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© 2010 Northern Trust Corporation northerntrust.com

NORTHERN TRUSTDEFINED CONTRIBUTION SOLUTIONS

THE PATH FORWARD

Designing the Ideal Defined Contribution PlanPresenting the Results of Northern Trust’s 2010 Defined Contribution Industry Survey

http://www.northerntrust.com/

2 The Path Forward: Designing the Ideal Defined Contribution Plan − October 2010

1999 2009

56%

45%44%

55%

Defined Benefit Defined Contribution

2025 2040 2055

0%

42%

85%

Private industry State and local government

19%

10%

Total U.S. Pension Assets 1999 vs. 2009

% of U.S. DB Participants in a “Frozen” Plan

Probability that Social Security Trust Fund Exhausted

Source: Bureau of Labor Statistics, April 2010. Source: Congressional Budget Office, 2009. Source: Towers Watson, January 2010.

There is too much riding on the success of the defined contribution system to risk getting it wrong


Northern Trust launches “The Path Forward” thought leadership series to pinpoint DC industry challenges and potential solutions

The question put to a group of

DC plan sponsors and investment

consultants

How would they design the ideal DC plan if they

were free from all existing regulations, laws,

structures, history and standard industry practices?

Participants included some of the

largest, most well-regarded firms

in the United States and several

of the most influential DC

investment consultants

50 plan sponsors managing over $100B in assets

and representing over 970,000 participants

Five leading investment consultants also shared

their views

Conversations focused on

perspectives regarding the

design of the ideal DC plan, with

a particular focus on these key

areas

Plan design and features

Investment options

Employee education and advice

Administration

Fees

Interviews were conducted by Greenwich Associates during July and August of 2010


Note: Two respondents requested anonymity.

Participating firms represent 50 of the largest DC plans and several of the most influential investment consultants in the United States

Accenture plc Idaho National Laboratory Ennis, Knupp & AssociatesACCO Brands Corporation ITT Corporation Hewitt Investment GroupAlcon, Incorporated Kimberly-Clark Corporation Russell Investment GroupAmerican Honda Motor Company Incorporated Lockheed Martin Corporation Slocum AssociatesAutoliv ASP, Incorporated McDonald's Corporation Towers WatsonBaker Hughes Incorporated Mead Johnson Nutrition CompanyBlue Cross of California Monsanto CompanyThe Boeing Company Nestle USA, IncorporatedBridgestone Americas, Incorporated PACCAR IncorporatedBurlington Northern Santa Fe Corporation Pfizer IncorporatedCampbell Soup Company Pitney Bowes IncorporatedCargill, Incorporated PricewaterhouseCoopers LLPContinental Grain Company The Readers Digest Association, IncorporatedElectrolux North America, Incorporated Robert Bosch LLCEnergizer Holdings, Incorporated S. C. Johnson & Son, IncorporatedExelon Corporation Sara Lee CorporationExxon Mobil Corporation Schlumberger LimitedFluor Corporation Texas Instruments IncorporatedFreeport-McMoRan Cooper and Gold Incorporated United Technologies CorporationFreescale Semiconductor, Incorporated UT-Battelle, LLCGATX Corporation Volkswagen Group of America, IncorporatedHonda of America W.R. Grace & CompanyHoneywell International Incorporated Walgreens CompanyHSBC North America Holdings Incorporated The Western Union Company

Plan Sponsors Investment Consultants


The ideal DC plan differs in many ways from our current DC construct

In general, the plan

sponsors and consultants

interviewed for the study

were in broad agreement

about the basic

characteristics of the ideal

DC plan

Simple, automatic and cost efficient

DC plan participants Required to participate

Able to contribution post-tax dollars without

restriction

Prevented from taking loans

DC Plan sponsors Required to contribute to employees’ plans

Allowed to share decision-making power with

participants

Held accountable for providing high levels of fee

transparency

Plan sponsors and

consultants had differing

views regarding

enrollment, contribution

levels and investment

options

Plan sponsors suggest broader investment line-

ups

Consultants promote greater levels of corporate

paternalism regarding participation and

investment decision-making


1. Mandatory Participation for all Employees

Employees are automatically enrolled into the plan on their first day of employment with no election to opt out, thereby ensuring immediate savings

Optional Participation in DC Plan?

