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Aon Hewitt Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. Nothing in this document should be construed as legal or investment advice. Please consult with your independent professional for any such advice. To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Aon Hewitt.

Nevada System of Higher Education Second Quarter 2017 Discussion Guide August 18, 2017

Aon Hewitt | Retirement and Investment Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.

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Discussion Topics

Section 1 Capital Markets Review

Section 2 Performance Review

Section 3 Noteworthy Items

Section 4 Vanguard Flash Report

Section 5 PIMCO Flash Report

Section 6 William Blair Flash Report

Section 7 Legal and Compliance Update

1


Legal Disclosures and Disclaimers

Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc. (“AHIC”). The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto.

This document is not intended to provide, and shall not be relied upon for, accounting, legal, or tax advice. Any accounting, legal, or taxation position described in this presentation is a general statement and shall only be used as a guide. It does not constitute accounting, legal, and tax advice and is based on AHIC’s understanding of current laws and interpretation.

This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon AHIC’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. AHIC disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. AHIC. reserves all rights to the content of this document. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of AHIC.

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Aon Hewitt Investment Consulting, Inc. 200 E. Randolph Street Suite 1500 Chicago, IL 60601 ATTN: AHIC Compliance Officer © Aon plc 2017. All rights reserved.

2


Discussion Topics








3


Market Highlights

3.09% 2.46%

6.12% 6.27%

1.45%3.93% 4.70%

2.17%

-3.00%

17.90%

24.60%

20.27%

23.75%

-0.31%

-6.96%

2.97%

12.70%

-6.50%-10%

-5%

0%

5%

10%

15%

20%

25%

30%

S&P 500 Russell 2000 MSCI EAFE MSCI EmergingMarkets

BarclaysAggregate

Barclays LongGov't

Barclays LongCredit

Barclays HighYield

BloombergCommodity Index

SHORT TERM RETURNSAS OF 06/30/2017

Second Quarter 2017 One-Year

Source: Russell, MSCI, Bloomberg Barclays, DJ-UBS

14.63% 13.70%

8.69%

3.96%2.21% 2.82%

5.32%6.90%

-9.25%

7.18% 6.92%

1.03% 1.91%4.48%

7.27% 7.62% 7.67%

-6.49%

-15%

-10%

-5%

0%

5%

10%

15%

20%

S&P 500 Russell 2000 MSCI EAFE MSCI EmergingMarkets

BarclaysAggregate

Barclays LongGov't

Barclays LongCredit

Barclays HighYield

BloombergCommodity Index

LONG TERM ANNUALIZED RETURNSAS OF 06/30/2017

Five-Year Ten-Year

Source: Russell, MSCI, Bloomberg Barclays, DJ-UBS

4


Market Highlights

Second Quarter 1-Year 3-Year1 5-Year1 10-Year1

EquityMSCI All Country World IMI 4.25% 19.01% 4.87% 10.74% 3.95%MSCI All Country World 4.27% 18.78% 4.82% 10.54% 3.71%Dow Jones U.S. Total Stock Market 3.01% 18.52% 9.04% 14.50% 7.32%Russell 3000 3.02% 18.51% 9.10% 14.58% 7.26%S&P 500 3.09% 17.90% 9.61% 14.63% 7.18%Russell 2000 2.46% 24.60% 7.36% 13.70% 6.92%MSCI All Country World ex-U.S. IMI 5.85% 20.43% 1.14% 7.58% 1.38%MSCI All Country World ex-U.S. 5.78% 20.45% 0.80% 7.22% 1.13%MSCI EAFE 6.12% 20.27% 1.15% 8.69% 1.03%MSCI EAFE (Local Currency) 2.71% 22.10% 7.02% 12.54% 2.02%MSCI Emerging Markets 6.27% 23.75% 1.07% 3.96% 1.91%Fixed IncomeBloomberg Bloomberg Barclays Global Aggregate 2.60% -2.18% -0.35% 0.78% 3.69%Bloomberg Bloomberg Barclays Aggregate 1.45% -0.31% 2.48% 2.21% 4.48%Bloomberg Bloomberg Barclays Long Gov't 3.93% -6.96% 5.54% 2.82% 7.27%Bloomberg Bloomberg Barclays Long Credit 4.70% 2.97% 5.28% 5.32% 7.62%Bloomberg Bloomberg Barclays Long Gov't/Credit 4.39% -1.07% 5.28% 4.26% 7.58%Bloomberg Bloomberg Barclays US TIPS -0.40% -0.63% 0.63% 0.27% 4.27%Bloomberg Barclays High Yield 2.17% 12.70% 4.49% 6.90% 7.67%Citi Group Non-U.S. WGBI 3.81% -5.01% -2.20% -0.80% 3.21%JP Morgan EMBI Global (Emerging Markets) 2.21% 5.52% 4.64% 5.20% 7.30%CommoditiesBloomberg Commodity Index -3.00% -6.50% -14.81% -9.25% -6.49%Goldman Sachs Commodity Index -5.46% -9.01% -24.82% -13.70% -9.67%Hedge FundsHFRI Fund-Weighted Composite2 1.14% 8.02% 2.57% 4.89% 2.98%HFRI Fund of Funds2 0.20% 5.85% 1.35% 3.75% 0.81%Real EstateNAREIT U.S. Equity REITS 1.52% -1.70% 8.36% 9.52% 6.00%InfrastructureFTSE Global Core Infrastructure Index 3.12% 6.53% 2.06% 6.82% 3.59%

