans and withdrawals essential to make plan attractive Brave New DC Environment  Participants encouraged to roll over assets.  Investment menu sensitive to performance chasing.  Education used to encourage behavior.  Match necessary to increase participation. New Reality? Old Assumption  Participants encouraged to stay in plan.  Equitable fee payment sought, or payment by plan sponsor.  Inertia allows investments to be geared to DB-ize plan.  Education used to help participants be comfortable with status quo.  Automatic enrollment unwind is essential.  Automatic enrollment weakens need for match.  Fees paid by plan participants through revenue sharing.

CALLAN ASSOCIATES INC Knowledge for Investors 7 Conclusions  Factors such as the PPA change the DC equation.  Plan sponsors may wish to use a new framework in DC decision making.  At least, they may wish to challenge the old framework.