Plan Sponsors

Optional Participation in DC Plan?

Consultants

Source: Greenwich Associates Research, 2010.

18

31

YesNo

1

4

YesNo


2. Default employee contributions of 5-6% of salary


Default Employee Salary Contribution for Auto-Enrollment?

Plan Sponsors

1-2% 3-4% 5-6% 7-8% 9-10% > 10%

5

12

19

2

7

1

Default Employee Salary Contributionfor Auto-Enrollment?

Consultants

1-2% 3-4% 5-6% 7-8% 9-10% > 10%

3

1

This contribution rate automatically increases on an annual basis until it reaches 11-12% of salary, the contribution level commonly recommended for retirement security


3. No limit on post-tax employee contributions

Though limits on employer matching contributions and government-sponsored tax deferral are acceptable, unlimited post-tax employee contributions encourages higher levels of saving

Restriction on Maximum Employee Contribution?

Plan Sponsors

Restriction on Maximum Employee Contribution?

Consultants


3

38

9

Yes

No

Depends on Employee Salary

1

2

2Yes

No

Depends on Employee Salary


Immediately One Year or Less

Two Years or Less

Five Years or Less

Other

30

2

6

10

2

Immediately One Year or Less

Two Years or Less

Five Years or Less

Other

3

1 1

4. Immediate vesting of employer contributions


Immediate vesting allows today’s more mobile workforce to recognize immediate benefit from plan participation

How Long Before Fully Vested?

Plan Sponsors

How Long Before Fully Vested?

Consultants


Prohibiting loans removes participant temptation from drawing upon balances for non-retirement related expenses, however those due to hardship are the likely exception to this rule

Allowed to Take Loans AgainstAccount Balances?

Plan Sponsors

Allowed to Take Loans Against Account Balances?

Consultants


5. Participant loans are not permitted, unless under duress

16

33

YesNo

5

YesNo


Participant-Led

Shared Decision-Making

Plan Sponsor-Led

13

32

5

Participant-Led

Shared Decision-Making

Plan Sponsor-Led

1

1

3

Participants are responsible for investments and asset allocations within guidelines established by sponsors, which enables participants to control their money while ensuring adherence to prudent investment practices

Who holds the decision-making power?

Plan Sponsors

Who holds the decision-making power?

Consultants


6. Continuation of shared decision-making between plan sponsor and participant


Ideal Number Investment Options Offered to Employees?

Plan Sponsors

Ideal Number Investment Options Offered to Employees?

Consultants

< 3

3-5

6-10

11-15

16-20

21-30

> 30

3

3

14

22

3

3

2

< 3

3-5

6-10

11-15

16-20

21-30

> 30

2

2

1


7. Optimized investment menus

Investment line ups are required to include asset allocation funds like target date or other managed options, but can also include more flexible options for more informed or active participants


Product-Re-lated Advice

Specific Investment

Strategy Advice

General Re-tirement Planning Advice

Broad-Based Fi-

nancial Counseling

Other

5 5 5

4

Product-Re-lated Advice

Specific Investment

Strategy Advice

General Re-tirement Planning Advice

Broad-Based Fi-

nancial Counseling

Other

35 36

41

32

5

8. Broad-based advice for participants


Participants have access to advice that not only focuses on investment products, but also long-term financial planning, offered in an environment of reduced concern about potential liability

Types of Advice Offered in Ideal DC Plan?

Plan Sponsors

Types of Advice Offered in Ideal DC Plan?

Consultants


9. High levels of fee transparency

Administrative Expenses

Investment Management Fees

Participant-Initiated Transactions Fees

Other

30

30

29

6

Administrative Expenses

Investment Management Fees

Participant-Initiated Transactions Fees

Other

4

4

4

1

Participants receive clear and concise information regarding administration expenses, investment management fees and participant-initiated transaction fees

What Fees Need to be Communicated?

Plan Sponsors

What Fees Need to be Communicated?

Consultants



Unbundling enables utilization of “best-of-breed” providers

Ideal DC Plan Service Structures?