MSCI Indices show net returns.All other indices show total returns.1 Periods are annualized.2 Latest 5 months of HFR data are estimated by HFR and may change in the future.

Returns of the Major Capital MarketsPeriod Ending 06/30/2017

5


Global Equity Markets

The momentum triggered by the prospects of U.S. reflationary policies that carried global equity markets higher in late 2016 and earlier this year stuttered and were ultimately replaced by strong corporate and economic fundamentals. Global equity markets returned 4.25% in Q2 2017. Performance was, however, far more varied on both a regional and sector level.

All regions generated positive returns with Developed Europe (excluding the UK) being the strongest performing region, returning 8.75% during the second quarter of 2017. Much of the return, however, was due to the weakness of the U.S. dollar. Political risk within continental Europe subsided following the win of pro-EU candidate Emmanuel Macron which encouraged a greater risk appetite in the region.

4.25%5.85%

2.83%

5.13% 5.41%

0.48%

6.18%

8.75%

1.78%

5.78%

19.01%20.43%

17.73%

14.19%

19.25%

10.56%

7.04%

25.07%

18.64%

22.82%

0%

10%

20%

30%

ACWI IMI 47.8%ACWI ex-U.S. IMI

52.2%USA IMI

5.9%UK IMI

8.1%Japan IMI

3.2%Canada

IMI

0.3%Israel IMI

15.1%Europe ex-

UK IMI

4.0%Pacific ex-Japan IMI

11.2%EmergingMarkets

IMI

GLOBAL MSCI IMI INDEX RETURNSAS OF 06/30/2017


Source: MSCISource: MSCI

6


Global Equity Markets

The two exhibits on this slide illustrate the percentage that each country/region represents of the global equity market as measured by the MSCI All Country World IMI Index and the MSCI All Country World ex-U.S. IMI Index.

USA52.2%

UK5.9%

Canada3.2%

Pacific ex-Japan4.0%

Japan8.1%

Europe ex-UK15.1%

Israel0.3%

Latin America1.3%

Asia8.3%

Eastern Europe, Middle East &

Africa1.6%

Emerging Markets11.2%

MSCI ALL COUNTRY WORLD IMI INDEXGEOGRAPHIC ALLOCATION AS OF 06/30/2017

Source: MSCISource: MSCI

UK12.4%

Canada6.6%

Pacific ex-Japan8.3%

Japan17.0%

Europe ex-UK31.5%

Israel0.6%

Latin America2.8%

Asia17.4%

Eastern Europe, Middle East &

Africa3.3%

Emerging Markets23.5%

MSCI ALL COUNTRY WORLD EX-U.S. IMI INDEXGEOGRAPHIC ALLOCATION AS OF 06/30/2017

Source: MSCI

7


U.S. Equity Markets

The Russell 3000 Index returned 3.02% during the second quarter of 2017 and 18.51% over the trailing one-year period.

During the second quarter of 2017, the health care sector was the strongest performing sector, posting a return of 7.27%. Conversely, energy and utilities were the weakest performing sectors and the only sectors which posted negative returns in Q2 2017, falling 7.36% and 1.33% respectively.

