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Addendum

Investment Policy Statement

State of California Savings Plus Program The following Investment Policy Statement (IPS) is currently being updated to include our revised Excessive Trading Policy. Once finalized, the updated IPS will be posted to savingsplusnow.com.

Investment Policy Statement State of California - Savings Plus Program

Investment Policy Statement State of California Savings Plus Program

Revised May 2016


Contents

Program Objectives and Background ............................................................................................ 1

Purpose of the Investment Policy Statement .................................................................................. 3

Roles & Responsibilities ................................................................................................................ 4

Program Investment Structure ....................................................................................................... 8

Investment Option Profiles ........................................................................................................... 12

Investment Option Performance Standards .................................................................................. 24

Acknowledgement of Approval .................................................................................................... 28


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Program Objectives and Background

The Savings Plus Program (the “Program”) consists of voluntary defined contribution plans and mandatory retirement plans established by the State of California Department of Human Resources (CalHR) for the benefit of participating employees and their beneficiaries.

The Program contains the following plans:

An eligible nonqualified 457(b) deferred compensation plan for eligible employees (“457 Plan”)

A qualified 401(k) plan for eligible employees (“401(k) Plan”)

An eligible nonqualified 457(b) deferred compensation plan for eligible part-time, seasonal, and temporary employees, the Part-time, Seasonal, and Temporary Employees Retirement Program (“PST Program”)

A qualified 401(a) plan for eligible new State employees hired between August 11, 2004 and June 30, 2013, the Alternate Retirement Program (“ARP”)

The 457 Plan was established under Chapter 4, Section 19993 of the California Government Code and was first established in 1974. The 401(k) Plan was established in 1985 under Chapter 9, Section 19999.5 of the California Government Code and was first implemented in 1989. The PST Program was established under Chapter 8.5, Section 19999.2 of the California Government Code and was implemented in 1991. The ARP was established under Chapter 8.6, Section 19999.3 of the California Government Code and was implemented in 2004. All of the above plans are intended to satisfy the requirements of sections 457(b) or 401(a) of the Internal Revenue Code, as applicable.

457 Plan and 401(k) Plan

The 457 Plan and the 401(k) Plan are voluntary. These plans allow eligible state employees the opportunity to defer a portion of their current compensation tax-deferred and after-tax as a Roth option to supplement their future retirement income.

Subject to state law, CalHR or its authorized designee(s) (collectively, the “Plan Sponsor”) has the sole authority to establish the overall design of the 457 Plan and the 401(k) Plan and to select and periodically review the investment options available under these plans.

Participants in the 457 Plan and the 401(k) Plan generally have complete discretion to decide their contribution levels and to direct the investments within their accounts among the investment options available under the respective plan. No fiduciary of the 457 Plan or the 401(k) Plan, including but not limited to the Plan Sponsor, the Investment Committee, and the Program, will be liable for any loss resulting from a participant’s investment directions.

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PST Program and ARP

The PST Program and the ARP are mandatory programs for eligible state employees. Both programs provide for automatic tax-deferred contributions of a portion of the covered employees’ current compensation. Effective July 2015, ARP contributions ceased to be collected; roughly four years later, this program will cease to exist.

Subject to State law, the Plan Sponsor has the sole authority to establish the overall design of the PST Program and the ARP. In addition, the Plan Sponsor has sole authority to invest the assets under the PST Program and the ARP.

Investment Committee

The Plan Sponsor maintains an Investment Committee (the “Committee”) to periodically evaluate and make recommendations to the Plan Sponsor regarding the investment options available under the 457 Plan and the 401(k) Plan and the investments under the PST Program and the ARP, as well as other investment related matters. The Plan Sponsor appoints the Committee members. Committee members shall serve at the will of the Plan Sponsor and may be removed as the Plan Sponsor deems appropriate.


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Purpose of the Investment Policy Statement

This Investment Policy Statement (the “Policy”) defines the objectives of the Program and establishes policies and procedures for meeting those objectives in a manner that is consistent with the applicable requirements of California law and other governing laws.

This Policy outlines guidelines and requirements in three functional areas:

Planning

Define the Program’s objectives and link those to the Program’s investment structure

Establish guidelines for the investment of the Program’s assets

Document the responsibilities of Program fiduciaries responsible for the oversight and management of the Program’s assets and the responsibilities of non-fiduciaries

Operations

Outline criteria and procedures for the ongoing operation of the Program’s investments

Establish investment performance standards

Control

Monitor results, including investment performance

Describe ways to address investment options that fail to satisfy established standards

In general, this Policy is intended to incorporate sufficient flexibility to accommodate current and future economic and market conditions and changes in applicable accounting, regulatory, and statutory requirements. As recommended by program staff and/or investment consultant(s), the Committee intends to review this Policy at least annually and, if appropriate, recommend amendments to the Plan Sponsor to reflect changes in the capital markets, the Program’s objectives, or other factors relevant to the Program.

