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CFA CFP CPE

Important Reminder!!!. Be sure to sign the “Sign-In/Sign-Out” sheet outside of the room when applying for Continuing Education Credits for the following certifications. (Check the appropriate certification). CFA CFP CPE.

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CFA CFP CPE

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  1. Important Reminder!!! Be sure to sign the “Sign-In/Sign-Out” sheet outside of the room when applying for Continuing Education Credits for the following certifications. (Check the appropriate certification) • CFA • CFP • CPE

  2. The Evolution of Investment Vehicle Types – Emerging Investment Choices and Evaluating them for your Fund Line-up. Moderator: Geraldine Jimenez, CalPERS Panel: Michael Eldredge, ING Financial Advisers LLC Georgette Gestely, New York City (NY) John Sturiale, Charles Schwab & Co., Inc.

  3. Michael C. Eldredge, CFA ING Financial Advisers LLC

  4. Sponsor Objective • Build “Best in Class” Fund Menu • Develop Investment Policy Statement “IPS” • Monitor / Evaluate / Replace For Sponsor Informational Use Only

  5. How to Evaluate Funds - “Tricks of the Trade” • Rolling Period - NOT single point • Challenge the Peer Group • Risk Counts! Look at it! Score it! • Compounding – Growth of a $$ For Sponsor Informational Use Only

  6. Evolution of Investment Options Pre-1990 Individual Funds (few) THE EXPERIMENTS Individual Funds (many) S&P 500 Index (added) Mid-1990’s Specialty Funds (added) Late 1990’s 2000 + Target Risk (3-5 funds) Target Date (Up to 10+) THE ANSWER (?) For Sponsor Informational Use Only

  7. A RE A N For Sponsor Informational Use Only

  8. Challenges To Sponsors Peer Group a) IPS POS b) For Sponsor Informational Use Only

  9. Conclusion GOOD: • Build a “Best in Class” fund menu • Evaluate fund performance vs. an IPS • Replace as necessary NEW PARADIGM: • Focus on participant results – not only funds • Turn IPS into Participant Outcome Statement (POS) • Offer managed investment experience, like Target Date Funds For Sponsor Informational Use Only

  10. John Sturiale Charles Schwab & Co., Inc.

  11. Target Retirement Funds • Fund Implementation • Defaulting, mapping by age • Asset Allocation Drivers - Risk, volatility, human element • Asset Classes • Long-term bias to small cap, mid cap, international • Expense Ratios - Low cost institutional pricing CURRENT DEVELOPMENTS FUTURE OUTLOOK • Fund Structure • Open architecture • Non-proprietary managers • Emphasis on downside protection • Increased use of alternative investments • Fund Cost - Low cost institutional pricing Collective Trust Funds • Lifetime Income Generation • Target Fund structure

  12. SMRT Investment Philosophy • SMRT Investment Philosophy • Efficient allocation of glide path (stress tested in different market conditions)1 • Combination of active – passive management • Low correlation of managers (using a non-proprietary approach) 1 “Analysis of the SMRT Funds Glide Path,” January 2007, Israelsen, Craig Ph.D.

  13. Non-proprietary Sub-Advisor benefits: • Reduction of fiduciary risk - ability to diversify away from only one fund family • Unconstrained universe of investment teams and styles • Termination and replacement of investment managers without political implications • Elimination of “group think” among Portfolio Managers and Analysts • 3-year performance requirement – preventing “seeding” of new products ALL of these benefits can contribute to lower risk/volatility for the SMRT Funds. SMRT Funds • Please use this slide template for your presentation. • Please follow the guidelines for fonts, font sizes and colors to ensure optimal viewing on the screen and in print. • If you have any questions about this template please contact brands@schwab.com BENEFITS OF A MULTIPLE FUND FAMILY APPROACH