Performance across the market capitalization spectrum was positive during the quarter. A similar trend to the first quarter of 2017 was observed as growth stocks outperformed value stocks across the market capitalization spectrum. In particular, small-cap value stocks underperformed, returning 0.67% while large-cap growth stocks were the standout performer, returning 4.83%.

3.02%1.33%

4.83%

1.37%

4.22%

0.67%

4.39%

18.51%

15.36%

21.62%

15.93%17.05%

24.86% 24.40%

0%

10%

20%

30%

Russell 3000 32.0%Large Value

34.1%Large Growth

15.2%Medium Value

11.1%Medium Growth

3.8%Small Value

3.9%Small Growth

RUSSELL STYLE RETURNSAS OF 06/30/2017 Second Quarter 2017

One-Year

Source: Russell Indexes

3.02% 3.74%

7.27%

2.97%0.96%

-7.36%

2.50%4.54% 3.90%

-1.33%

18.51%

34.75%

14.57%17.28%

2.43%

-4.66%

20.80%23.16%

27.57%

-1.97%

-10%

0%

10%

20%

30%

40%

Russell3000

18.2%Technology

13.9% Healthcare

13.8%Cons. Disc

7.2%Cons.

Staples

5.6%Energy

3.9% Materials &Processing

10.9%ProducerDurables

21.2%FinancialServices

5.2%Utilities

RUSSELL GICS SECTOR RETURNSAS OF 06/30/2017


Source: Russell Indexes

8


Currency

90

95

100

105

110

115

120

125

130

135

TRADE WEIGHTED U.S. DOLLAR INDEX(1997 = 100)

Source: Federal ReserveSource: Federal Reserve

70

80

90

100

110

120

130

140

150

160

170

U.S. DOLLAR RELATIVE TO EUR, GBP AND JPYREBASED TO 100 AT 06/30/2011

EUR/USDGBP/USDJPY/USD

Source: DataStream

Stronger DollarWeaker Dollar

As measured through the broad trade weighted U.S. dollar index, the U.S. dollar rose sharply over the quarter.

The U.S. dollar appreciated sharply against all major currencies as expectations of greater fiscal spending and increased number of future interest rate hikes led to significant US dollar inflows.

The pound was dragged down by worries over the possibility of a hard-Brexit. The yen depreciated sharply against the dollar owing to the divergent monetary policy stances by the two central banks.

9


U.S. Fixed Income Markets

The Bloomberg Barclays Aggregate Bond returned 1.45% during the second quarter of 2017. Corporate bonds outperformed with a return of 2.54%, driven by lower government bond yields and narrowing credit spreads. ABS bonds returned the least at only 0.60%.

Baa bonds outperformed high yield bonds and all the other investment grade corporate bonds across different credit qualities. Over the year, high yield bonds have been the strongest performer, returning 12.70%.

Longer duration bonds outperformed as the U.S. yield curve flattened during the quarter.

0.31%

0.80%1.06%

1.38%

4.31%

0.38%0.16%

-0.36%

-1.80%

-1.28%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

1-3 Yr. 3-5 Yr. 5-7 Yr. 7-10 Yr. >10 Yr.

BLOOMBERG BARCLAYS AGGREGATE RETURNS BY MATURITYAS OF 6/30/2017

Second Quarter One-Year

Source: Bloomberg Barclays Live

1.06%1.64%

2.43% 2.68%2.17%

-1.26%

-0.15%

1.12%

3.54%

12.70%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Aaa Aa A Baa High Yield

BLOOMBERG BARCLAYS AGGREGATE RETURNS BY QUALITY AND HIGH YIELD RETURNSAS OF 6/30/2017



1.45%1.17%

2.54%

0.87%0.60%

1.31%

-0.31%

-2.18%

2.28%

-0.06%

0.63%

-0.33%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

Barclays Agg.Bond

44.2%Gov't

25.3%Corp.

28.2%MBS

0.5%ABS

1.8%CMBS

BLOOMBERG BARCLAYS AGGREGATE RETURNS BY SECTORAS OF 6/30/2017



10


U.S. Fixed Income Markets

The Treasury yield curve flattened during the quarter. Short maturity bond yields continued to rise as the U.S. Federal Reserve (Fed) hiked the federal funds rate for a third successive quarter. Yields of long maturity bonds fell as inflation expectations decreased amid falling oil prices and concerns over the implementation of reflationary policies.