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Roles & Responsibilities

Program Participants

The 457 Plan and the 401(k) Plan allow participants to direct the investment of their account balances. Accordingly, participants in those plans bear the responsibility of developing and monitoring a strategy for the investment of their accounts, including the following:

Determine the amount to contribute to the 457 Plan and to the 401(k) Plan within the limitations set by those plans and the Internal Revenue Code

Allocate account balances and deferrals to the available investment options based on individual circumstances, which may change over time, including time horizon, goals and objectives, and risk tolerance

Rebalance account balances to the participant’s desired allocation due to market movements and account activity

The PST Program is a mandatory retirement savings program authorized by federal law for employees who are not covered by a retirement system or by Social Security. The Program administers the PST Program for California State employees and California State University employees. The employer deducts a portion of the participant’s wages and deposits the money in a PST Program account for the participant. The PST Program is set up as a 457 Plan.

The ARP is a mandatory retirement savings program in which certain state employees were automatically enrolled from August 11, 2004 through June 30, 2013. It is an "alternate" retirement program because it provides two years of retirement savings in lieu of two years of retirement service credit under CalPERS. For two years from initial hire (or from CalPERS membership eligibility), the employer deducted a portion of the participant’s wages and deposited the money in an account for the participant. As stated above, ARP contributions ended in July 2015. The Program administers ARP, which is set up under Internal Revenue Code (IRC) Section 401(a) as a Money Purchase Plan.

Plan Sponsor & Committee

The Plan Sponsor and the Committee act in the sole interest of Program participants and their beneficiaries for the exclusive purpose of providing benefits to the participants and their beneficiaries, and ensuring the Program is administered at a reasonable expense. Furthermore, the Plan Sponsor and the Committee must comply with and fulfill all aspects of the established guidelines under the Internal Revenue Code and other governing rules and regulations that relate to the administration and investment of the assets under the plans.

Plan Sponsor

The Plan Sponsor performs the following in conjunction with Program and statutory provisions:

Comply with all applicable rulings, regulations, and legislation

Act in accordance with the provisions of trust and/or custodial agreements

Act as fiduciary of the Program

Appoint Committee members

Monitor Committee actions

Approve or disapprove Committee recommendations

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Committee

The Committee or its designee is responsible for the following tasks:

Establish and maintain this Policy

Periodically evaluate the Program’s investment performance, investment costs, and administrative costs to participants

Vote on plan design, investment structure, plan monitoring guidelines, and manager standing (includes putting a manager on watch, taking them off watch, and termination) based on recommendations from the Program’s Investment Consultants

Recommend to the Plan Sponsor plan design and investment structure

Investment Consultants

The Investment Consultants are responsible for the following tasks:

Provide recommendations regarding investment plan design, investment structure, plan monitoring guidelines, and this Policy

Conduct Investment Manager and other service provider searches

Conduct periodic due diligence visits with Investment Managers and the Trustee/Custodian

Develop quarterly investment-related evaluation reports

Develop annual investment-related evaluation reports

Perform investment monitoring functions

Assist with implementation of new investments and investment-related products/services

Report to the Committee and/or its designees on current investment trends and issues

The Investment Consultants acknowledge that each is a fiduciary with respect to these services that consist of investment advice as defined by ERISA as being fiduciary in nature. As of the date of the adoption of the May 2006 Policy, any new contract for an Investment Consultant(s) must require disclosure of any conflicts of interest that exist with any providers or potential providers supplying services to the Program.

Investment Managers

The Investment Managers selected by the Plan Sponsor are responsible for making investment decisions consistent with the approach stated in relevant contracts, Investment Manager Agreements, fund declarations and prospectuses. Investment Managers are also responsible for reporting investment results on a regular basis as required by the contract.

Annually, each Investment Manager is expected to meet with the Committee and/or its representative(s) to provide at a minimum:

A verbal and written review of their investment performance and portfolio structure

A synopsis of their key investment decisions, their underlying rationale, and expected future implications

Strategy, team, and organizational updates

Contract compliance

Expenses

Investment Managers and/or the Third Party Administrator (TPA), as may be so designated by the Plan Sponsor, are responsible to vote all proxies and corporate actions in the best interest of Program participants and their beneficiaries. In accordance with their contract, Investment Managers are also required to notify the Committee (or its designees) and the Investment Consultant(s) in writing of changes in investment strategy, operation, and personnel that has material impact to the investment strategy.


