1.  The Younger Members Convention 2-3 December 2002 The De Vere Daresbury Park Hotel, Warrington, Cheshire

2. Investment options for members of DC schemes December 3 Andrew Hancock

3. Background DB to DC DC transfer Bear market State/citizen relationship Media interest

4. Statistics (1) 7% of UK pension assets are in DC … …so currently around 60 billion pounds But growing, and fast Expected to be 21% within 10 years

5. Historic DC approach Few options, maybe none Often just a balanced managed fund Little education And even less advice No understanding

6. Issues to consider Member choice Number of options Range of options Default option Communications / Advice Monitoring and changing managers

7. Member Choice? One size unlikely to fit all… …so choice generally advisable Assuming the members are financially aware enough to make reasonable decisions 80% UK DC funds currently offer choice

8. Quiz 1 The average number of investment funds offered in a 401 (K) is -a) 1-5 -b) 6-10 -c) 11-15 -d) 16-20

9. Criteria for Number/Range of options Diversification Expenses Choice Litigation risk Communication Demographic profile of employees

10. Appropriate investment options Consider offering -cash funds -bond funds -equity funds -lifestyle funds -property funds - other asset classes?

11. Default option Yes/No Stakeholder requires Could be considered advice ? Litigation risk? Which fund?

12. Quiz 2 What proportion of DC members never rebalance their investments? -a) 35% -b) 45% -c) 65% -d) 85%

13. Lifestyle funds Increasingly popular Designed to match employee’s risk profile Equities young, gradually switching to… Gilts and cash as approach retirement Automatically rebalancing

14. Lifestyle funds - Issues How many funds? One manager (expenses)… …or several (expertise) Flexibility around NRA Still equity investment! And relatively few switching dates

15. Quiz 3 The percentage of US DC sponsors offering investment advice is -a) 15% -b) 22% -c) 29% -d) 36%

16. Communication - principles Education and/or advice? Risk return trade off – and ways of conveying this Long term nature should be stressed Expenses, and who is paying

17. Communication Various media -use as many as possible -electronic increasingly popular -booklets -seminars -free phone lines -bulletin boards

18. Quiz 4 What proportion of US 401 (K) funds changed an investment manager in the last year? -a) 28% -b) 36% -c) 45% -d) 51%

19. Monitoring the options No less than quarterly, looking out for -Demographic changes -Performance issues -‘Style drift’ -Market practice evolution -New funds in marketplace

20. Changing the options Several issues -Whole review may be advisable -Lead time, plan well in advance -Communication issues -‘Black out’ periods

21. Risks Sponsors held responsible, for losses caused by any of… -Poor selection of managers -Poor diversification of options -Misleading education materials -Bad advice / advisors

22. The Future? Much greater fund choice Much more education… …and from younger ages And more advice, onsite? Legal actions on behalf of members DC to DB?

23. Case Study 1 – small UK employer Manufacturing company US parent, closed DB scheme to new hires DC scheme commenced 2001, 1 fund… …Lifestyle fund

24. Case Study 2 – medium size US employer Had 13 funds, replacing one of the equity managers Replaced fund with like for like, considering the total situation, filling in a few blanks also Final result 17 funds – many equity funds Large Value, Small Growth etc And several lifestyle funds, bond funds also

25. Case Study 3 – 7/11 Large US based retailer, many part timers 401 (K) Plan wholly invested in property No decision making by employees Bought property from parent company And leased it back, at guaranteed rents Historical returns excellent But largely due to company success?

26. The Enron story 401 (K) match provided as company stock In addition, many employees directed own contributions to company stock The share price soared… …and then crashed After fraud and accounting irregularities came to light

27. The Enron Story (cont) Enron stock $82 (January 2001) $26 (19 Oct 2001) – disclosed blackout start $15 (26 October 2001) – actual blackout start $10 (13 November 2001) – end of blackout $0.28 (30 November 2001) then bankruptcy Executives sold private holdings during blackout period Resulting legislation

28. Useful References www.plansponsor.com www.greenwich.com www.prc.wharton.upenn.edu/prc