  14. Disclosures The Schwab Managed Retirement Trust Funds™, the Schwab Institutional Trust Funds®, and the Schwab Stable Value Fund™ are collective trust funds managed and distributed by The Charles Schwab Trust Company (“CSTC”), California state-chartered, non-depository trust company. CSTC acts as trustee and manager of the Funds. The Funds are not mutual funds, and their units are not registered under the 1933 Act, as amended or applicable securities laws of any state or other jurisdiction. The Funds are not registered under the 1940 Act, as amended, or other applicable law, and unit holders are not entitled to the protections of the 1940 Act. The Funds are not insured by CSTC, any of its affiliates, the FDIC or any other person. As defined in the Funds’ Declaration of Trust and Participation Agreement documents, the Funds are available for investment by eligible, qualified retirement plan trusts only. The unit value of the Funds will fluctuate, and investors may lose money. The Charles Schwab Corporation (Charles Schwab) provides services with respect to retirement plans and participants through its subsidiaries, Schwab Retirement Plan Services, Inc., The Charles Schwab Trust Company, and Charles Schwab & Co., Inc. (member SIPC). Charles Schwab also provides equity compensation plan services and other financial and retirement services to corporations and executives through Charles Schwab & Co., Inc. The Schwab Managed Retirement Funds Benchmark is the performance of a composite with asset allocations identically weighted to those of the Fund and is comprised of the following unmanaged indices: Russell 3000 Index, MSCI EAFE Ndtr_D Index, Lehman Bros. Aggregate Bond Index, and the 3-month T-bill. The benchmark model assumes monthly rebalancing and includes the reinvestment of income. Indices do not incur management fees, costs, and expenses, and cannot be invested in directly. The Russell 3000 Index contains the largest 3,000 companies incorporated in the United States and represents approximately 98% of the investable U.S. equity market. It is not an investment product available for purchase. The MSCI EAFE Ndtr_D Index is an aggregate of 21 individual country indices that collectively represent many of the major markets of the world, excluding the United States. Ndtr_D indices are calculated daily and take into account actual dividends reinvested daily before withholding taxes, but exclude special tax credits declared by companies. It is not an investment product available for purchase. The Lehman Brothers Aggregate Bond Index reflects the price fluctuations of the U.S. Treasury and government agency securities, corporate bond issues and mortgage-backed securities. It is not an investment product available for purchase. The Salomon Brothers U.S. Treasury Bills Indices are return equivalents of yield averages. The 6-Month T-Bills Index is an average of the last six 6-Month Treasury bills issues. Similarly, the 1 and 3-month T-Bills Indices consist of the last one 1-month and three 3-month Treasury bills issues. It is not an investment product available for purchase. Asset allocation targets are as of 2007 and only subject to change by way of CSTC investment committee direction. PIMCO manages to a total return objective by investing directly in a diversified series of underlying sector-based mutual funds, encompassing U.S. corporate bonds, U.S. treasuries and U.S government agencies, mortgages and asset-backed securities, as well as international bonds. All of these mutual funds are managed by PIMCO and are not available for purchase by individual investors. Sharpe Ratio: Developed by Nobel Laureate William Sharpe, the Sharpe Ratio is a risk-adjusted measure calculated by using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe Ratio, the better the fund’s historical risk-adjusted performance. The Sharpe ratio is calculated for the past 36-month period by dividing a fund’s annualized excess returns by the standard deviation of a fund's annualized excess returns. Since this ratio uses standard deviation as its risk measure, it is most appropriately applied when analyzing a fund that is an investor’s sole holding. The Sharpe Ratio can be used to compare two funds directly on how much risk a fund had to bear to earn excess return over the risk-free rate. International investments are subject to additional risks such as currency fluctuation, political instability and the potential for illiquid markets. Investing in emerging markets may accentuate these risks. Charles Schwab & Co., Inc. and its affiliates ("Schwab") receive remuneration from registered investment companies available through Schwab's Mutual Fund MarketPlace® and/or their affiliates for services rendered in connection with Schwab's no transaction fee service and Schwab Retirement Choice service. Such remuneration is calculated based on the aggregate net asset value of certain shares held in Schwab's customers' accounts and the calculation of the amount of such remuneration is subject to change from time to time, may include maintenance, networking and marketing fees in addition to shareholder and administrative services fees and may be paid, in whole or part, from a 12b-1 plan. Schwab may also receive certain compensation for serving as investment advisor, administrator, underwriter, transfer agent, shareholder servicing agent, and/or broker of record with respect to (i) affiliated funds, including The Charles Schwab Family of Funds (“SchwabFunds®”), and other mutual funds made available through Charles Schwab Investment Management, Inc. (“Laudus Funds”) and U.S. Trust Company, N.A. (“Excelsior Funds”), and (ii) collective trust funds sponsored by and made available through CSTC. The exact amount of the fees will vary depending on the mix of assets selected.