Plan Sponsors

Ideal DC Plan Service Structures?

Consultants


Bundled Offering

Unbundled Offering

Internal Administration

Other

10. Unbundled service structures

Bundled Offering

Unbundled Offering

Internal Administration

Other

39

7

11

4

1



Some steps can be implemented in the short-term with minimal costs to employers or participants

Path Forward Action Items: Short-Term

1. AutomationPlan sponsors should act immediately to adopt automatic enrollment and auto-escalation features.

2. Simplification of investments

Plan sponsors must take steps to make plans simpler and more efficient. This can be achieved mainly by reducing the number of investment options to plan participants.

3. TransparencyPlan sponsors should be providing all plan participants with detailed information about administrative expenses, investment management fees and participant-initiated transaction fees.

4. Customization of default options

Plan sponsors should set an appropriate default contribution level for employees and work with providers to identify proper default investment options.



Other alterations – in the medium term – will require plan sponsors to make some hard decisions and accept new costs

Path Forward Action Items: Medium-Term

1. Employer matchPlan sponsors should set a reasonable employer matching contribution level either based on employee contributions or, ideally, independent of employee contribution and tied to employee salary.

2. Improved advice

Plan sponsors should provide participants with robust consultative services in the following areas: product-related advice, specific investment strategy advice, general retirement planning advice and broad-based financial planning.

3. Streamline across geographies

Plan sponsors should eliminate unnecessary differences in plan structure across geographic regions.



The ideal DC structure requires regulators/politicians to face up to current shortcomings and change regulatory structures

Path Forward Action Items: Long-Term

Reduce liability and fiduciary concerns

Address liability and fiduciary concerns that discourage plan sponsors from providing participants with robust advice.

Encourage more savingEliminate employee contribution caps so all participants can prepare for retirement to the full extent they are able.

Allow annuities in plans

Facilitate the inclusion of annuities within defined contribution plans to provide participants with a reliable stream of income post-retirement to plan “through retirement” rather than “to retirement.”


Key Characteristic Why This Makes Sense

1.Mandatory participation for all employees.

Employees are automatically enrolled into the plan on their first day of employment, thereby ensuring immediate savings.

2.Initial default employee contributions of 5-6% of salary.

This contribution rate automatically increases on an annual basis until it reaches 11% − 12% of salary, the contribution level commonly recommended for retirement security.

3.No limit on post-tax employee contributions.

Though limits on employer matching contributions and government-sponsored tax deferral are acceptable, unlimited post-tax employee contributions encourage higher levels of saving.

4.Immediate vesting of employer contributions.

Immediate vesting allows today’s more mobile workforce to recognize immediate benefit from plan participation.

5.Participant loans are not permitted, unless under duress.

Prohibiting loans removes participant temptation from drawing upon balances for non-retirement related expenses. Hardship withdrawals are the exception to this rule.

6.Continuation of shared decision-making between plan sponsor and participants.

Participants are responsible for investments and asset allocations within guidelines established by sponsors, which enables participants to control their money while ensuring adherence to prudent investment practices.

7. Optimized investment menus.Investment lineups are required to include asset allocation funds like target date or other managed options, but can also include more flexible options for more informed or active participants.

8.Broad-based advice for participants.

Participants have access to advice that not only focuses on investment products, but also long-term financial planning, offered in an environment of reduced concern about potential liability.

9. High levels of fee transparency.Participants receive clear and concise information regarding administration expenses, investment management fees and participant-initiated transaction fees.

10. Unbundled service structures. Unbundling enables utilization of “best of breed” providers.

In review, the ideal DC plan contains 10 key characteristics

20 2010 Program Solutions Conference

Important Information

NOT A SOLICITATION. No information provided herein shall constitute, or be

construed as, an offer to sell or a solicitation of an offer to acquire any security,

investment product or service, nor shall any such security, product or service be

offered or sold in any jurisdiction where such offer or solicitation is prohibited by

law or regulation. This material is provided for informational purposes only and

does not constitute a recommendation of any investment strategy or product

described herein. Opinions expressed are those of the presenter(s) and subject to

change without notice.

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