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Custodian Bank

The Custodian Bank is responsible for performing the following, as well as other agreed-upon activities, in conjunction with the Program, the contract, and statutory provisions:

Fulfill all the regular fiduciary duties of a custodian, as required by ERISA and other pertinent state and federal laws

Provide an effective relationship management and client service approach that ensures necessary attention and resources are devoted to the Program to meet service expectations and requirements

Protect Program assets, ensure timely settlement of security transactions, credit all income and principal realizable by the Program in a timely manner

Provide a sweep of uninvested cash assets in Investment Manager accounts into a suitable cash management vehicle daily, and calculate and report the net asset value for unitized accounts timely and accurately

Maintain accurate reporting systems in accordance with the contract, which provide information on all monies received or paid on behalf of the Program and on all securities under the custody contract including all unsettled securities transactions

Deliver Program assets to a successor custodian or as otherwise directed by the Plan Sponsor or its designee with proper instructions within a reasonable time period of termination

Distribute promptly all proxy materials or other corporate actions received by the Custodian

Coordinate asset transfers as requested by the Committee or its designee(s).

Provide fund accounting for investment options. Services include, but are not limited to, calculating net asset value (NAV), maintaining a working interface for trading and reconciliation with the Third Party Administrator, execute daily trades, execute monthly rebalancing for the investment structure, posting securities trades, and analyzing funds relative to target allocations

Provide compliance monitoring services for the Program’s separate accounts

Third Party Administrator

The TPA is responsible for performing the following, as well as other agreed upon activities, in conjunction with Program, the contract and statutory provisions:

Provide an effective relationship management and client service approach that ensures necessary attention and resources are devoted to the Program to meet service expectations and requirements

Provide and maintain relationship staffing at all levels including relationship management, on-site plan representative, operations, processing, technology, and other categories necessary to achieve agreed-upon service expectations and requirements

Provide and maintain a recordkeeping system and operating environment that is compliant with government regulations, statutory provisions, and the specific requirements of the Program related to all aspects of Program administration and event processing

Maintain and update a participant database, which includes participant data, plan participation data, fund elections, account balances, and any other data required by the Plan Sponsor

Update participant database and other demographic details through effective file transmission activity (inbound and outbound) with centralized and non-centralized payroll sources

Through a working interface for trading and reconciliation maintained with the Custodian, reconcile all contributions to deposits; reconcile Program level and investment option level balances with the balances in the trust, as displayed on the trustee’s reports

Ensure deposits are properly allocated to specific investment options according to participant elections

Provide individual participants with access to statements detailing beginning balances, all transactions, income credited, and ending balances as required by governing regulations

Calculate participant distributions based on governing regulations, Program rules, participant


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account balances, and/or participant requests

Provide monthly reconciliation reports as identified in the contract

Develop, implement, monitor, and review a comprehensive communications and marketing strategy in conjunction with the Program


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Program Investment Structure

PST Program and ARP

The investment goal for assets in the PST Program and in the ARP is to maximize total return consistent with capital preservation by investing in short-duration securities. PST Program assets and ARP assets are invested in the Short Term Investment Fund-PST and Short Term Investment Fund-ARP respectively.

457 Plan and 401(k) Plan

The appropriate investment strategy for any individual participant to accumulate retirement savings or achieve other savings objectives is a function of multiple personal factors, including but not limited to age, income, time horizon, risk tolerance, return expectations, accumulation objectives, and other assets outside of the Program. To allow participants to establish savings and investment strategies that meet their individual needs, the Program provides a variety of investment options in which participants may invest and diversify their account balances.

The 457 Plan and the 401(k) Plan currently allow participants to direct their account balances to a variety of investment options providing broad capital market access.

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457 Plan and 401(k) Plan Investments by Tier

This chart provides a visual of the 457 Plan and 401(k) Plan investment options and how they are categorized within tiers.

Chart Definitions

Level of Participant Interaction: The amount of ongoing interaction required by an individual

participant to successfully manage a given investment.

o For example, the structures and allocations of the Target Date Funds are administered by

the Program in consultation with the Investment Consultant(s), and thus require little to no

involvement by the participant. Conversely, the self-directed brokerage account requires a

high degree of ongoing monitoring and management by the participant, as the investment

profile and structure is completely determined by the participant.

Level of Risk: The amount of volatility expected in a given investment.

Each investment option available under the 457 Plan and the 401(k) Plan is intended to fill a primary savings and investment role consistent with the Program’s objectives and to address the risks that participants face. The Program considers factors such as participant investment knowledge, participant risk tolerance, liquidity needs, and plan size.

Participants who fail to give investment instructions regarding either their balance or future contributions to the 457 Plan or the 401(k) Plan are invested in the Qualified Default Investment Alternative (“QDIA”) selected by the Committee in accordance with DOL Reg. § 2550.404c-5.