The 10-year U.S. Treasury yield ended the quarter at 2.31%, 9 basis points lower than its level at the beginning of the quarter.

The 10-year TIPS yield rose by 15 basis points during the quarter and ended the period at 0.58%.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0 5 10 15 20 25 30

Maturity (Years)

U.S. TREASURY YIELD CURVE

6/30/2016

3/31/2017

6/30/2017

Source: U.S. Department of Treasury

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 Jun 17

U.S. 10-YEAR TREASURY AND TIPS YIELDS

10Y TIPS Yield

10Y Treasury Yield

Source: U.S. Department of Treasury

11


Credit Spreads

During the second quarter of 2017, increased risk appetite saw a further narrowing of credit spreads which fell across all areas of the credit market except for MBS bonds which rose by 5 basis points

High yield bonds spreads (-19 basis points) fell by the most during the quarter, followed by spreads on long credit bonds (-11 basis points).

After falling by over 30 bps last quarter, emerging market bond spreads were more muted with a narrowing of only 2 basis points.

Spread (bps) 6/30/2017 3/31/2017 6/30/2016 Quarterly Change (bps) 1-Year Change (bps)

U.S. Aggregate 43 44 55 -1 -12

Long Gov't 2 3 3 -1 -1

Long Credit 157 168 215 -11 -58

Long Gov't/Credit 94 101 130 -7 -36

MBS 32 27 27 5 5CMBS 74 77 98 -3 -24ABS 46 54 61 -8 -15Corporate 109 118 156 -9 -47High Yield 364 383 594 -19 -230Global Emerging Markets 255 257 345 -2 -90Source: Bloomberg Barclays Live

12


European Fixed Income Markets

In the Eurozone, bond spreads fell during the second quarter of 2017 with yields falling across the Eurozone periphery (except for Italy). German bund yields rose by 14 bps during the quarter with major rise coming towards end of the quarter following a hawkish twist in European Central Bank sentiment. The ECB Governor intimated that tapering of the extensive Quantitative Easing policy may be on the cards sooner than initially expected.

Furthermore, the election of Emmanuel Macron stemmed the rising tide of populism in European politics helped to narrow both French and other European government bond yields from German Bund yields.

The bailout of Greek debt led to a larger narrowing of 161 bps during the quarter while stronger than expected economic data led to a narrowing of Portuguese government bond yields relative to German Bund yields.

0%

5%

10%

15%

20%

25%

30%

EUROZONE PERIPHERAL BOND SPREADS(10-YEAR SPREADS OVER GERMAN BUNDS)

Spain ItalyPortugal GreeceIreland

Source: DataStream

13


Commodities

The Bloomberg Commodity index declined during the second quarter, returning -3.00%. During the second quarter of 2017, the best performing segment was livestock with a return of

11.21%, followed by grains (4.46%). Softs was the worst performing sector during the quarter with a return of -14.25%. The energy sector was particularly volatile during the quarter. High crude oil inventory levels in

the U.S., driven up by U.S. shale producers, offset the extension of agreed crude oil production cuts which temporarily drove the price of crude oil higher.

-3.00%

-0.22%

-9.68%

-1.19%

-3.18%

-0.40%

-14.25%

4.46%

11.21%

-6.50%

-3.22%

-14.76%

17.48%

-8.43%

-13.05%

-22.59%

-9.75%

5.85%

-25% -20% -15% -10% -5% 0% 5% 10% 15% 20%

Bloomberg Commodity Index

Ex-Energy

Energy

Industrial Metals

Prec. Metals

Agric.

Softs

Grains

Livestock

COMMODITY RETURNSAS OF 06/30/2017

Second Quarter 2017

One-Year

Source: Dow Jones-UBS

14


U.S. Commercial Real Estate Markets

*Indicates preliminary NFI-ODCE data gross of fees

12 MONTH TRAILING TRANSACTION VOLUME BY TYPE SOURCE: RCA, AON HEWITT 3/31/2017

After modest declines early in the quarter, U.S. REITs (FTSE NAREIT Equity REIT Index) gained 1.5% over the quarter, following a 2.2% gain in June. REITs continued to underperform broader equities up until June, as investors appeared to prefer sectors with a perceived better growth environment. Declining bond yields in June appeared to bolster REIT share prices although performance varied widely by property type. That said, U.S. REITs are currently trading towards the middle of their five-year historical range relative to their underlying property assets, currently at a 4% premium to private market pricing.