  15. Georgette Gestely, New York City Deferred Compensation Plan (NY)

  16. Plan Structure NYC Deferred Compensation Plan is the umbrella program for the 457 Plan, the 401(k) plan, the Roth 401(k) plan, the NYCE IRA and the NYCE Roth IRA • the 457 was introduced in 1986 • the 401(k) was introduced in January 2001 • the Roth 401(k) was introduced in April 2005 • the NYCE IRA was introduced in November 2006 • the NYCE Roth IRA was introduced in July 2007 • Investment and fee structures are identical in all programs

  17. The NYC Plan developed into a one-stop-shop retirement savings plan, serving city employees, city retirees and the spouses of employees and retirees. With that in mind, the Plan reviewed and revised the investment option line-up to remain state of the art: • The goals were to: • Reduce the volatility in the investment options • Reduce investment management fees • Help participants who did not feel comfortable creating portfolios by themselves

  18. Investment Line UpThe model structure that the Plan ultimately arrived at included: • Style-neutral investment options created through the blending of growth, value, core, and index funds • Separate accounts as low-cost substitutes for mutual funds • 12 time based (lifecycle) pre-arranged portfolios along a glide path extended through age 85, made up of the Plan’s core investment options

  19. The Separate Account Structure

  20. The Pre-Arranged Portfolios

  21. Goal #1: Blended Options The Multiple Manager Structure of the Core Investment Options • Less subject to style risk/exposure, and idiosyncratic risk • Emphasis is primarily on asset class exposure rather than active manager risk • Investment options utilize blended unit values • Non-performing managers can be switched without blackout periods

  22. Goal #2: Reduce Fees Why Separate Accounts? • Minimizes expenses • Allows control over investment managers and investment policy • Maximizes returns • Keeps it simple for the participant. They only need to determine if they want to be in this asset class. The evaluation of the manager and underlying holdings is done by the Board, staff, and investment consultants. • Underlying fund managers can be changed without any disruption to the participants (funds keep the same values and there is no blackout period) • Prevents trading abuses: not open to outside investors • Allows for securities lending

  23. Goal #3: Creating Pre-Arranged Portfolios • NYC DCP already had its own core investment options as well as a custodian and recordkeeper in place in order to create pre-arranged portfolios • The unbundled nature of the Plan and the competitively bid individual investment options are incompatible with adding on family of fund’s PAPs • The separate account structure makes the PAPs available to participants at no extra charge

  24. The Story of Pre-Arranged Portfolios begins with the Failure of the Great Defined Contribution Challenge: Creating Investment Professionals out of each and every employee Defined Contribution Plans have expected participants to • Have the time to learn the subject of investing • Have the interest to learn the subject • Have the ability to not only learn investment techniques, but to employ them properly over time to manage their accounts In Short, Defined Contribution Plans • Have expected participants to understand modern portfolio theory • Have expected participants to utilize their newly acquired investment expertise to create diversified portfolios

  25. How do we manage Portfolios going forward? • PAPs are able to fit into the better, more up-to-date communications programs:  • the old model of education or advice focused on the accumulation phase of investing (where to invest your money)  • pre-arranged portfolios have answered that question • the new model of education focuses on the distribution phase of investing (how to take out your money) • pre-arranged portfolios continue to roll down through-out your years of retirement

  26. Result #1: Blended investment options have other benefits besides reducing volatility From a procurement and communications point of view,it is easier to run the plan. • The Board retains more control over investment options. • A non-performing manager can be switched out without transferring out, and then transferring in, all the assets of the investment option and risking a black out period.

  27. Result #2: How do Plan fees compare to the universe? The City’s average participant pays $.20 on $100; the median cost of average institutional fund is $.54 on $100; the median cost of a retail fund in an IRA is $.83 on $100. The change from mutual funds to separate accounts has resulted in a cost savings of approximately $3 million annually for Plan participants.

  28. Result #3: Participants diversified their investments using the Pre-Arranged Portfolios As of March 31, 2007, 14.4% of the Plan assets or $1.2 Billion have been invested in the portfolios. Remaining Challenges • Benchmarks for the PAPs are not available in the market place because the portfolios are always changing. There is also no consistency among the products. Therefore, the products must be compared to their peers in performance. • Participants have difficulty accepting that they are diversified in a single portfolio and should, therefore, not invest in more than one. • Due to inertia, it is difficult to get existing participants to transfer their money into a portfolio. • Similarly, participants tend to invest new contributions into a Portfolio, but not move existing balances into them.

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