The program investment structure was developed in consultation with the Investment Consultant(s). The analysis identified the appropriate asset categories that cover the overall risk/return spectrum offered by the Program and determined the investment options to be offered through both active


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and passive management. Participants bear the full risk of investment results from their investment directions. The Program offers the following investment options under both the 457 Plan and the 401(k) Plan:

Target Date Funds – Tier 1 (QDIA)

Small Cap Fund – Tier 2(B) (Active)

Small Cap Index Fund – Tier 2(A) (Passive)

International Fund – Tier 2(B) (Active)

International Index Fund – Tier 2(A) (Passive)

Mid Cap Fund – Tier 2(B) (Active)

Mid Cap Index Fund – Tier 2(A) (Passive)

Large Cap Fund – Tier 2(B) (Active)

Large Cap Index Fund – Tier 2(A) (Passive)

Socially Responsible Fund – Tier 2(B) (Active)

Diversified Real Return Fund – Tier 2(B) (Active)

Bond Fund – Tier 2(B) (Active)

Bond Index Fund – Tier 2(A) (Passive)

Short Term Investment Fund – Tier 2(B) (Active)

Short Term Investment Fund-Cash – Tier 2(B) (Active)

Self-Directed Brokerage Account – Tier 3

The Plan Sponsor, through a recommendation from the Committee and/or outside Investment Consultant(s), or both, may replace or hire additional managers within an investment category at any time. The investment options, along with their benchmarks, descriptions, and performance evaluation measures, may be changed as recommended by the Committee and approved by the Plan Sponsor.

While each of the defined contribution plans under the Program are governmental plans, as defined in Section 3(32) of Title I of the Employee Retirement Income Security Act of 1974 (ERISA), as amended, and are therefore not subject to the provisions of that Title, including the fiduciary requirements, the Plan Sponsor intends to generally follow the fiduciary best practices of ERISA.

Self-Directed Brokerage Account (SDBA)

Participants can make their own investment decisions and have full discretion over the menu of investment options available to them on the brokerage platform. Participants assume all responsibility for their investment decisions in the SDBA. Participant investment elections through the SDBA option will be subject to the Investment Guidelines provided by the brokerage account provider.

Participant investment elections through the SDBA are not otherwise covered under this Policy.

Excessive Trading Policy

The Investment Committee adopts a policy on excessive trading by plan participants as deemed necessary by the circumstances. Excessive trading (also known as frequent trading or market timing) is the practice of buying and selling investments frequently in an attempt to profit from discrepancies between a fund’s unit price and the value of the underlying holdings . This practice increases fund expenses, which results in higher fees and adversely affects fund performance for all shareholders invested in the fund.


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Designed to protect our participants from the potential negative impacts of market timing, the excessive trading policy imposes a 2.5 percent redemption fee on the sale of securities in the Savings Plus International funds (Active and Index) if the sale occurs within 30 calendar days of purchase. Proceeds from such fees will flow back into the unit value of the fund to compensate the other participants for the effects of the frequent trading behavior.


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Investment Option Profiles

The Program intends to offer participants a diversified selection of investment options from which to invest their assets. The following pages outline the specific roles and characteristics of each investment option under the Program. The investment vehicles included in each of the investment categories may consist of mutual funds, commingled investment trusts, and separate account(s) which also include FDIC/NCUA insured deposit savings accounts. Investments made through mutual funds and commingled investment trusts are governed by the fund’s investment guidelines outlined in the prospectus and trust agreement, respectively. An Investment Management Agreement (IMA) is established for each separately managed account to specify investment guidelines and objectives for the separate account. The IMA is maintained as an exhibit to the Standard Agreement entered into by and between the State and the Investment Manager. The Committee may seek outside experts to assist in the establishment and maintenance of an IMA.

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Tier 1 – Target Date Funds

Fund Target Date Funds

Management Active and Passive

Objectives The Custom Target Date Funds are a series of diversified portfolios designed to simplify the asset allocation process for participants and provide an option to accumulate wealth based on their expected retirement/separation date through a single investment option. The date in each fund name represents the approximate year the participant is anticipated to begin withdrawing their accumulated account balance, and is referred to as the “target date.” As a fund’s target date approaches, the allocation to the underlying investment strategies automatically shifts to a more conservative mix in order to preserve the accumulated balance. However, the principal value of the fund is not guaranteed at the target date nor any other time.

assets. Manager Structure The Program, with the assistance of an Investment Consultant, shall have discretion over the Investment Manager structure of the investment funds. The target allocations are reviewed annually for appropriateness and adjusted to de-risk the portfolio as the target date draws closer. This reflects the need for reduced investment risks as the target date approaches and the need for a lower volatility portfolio, which may represent a significant source of retirement income.