One of the main leading indicators of a peaking market is the sector’s falling transaction activity, which has been especially present for portfolio and entity deals, down over 30% YOY. Sales volumes as well as pricing for individual assets, however, has remained fairly stable and elevated YTD. That said, stabilized assets are the most attractive to the marketplace while non-stabilized assets or assets in less than key locations often struggle to attract acceptable bids. A disconnect between buyers and sellers is growing, driven initially by a moderation in underlying fundamentals such as demand and rent growth. Given the advance state of the current real estate cycle, investor’s return expectations have begun to decline, increasing the sector’s exit risk.

1.71%

7.89%

11.35% 11.79%

5.25%

1.52%

-1.70%

8.36%9.52%

6.00%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Second Quarter 2017 1-Year 3-Years 5-Years 10-Years

PRIVATE VS. PUBLIC REAL ESTATE RETURNSAS OF 06/30/2017

Private (NFI-ODCE Gross)*

Public (NAREIT Gross)

*First quarter returns are preliminarySources: NCREIF, NAREIT

1.71%

7.89%

11.35% 11.79%

5.25%

1.52%

-1.70%

8.36%9.52%

6.00%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Second Quarter 2017 1-Year 3-Years 5-Years 10-Years

PRIVATE VS. PUBLIC REAL ESTATE RETURNSAS OF 06/30/2017

Private (NFI-ODCE Gross)*

Public (NAREIT Gross)

*First quarter returns are preliminarySources: NCREIF, NAREIT

15


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16


Discussion Topics








17


Asset Allocation

*Other Assets includes Loans and TIAA-CREF Money Market.

RPA70.7%

TSA14.8%

Pre-9913.2%

415(M)0.4%

Medical Resident

1.0%

Assets by PlanAs of June 30, 2017

TIAA (New Line-Up)35.5%

Fidelity (Legacy)

6.9%

TIAA (Legacy)52.9%

Valic (Legacy)4.3%

T. Rowe (Legacy)

0.5%

American Century (Legacy)

0.0%

Assets by VendorAs of June 30, 2017

As of 6/30/2017

$ % $ % $ % $ % $ % $ %TIAA (New Line-Up) 792,553,411$ 39.1% 182,579,453$ 43.2% 15,308,350$ 4.1% 8,012,553$ 75.3% 18,066,313$ 63.9% 1,016,520,080$ 35.5%Fidelity (Legacy) 153,620,382$ 7.6% 35,473,037$ 8.4% 6,057,801$ 1.6% 1,114,509$ 10.5% 874,124$ 3.1% 197,139,853$ 6.9%TIAA (Legacy) 989,212,109$ 48.8% 174,920,962$ 41.4% 348,629,895$ 92.5% 1,475,488$ 13.9% 191,830$ 0.7% 1,514,430,284$ 52.8%Valic (Legacy) 83,914,511$ 4.1% 29,753,986$ 7.0% -$ 0.0% 45,288$ 0.4% 9,159,665$ 32.4% 122,873,450$ 4.3%T. Rowe (Legacy) 6,947,929$ 0.3% 238,320$ 0.1% 6,540,583$ 1.7% -$ 0.0% -$ 0.0% 13,726,833$ 0.5%American Century (Legacy) -$ 0.0% -$ 0.0% 260,502$ 0.1% -$ 0.0% -$ 0.0% 260,502$ 0.0%Total 2,026,248,343$ 100.0% 422,965,758$ 100.0% 376,797,130$ 100.0% 10,647,838$ 100.0% 28,291,932$ 100.0% 2,864,951,002$ 100.0%Other Assets* 1,092,999$ 0.0%Grand Total 2,026,248,343$ 70.7% 422,965,758$ 14.8% 376,797,130$ 13.1% 10,647,838$ 0.4% 28,291,932$ 1.0% 2,866,044,001$ 100.0%

TotalPlan RPA TSA Pre-99 415(M) Medical Resident

18


Tier I(a) Watch List

Tier I (a)