Primary Investments

The Custom Target Date Funds contain allocations to a diverse set of assets that are intended to provide capital appreciation, capital preservation, and protection against inflation. Each of the funds seeks to provide capital growth and income consistent with its current asset allocation, which will change over time, automatically increasing its allocation to fixed income while decreasing its allocation to equities. For example, the 2060 Fund begins with an asset allocation of 80% invested in equities, 10% in fixed income, and 10% in inflation protection strategies. Over time the equity allocation decreases while the fixed income allocation increases. In the year 2060, this same 2060 Fund will have a target allocation of 25% in equities, 70% in fixed income, and 5% in inflation protection strategies.

At any given time, actual allocations among the underlying strategies may vary slightly due to market movements and portfolio cash flows.

Source of Return Interest and dividend income

Capital appreciation/(depreciation)


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Tier 1 – Target Date Funds

Fund Target Date Funds

Expected Return Expected return will vary from low to high depending on the underlying asset allocation. The Income Fund is expected to provide a lower rate of return given the lower volatility expectations of the Fund’s target asset allocation. Contrary, the 2060 Fund is expected to provide a higher rate of return given the higher volatility expectations of the Fund’s target asset allocation. However, the emphasis for the Target Date Fund series is not necessarily on optimizing expected return, but rather on maximizing the income replacement capabilities of the median Savings Plus participant during retirement.

Expected Risk1

Expected risk will vary from low to high depending on the underlying asset allocation. The Income Fund is expected to exhibit a lower level of risk given the lower volatility expectations of the Fund’s target asset allocation. Contrary, the 2060 Fund is expected to exhibit a higher level of risk given the higher volatility expectations of the Fund’s target asset allocation. The expected risk profile of the Target Date Fund series is designed with a focus on capital appreciation for funds with a long investment horizon (e.g., 2060 Fund) and with an emphasis on capital preservation through risk minimization of accumulated balances as the target date nears.

1. Risk is defined as standard deviation of quarterly returns.


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Tier 2(A) – Passive Core Options

Fund Small Cap Index Fund

Management Passive

Objectives Replicate the return of the Russell 2000 Index

Primary Investments

Stocks with market capitalizations that are in-line with the Russell 2000 Index are used to achieve the Fund’s objective. The Fund may employ a sampling technique to build a portfolio with similar characteristics to the Russell 2000 Index. The Fund may also use futures and/or options to manage risk and to equitize dividends and cash flows.

Source of Return Dividend income


Expected Return Very High

Expected Risk1

Very High

Fund International Index Fund

Management Passive

Objectives Replicate the return of the MSCI ACWI Ex-U.S. IMI (net)

Primary Investments

Stocks with market capitalizations and region exposures that are in-line with the MSCI ACWI Ex-U.S. IMI (net). The Fund may employ a sampling technique to build a portfolio with similar characteristics to the MSCI ACWI Ex-U.S. IMI (net). The Fund may also use futures and/or options to manage risk and to equitize dividends and cash flows.



Expected Return High

Expected Risk1

High



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Fund Mid Cap Index Fund

Management Passive

Objectives Replicate the return of the S&P Mid Cap 400 Index

Primary Investments

Stocks with market capitalizations that are in-line with the S&P Mid Cap 400 Index. The Fund may employ a sampling technique to build a portfolio with similar characteristics to the S&P Mid Cap 400 Index. The Fund may also use futures and/or options to manage risk and to equitize dividends and cash flows.




Expected Risk1

High

Fund Large Cap Index Fund

Management Passive

Objectives Replicate the return of the S&P 500 Index

Primary Investments

Stocks with market capitalizations that are in-line with the S&P 500 Index. The Fund may employ a sampling technique to build a portfolio with similar characteristics to the S&P 500 Index. The Fund may also use futures and/or options to manage risk and to equitize dividends and cash flows.




Expected Risk1

Moderate/High

Fund Bond Index Fund

Management Passive

Objectives Replicate the return of the Barclays U.S. Aggregate Bond Index

Primary Investments

Fixed income securities that have characteristics in-line with the Barclays U.S. Aggregate Bond Index. The Fund may employ a sampling technique to build a portfolio with similar characteristics to the Barclays U.S. Aggregate Bond Index. The Fund may also use futures and/or options for the purpose of managing risk and to bondize cash flows.

Source of Return Interest income


Expected Return Moderate

Expected Risk1

Moderate



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Tier 2(B) – Active Core Options

Fund Small Cap Fund

Management Active

Objectives High total return Provide active management with exposure to multiple investment styles

Manager Structure The Program, with the assistance of an Investment Consultant, shall have discretion over the Investment Manager structure of the Fund. The investment structure will be reviewed periodically and the manager allocations will be tested monthly.

Primary Investments

Domestic stocks with market capitalizations that are in-line with stocks found in Russell 2000 Index. The total portfolio consists of predominately actively managed strategies, which include value, growth and core investment styles, as well as a passively managed index sleeve, which closely tracks the Russell 2000 Index. The investments should exhibit characteristics, including price/earnings and price/book ratios that are in-line with the Russell 2000 Index.