2ndQuarter 2017

1stQuarter 2017

4thQuarter

2016

3rdQuarter 2016

Vanguard Target Retirement Income Trust II No No No No No (Buy) NoVanguard Target Retirement 2010 Trust II No No No No No (Buy) NoVanguard Target Retirement 2015 Trust II No No No No No (Buy) NoVanguard Target Retirement 2020 Trust II No No No No No (Buy) NoVanguard Target Retirement 2025 Trust II No No No No No (Buy) NoVanguard Target Retirement 2030 Trust II No No No No No (Buy) NoVanguard Target Retirement 2035 Trust II No No No No No (Buy) NoVanguard Target Retirement 2040 Trust II No No No No No (Buy) NoVanguard Target Retirement 2045 Trust II No No No No No (Buy) NoVanguard Target Retirement 2050 Trust II Yes No No No No (Buy) NoVanguard Target Retirement 2055 Trust II Yes No No No No (Buy) NoVanguard Traget Retirement 2060 Trust II* Yes No No No No (Buy) NoNegative tracking of greater than 0.2% constitutes underperformance for the Plan's target date retirement funds.

Notes on Table: Changes in Watch List designations from the previous quarter are highlighted in red. Yellow-Level Watch List. An investment fund goes on the Watch List with a yellow designation when two of the above occur, or when item numbers 4, 5, or 6 occur. Orange-Level Watch List. An investment fund goes on the Watch List with an orange designation when it has been on the yellow watch list for two consecutive quarters

or when three of the above occur. Red-Level Watch List. An investment fund goes on the Watch List with a red designation when it has been on the orange watchlist for two consecutive quarters

or when four of the above occur. When an investment fund is placed on the Watch List with a red designation, a formal fund review will be conducted and a recommendation for action will be made.

* Since-inception returns were used since this fund does not have a trailing five-year return.

6.Significant

Organizational Change

Watch List Status1.Underperformed

DuringTrailing5 Years

2.Underperformed

in 3 of 4Trailing

Calendar Quarters

3.Diverged

from Strategy and/or

Portfolio

4.Adverse

Change in Portfolio Manager

5.Weak

Manager Research

Rating

19


Tier I Watch List

Tier I

2ndQuarter 2017

1stQuarter 2017

4thQuarter 2016

3rdQuarter 2016

Vanguard Target Retirement Income - Instl. No No No No No (Buy) NoVanguard Target Retirement 2010 - Instl. No No No No No (Buy) NoVanguard Target Retirement 2015 - Instl. No No No No No (Buy) NoVanguard Target Retirement 2020 - Instl. No No No No No (Buy) NoVanguard Target Retirement 2025 - Instl. No No No No No (Buy) NoVanguard Target Retirement 2030 - Instl. No No No No No (Buy) NoVanguard Target Retirement 2035 - Instl. Yes No No No No (Buy) NoVanguard Target Retirement 2040 - Instl. Yes No No No No (Buy) NoVanguard Target Retirement 2045 - Instl. Yes No No No No (Buy) NoVanguard Target Retirement 2050 - Instl. Yes No No No No (Buy) NoVanguard Target Retirement 2055 - Instl. Yes No No No No (Buy) NoVanguard Traget Retirement 2060 - Instl.* Yes No No No No (Buy) NoNegative tracking of greater than 0.2% constitutes underperformance for the Plan's target date retirement funds.