Expected Return Very High

Expected Risk1

Very High

Fund International Fund

Management Active

Objectives High total return Provide non-U.S. equity (developed and emerging markets) exposure Provide active management with exposure to multiple investment styles


Primary Investments

Foreign stocks of developed and emerging market countries with market capitalizations diversified across the size spectrum (Large, Mid, and Small capitalizations). The total portfolio consists of predominately actively managed strategies which include value, growth and core investment styles, as well as a passively managed index sleeve which closely tracks the MSCI ACWI Ex-U.S. IMI (net). The investments should exhibit characteristics, including price/earnings and price/book ratios that are in-line with the MSCI ACWI Ex- U.S. IMI (net).




Expected Risk1

High



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Fund Mid Cap Fund

Management Active



Primary Investments

Domestic stocks with market capitalizations that are in-line with stocks found in Russell Midcap Index. The total portfolio consists of predominately actively managed strategies which include value, growth and core investment styles, as well as a passively managed index sleeve which closely tracks the S&P Mid Cap 400 Index. The investments should exhibit characteristics, including price/earnings and price/book ratios that are in-line with the Russell Midcap Index.




Expected Risk1

High

Fund Large Cap Fund

Management Active



Primary Investments

Domestic stocks with market capitalizations that are in-line with stocks found in the Russell 1000 Index. The total portfolio consists of predominately actively managed strategies which include value, growth, and core investment styles, as well as a passively managed index sleeve which closely tracks the S&P 500 Index. The investments should exhibit characteristics, including price/earnings and price/book ratios that are in-line with the Russell 1000 Index.




Expected Risk1

Moderate/High



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Fund Socially Responsible Fund

Management Active

Objectives Long-term capital appreciation and current income by investing in companies that meet certain environmental, social, and governance criteria, resulting in a total investment return consistent with a balanced investment approach.

Primary Investments

The Socially Responsible Fund invests in stocks, bonds, and money market instruments to provide a complete investment portfolio of socially responsible investments. The Fund tactically alters the allocation of assets between stocks and bonds based on the Investment Manager’s assessment of the market outlook and the relative attractiveness of the underlying asset categories in order to optimize portfolio return and reduce portfolio risk. The Fund generally holds 60% stocks and 40% bonds; however, the allocation of stocks can range from 45% to 75%. The Fund invests primarily in high-quality, large and mid-capitalization equity securities, as well as investment-grade bonds. A small portion (up to 15%) of the equity allocation may be invested in foreign stocks.

Source of Return Dividend/Interest income


Expected Return High/Moderate

Expected Risk1

Moderate/High


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Fund Diversified Real Return Fund

Management Active and Passive

Objectives Hedge against inflation risk by investing in assets that offer protection against movements of inflation while also providing low correlation to traditional asset categories. Total return that outpaces inflation (CPI) + 3.0% return premium

Manager Structure

The Program, with the assistance of an Investment Consultant, shall have discretion over the Investment Manager structure of the Fund. The investment structure will be reviewed periodically and the manager allocations will be tested monthly.

Primary Investments

The total portfolio consists of three underlying real return strategies: Treasury Inflation-Protected Securities (TIPS) Index, Global Real Estate Investment Trusts, and a multi-asset class inflation hedge strategy. Asset allocations to the three underlying real return strategies will vary due to market movements and portfolio cash flows. TIPS Bond Index Segment: The TIPS segment shall be invested proportionally in treasury securities comprising the Barclays U.S. TIPS Index.

Global Real Estate Investment Trust Segment: The Global Real Estate Investment Trust segment shall be invested in a portfolio of securitized real estate securities including equity securities of real estate companies, real estate investment trusts (REITS), and real estate operation companies (REOCS).

Multi-Asset Class Inflation Hedge Segment: The multi-asset class inflation hedge segment is comprised of a multi-strategy fund investing in inflation sensitive equities, treasury inflation protected securities, and commodities.

Source of Return Dividend/Interest income


Expected Return Moderate/High

Expected Risk1

Moderate/High



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Fund Bond Fund

Management Active

Objectives Total return that outpaces inflation.

Manager Structure


Primary Investments

Government, corporate, mortgage-backed, and asset-backed fixed income securities with an average portfolio duration generally between three and seven years; high-yield and international issues will be utilized. Derivatives may be used for hedging or non-hedging purposes. The total portfolio consists of a combination of intermediate duration fixed core investment styles along with global markets, and should exhibit characteristics, including effective duration, maturity, and average portfolio quality, that are in-line with the custom benchmark consisting of 60% Barclays U.S. Aggregate Bond Index and 40% Barclays Global Aggregate Bond Index (Unhedged).