Watch List Status6.Significant


5.Weak

Manager Research

Rating

1.Underperformed


4.Adverse


3.Diverged


Portfolio

2.Underperformed

in 3 of 4Trailing

Calendar Quarters

20


Tier II Watch List Tier II

2ndQuarter

2017

1stQuarter

2017

4thQuarter

2016

3rdQuarter

2016

Vanguard Total Bond Market Index Fund No No No No No (Buy) NoVanguard Total Stock Market Index Fund No No No No No (Buy) NoVanguard Institutional Index Fund No No No No No (Buy) NoVanguard Extended Market Index Fund No No No No No (Buy) NoVanguard Total International Stock Index No No No No No (Buy) NoVanguard Developed Market Index Fund No No No No No (Buy) NoVanguard Emerging Markets Stock Index Fund No No No No No (Buy) NoVanguard Federal Money Market Fund No No No No No (Buy) NoTIAA Traditional - RC No No No No No (Buy) NoTIAA Traditional - RCP No No No No No (Buy) NoPIMCO Total Return Fund No No No No No (Buy) NoDFA Inflation-Protected Securities Yes No No No No (Buy) NoNomura High Yield Fund* No No No No No (Buy) NoT. Rowe Price Instl. Large Cap Growth Fund No No No No No (Buy) NoDiamond Hill Large Cap No No No No No (Buy) NoWilliam Blair Small/Mid Cap Growth Fund No No No No No (Buy) NoDFA U.S. Targeted Value No No No No No (Buy) NoDodge & Cox Global Stock Fund No No No No No (Buy) NoHarding Loevner International Equity Instl. No No No No No (Buy) NoMFS International Value Fund No No No No No (Buy) NoLaudus Mondrian Emerging Markets Instl. Yes Yes No No No (Buy) NoCohen & Steers Instl Realty Shares No No No No No (Buy) NoNegative tracking of greater than 0.1% for domestic equities and fixed income or 0.3% for non-U.S. equities constitutes underperformance for the Plan's index funds.





6.Significant


Watch List Status1.Underperformed


2.Underperformed

in 3 of 4Trailing

Calendar Quarters

3.Diverged


Portfolio

4.Adverse


5.Weak

Manager Research

Rating

21


Tier I(a) Performance Summary As of 6/30/2017

22


Tier I Performance Summary As of 6/30/2017

23


Tier II Performance Summary As of 6/30/2017

24


Tier II Performance Summary (cont’d) As of 6/30/2017

25


Top Contributed Funds

*TIAA RC 31% / TIAA RCP 69% Contribution Split Source: As reported by TIAA-CREF

As of 6/30/2017

26


Quarterly Participant Transfers As of 6/30/2017

Investment Transfers In Transfers Out Net Transfers Ending Balance

(6/30/2017) Vanguard Target Retirement Trust II Funds $1,307,995 ($5,464,155) ($4,156,159) $427,161,741

Vanguard Target Retirement Mutual Funds $73,654 ($2,181,689) ($2,108,034) $67,197,149

Vanguard Total Bond Market Index Inst $1,933,124 ($620,719) $1,312,406 $23,150,657

Vanguard Total Stock Market Index Inst $825,118 ($919,841) ($94,723) $33,796,219

Vanguard Institutional Index Inst $2,574,433 ($2,150,225) $424,208 $81,612,706

Vanguard Extended Market Index Inst $4,006,967 ($301,087) $3,705,880 $31,838,476

Vanguard Total International Stock Index Inst $229,837 ($137,147) $92,690 $6,323,268

Vanguard Developed Markets Index Ins $804,643 ($1,347,057) ($542,415) $18,026,912

Vanguard Emerging Markets Stock Index Inst $744,956 ($611,382) $133,575 $16,785,773

Vanguard Federal Money Market Inv $1,193,180 ($1,651,818) ($458,638) $14,397,000

TIAA Traditional $3,669,105 ($2,104,437) $1,564,668 $113,631,861

PIMCO Total Return Instl $124,397 ($1,614,759) ($1,490,362) $13,873,949

DFA Inflation Protected Securities Portfolio Inst $508,118 ($203,910) $304,207 $8,726,034