Expected Return Moderate

Expected Risk1

Moderate

Fund Short Term Investment Fund

Management Active

Objectives Modest total return equal to or greater than inflation

Manager Structure


Primary Investments

Government, corporate, mortgage-backed fixed income securities, and money market instruments with average portfolio duration between one and three years. The total portfolio consists of short duration core fixed income investment styles and should exhibit fixed income characteristics, including effective duration, maturity and average portfolio quality that are in-line with the Barclays U.S. 1-3 Year Government/Credit Bond Index.



Expected Return Low

Expected Risk1

Low



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Fund Short Term Investment Fund – Cash

Management Active

Objectives Principal preservation Current income

Manager Structure


Primary Investments

High-quality U.S. dollar-denominated short-term fixed income, money market instruments (U.S. Treasury bills, notes and bonds) of domestic and foreign issuers, repurchase agreements, and bank deposits/contracts.

Source of Return Contract income

Interest income


Expected Return Low

Expected Risk1

Low



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Tier 3 – Brokerage Account

Fund Self-Directed Brokerage Account (SDBA)

Management Not Applicable

Objectives Provide participants with additional investment options beyond the Target Date Funds and Core Funds.

Primary Investments

Mutual funds and individual securities with varying risk/return characteristics accessed through a SDBA.

Source of Return Varies

Expected Return Varies

Expected Risk1

Varies



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Investment Option Performance Standards

Based on Investment Consultant analyses and observations, the Committee shall evaluate each investment option’s performance quarterly, based on the quantitative and qualitative standards as outlined below. The Committee may retain an outside expert to assist in this process.

Qualitative Standards

The following qualitative standards will be used in the evaluation of each Investment Manager in the Program:

Compliance with stated investment guidelines, contract terms, and/or state or federal laws and rules

Adherence to stated investment style and philosophy

Ownership stability and alignment of interests with investors

Retention and attraction of key investment professionals associated with the management of the investment strategy

Litigation and assessment of impact on future investment performance

Disclosure of relevant information that may have an adverse impact on performance

An Investment Manager that fails to satisfy any of the above (or combination of the above) criteria may be placed on a watch list as further discussed below in Monitoring and Ramifications or removed from the Program.

Quantitative Standards

The Committee adopted a fund-of-funds investment option structure. Each investment option offered to Program participants is constructed of separate and distinct investment strategies. The Committee intends to monitor performance at two levels; investment option and underlying component Investment Manager strategy. Performance results are measured by:

1) Investment Options: Total time-weighted rates of return net of investment management fees and all fund expenses including Program expenses (i.e., explicit costs paid for administration or other Program costs);

2) Underlying component Investment Manager strategy: Total time-weighted rates of return. Investment manager returns are net of investment and fund direct fees such as trading compared to its benchmark and universe but gross of program expenses. FDIC/NCUA insured deposit savings account returns are based on their contracted value;

3) Against a respective market index and universe median over rolling three-year and five-year periods.

Volatility is measured by the standard deviation of quarterly returns and should be comparable to each strategy’s respective market index and in-line with respective universe averages. Strategies with greater volatility than the index are expected to earn a higher return than its respective index on a risk-adjusted basis.

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Monitoring and Ramifications

The following pages identify the investment return objectives established for each investment option category. It is expected that the investment options designated for each investment category will meet or exceed these performance objectives. The manager universes are comprised of professionally managed funds of comparable peers. The Committee monitors fund performance relative to these standards.

An active Investment Manager is expected to outperform its market index and manager universe median over the long-term – i.e. Quantitative Standards. At its discretion, the Committee may place an Investment Manager on the Watch List if the performance standard is not met for four consecutive quarterly observations of the trailing three-year and five-year periods. Significant portfolio management personnel or manager style changes are also cause for placement on the Watch List or for contract termination – i.e. Qualitative Standards.

A passive Investment Manager is expected to satisfy its tracking error standards over the long-term. At its discretion, the Committee may place an Investment Manager on the Watch List if the tracking error standard is not met for four consecutive quarterly observations of the trailing three-year and five-year periods. Significant portfolio management personnel or manager style changes are also cause for placement on the Watch List or for contract termination.

Once an Investment Manager is placed on the Watch List, additional due diligence is performed by the Investment Consultant. The results of the Investment Consultant’s findings are reviewed at each Committee meeting. The Investment Consultant’s recommendation as to whether the Investment Manager should continue on the Watch List, should be taken off the Watch List, or terminated by defunding the mandate, is evaluated by the Committee. The Committee, by way of vote, will decide if the Investment Manager will remain on the Watch List, be removed from the Watch List, or be replaced if circumstances exist that would warrant such action.


26

Tier 1 & Tier 2 Investment Options

Investment Options Comparative Manager

Universe Median 3 and 5 Years

Relative Market Index 3 and 5 Years

Tier 1 – Target Date Options

Target Date Funds Not Applicable Each Fund Will Be Evaluated

Compared to Customized Indices Based on Target Allocation Mixes

1


Small Cap Index Fund Not Applicable Russell 2000 Index

(Tracking Error +/- 0.30%)2

International Index Fund Not Applicable MSCI ACWI Ex-U.S. IMI (net)


Mid Cap Index Fund Not Applicable S&P Mid Cap 400 Index


Large Cap Index Fund Not Applicable S&P 500 Index


Bond Index Fund Not Applicable Barclays U.S. Aggregate

Bond Index (Tracking Error +/- 0.30%)

2


Small Cap Fund U.S. Small Cap Equity Mutual

Fund Universe

Russell 2000 Index

International Fund Non-U.S. Equity Mutual Fund

Universe

MSCI ACWI Ex-U.S. IMI (net)

Mid Cap Fund U.S. Mid Cap Equity Mutual

Fund Universe Russell Midcap Index

Large Cap Fund U.S. Large Cap Equity Mutual

Fund Universe

Russell 1000 Index

Socially Responsible Fund U.S. Balanced Mutual Fund

Universe 60% S&P 500 / 40% Barclays U.S.

Aggregate Bond Index

Diversified Real Return Fund Not Applicable

Consumer Price Index + 3% / 35% Barclays U.S. TIPS Index / 15% FTSE EPRA NAREIT Dev. Real

Estate Index/ 50% Multi-Asset Class Inflation Hedge

Strategy Custom Benchmark

Bond Fund U.S. Core Plus Fixed Income

Mutual Fund Universe

60% Barclays U.S. Aggregate Bond Index / 40% Barclays Global

Aggregated Bond Index (Unhedged)

Short Term Investment Fund U.S. Short Duration Fixed

Income Mutual Fund Universe Barclays 1-3 Year

Government/Credit Bond Index

Short Term Investment Fund – Cash

Money Market Mutual Fund Universe

90-day Treasury Bill Index


27

Underlying Component Strategies for Tier 2(B) – Active Core Options

Underlying Component Strategy

Comparative Manager Universe

Median 3 and 5 Years

Relative Market Index 3 and 5 Years

Small Cap Growth Equity Strategy

U.S. Small Cap Growth Equity Institutional Universe

Russell 2000 Growth Index

Small Cap Value Equity Strategy

U.S. Small Cap Value Equity Institutional Universe

Russell 2000 Value Index

International Small Cap Equity Strategy

Non-U.S. Small Cap Equity Institutional Universe

MSCI EAFE Small Cap Index (net)

International Growth Equity Strategy

Non-U.S. Growth Equity Institutional Universe

MSCI ACWI Ex-U.S. IM Growth Index (net)

International Core Equity Strategy

Non-U.S. Core Equity Institutional Universe

MSCI ACWI Ex-U.S. IMI (net)

International Value Equity Strategy

Non-U.S. Value Equity Institutional Universe

MSCI ACWI Ex-U.S. IM Value Index (net)

Mid Cap Growth Equity Strategy

U.S. Mid Cap Growth Equity Institutional Universe

Russell Midcap Growth Index

Mid Cap Value Equity Strategy U.S. Mid Cap Value Equity

Institutional Universe Russell Midcap Value Index

Large Cap Growth Equity Strategy

U.S. Large Cap Growth Equity Institutional Universe

Russell 1000 Growth Index

Large Cap Value Equity Strategy

U.S. Large Cap Value Equity Institutional Universe

Russell 1000 Value Index

Global Real Estate Investment Trust Strategy

Global Real Estate Institutional Universe

FTSE EPRA/NAREIT Developed Real Estate Index

Multi-Asset Class Inflation Hedge Strategy

Not Applicable

Consumer Price Index + 5% / Custom Benchmark Based on the Target Asset Allocation Mix of the

Underlying Strategies

TIPS Bond Index Strategy Not Applicable Barclays U.S. TIPS Index

Market Duration Fixed Income Strategy

U.S. Core Plus Fixed Income Institutional Universe

Barclays U.S. Aggregate Bond Index

Short Duration Fixed Income Strategy

1-3 Year Fixed Income Institutional Universe

Barclays 1-3 Year Government/Credit Bond Index

1

Target Date Funds will also be evaluated based on their target allocation mixes, ability to span the risk/return spectrum, and the underlying funds that comprise each target date fund. These investment options are intended for participants who are in need of default investment options based on personal factors, including age, income, time horizon, risk tolerance, return and accumulation objectives. 2

Tracking error is defined as the return of the Fund minus the return of the relative market index.

investment policy statement - nationwide financial · the 457 plan was established under chapter 4,...

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