Neuberger High Income Bond R6 $342,572 ($11,347,765) ($11,005,192) $0

Nomura High Yield Fund $11,467,528 ($211,694) $11,255,834 $11,432,485

T. Rowe Price Inst LC Growth $893,733 ($794,356) $99,377 $16,226,007

Diamond Hill Large Cap Fund Y $411,556 ($1,515,566) ($1,104,010) $17,550,802

William Blair Small Md C Grw I $306,392 ($566,360) ($259,968) $11,220,070

DFA US Targeted Val Port Inst $155,857 ($2,635,377) ($2,479,521) $23,201,483

Dodge & Cox Global Stock Fund $3,048,738 ($867,210) $2,181,528 $26,166,304

Harding International Equit Inst $620,279 ($278,361) $341,917 $7,711,004

MFS International Value R6 $2,548,881 ($495,563) $2,053,318 $23,340,581

Laudus Mondrian Emerging Markets Ins $83,458 ($83,392) $65 $1,286,676

Cohen & Steers Inst Realty Shares $328,328 ($520,870) ($192,542) $15,628,640

Mutual Fund Window $421,892 $0 $421,892 $6,234,285

Total $38,624,742 ($38,624,742) $0 $1,016,520,080

27


Morningstar Model Portfolios – Performance As of 6/30/2017

28


Morningstar Model Portfolios – Allocations

29


Morningstar Model Portfolios – Benchmarks

30


Annual Investment Fee Transparency – As of June 30, 2017 Investment Option

Market ValueMgmt. Fee

(%) Mgmt. Fee ($)Revenue

Sharing (%)*Revenue

Sharing ($)Total Expense

(%)**Total Expense

($)Vanguard Target Retirement Income Trust II $3,648,150 0.08% $2,919 0.00% $0 0.08% $2,919Vanguard Target Retirement 2010 Trust II $8,223,085 0.08% $6,578 0.00% $0 0.08% $6,578Vanguard Target Retirement 2015 Trust II $28,767,449 0.08% $23,014 0.00% $0 0.08% $23,014Vanguard Target Retirement 2020 Trust II $46,917,727 0.08% $37,534 0.00% $0 0.08% $37,534Vanguard Target Retirement 2025 Trust II $50,710,728 0.08% $40,569 0.00% $0 0.08% $40,569Vanguard Target Retirement 2030 Trust II $58,777,806 0.08% $47,022 0.00% $0 0.08% $47,022Vanguard Target Retirement 2035 Trust II $71,171,320 0.08% $56,937 0.00% $0 0.08% $56,937Vanguard Target Retirement 2040 Trust II $70,727,618 0.08% $56,582 0.00% $0 0.08% $56,582Vanguard Target Retirement 2045 Trust II $53,531,704 0.08% $42,825 0.00% $0 0.08% $42,825Vanguard Target Retirement 2050 Trust II $25,852,368 0.08% $20,682 0.00% $0 0.08% $20,682Vanguard Target Retirement 2055 Trust II $6,736,442 0.08% $5,389 0.00% $0 0.08% $5,389Vanguard Target Retirement 2060 Trust II $2,097,344 0.08% $1,678 0.00% $0 0.08% $1,678Vanguard Target Retirement Income - Instl. $1,464,687 0.09% $1,318 0.00% $0 0.09% $1,318Vanguard Target Retirement 2010 - Instl. $2,509,517 0.09% $2,259 0.00% $0 0.09% $2,259Vanguard Target Retirement 2015 - Instl. $11,156,960 0.09% $10,041 0.00% $0 0.09% $10,041Vanguard Target Retirement 2020 - Instl. $8,186,547 0.10% $8,187 0.00% $0 0.10% $8,187Vanguard Target Retirement 2025 - Instl. $7,928,795 0.10% $7,929 0.00% $0 0.10% $7,929Vanguard Target Retirement 2030 - Instl. $7,407,358 0.10% $7,407 0.00% $0 0.10% $7,407Vanguard Target Retirement 2035 - Instl. $6,254,137 0.10% $6,254 0.00% $0 0.10% $6,254Vanguard Target Retirement 2040 - Instl. $6,341,646 0.10% $6,342 0.00% $0 0.10% $6,342Vanguard Target Retirement 2045 - Instl. $7,286,108 0.10% $7,286 0.00% $0 0.10% $7,286Vanguard Target Retirement 2050 - Instl. $7,199,575 0.10% $7,200 0.00% $0 0.10% $7,200Vanguard Target Retirement 2055 - Instl. $1,129,821 0.10% $1,130 0.00% $0 0.10% $1,130Vanguard Target Retirement 2060 - Instl. $331,998 0.10% $332 0.00% $0 0.10% $332Vanguard Total Bond Market Index Fund $23,150,657 0.04% $9,260 0.00% $0 0.04% $9,260Vanguard Total Stock Market Index Fund $33,796,219 0.04% $13,518 0.00% $0 0.04% $13,518Vanguard Institutional Index Fund $14,397,000 0.04% $5,759 0.00% $0 0.04% $5,759Vanguard Extended Market Index Fund - Instl. $31,838,476 0.06% $19,103 0.00% $0 0.06% $19,103Vanguard Total International Stock Index $6,323,268 0.09% $5,691 0.00% $0 0.09% $5,691Vanguard Developed Market Index Fund $18,026,912 0.06% $10,816 0.00% $0 0.06% $10,816Vanguard Emerging Markets Stock Index Fund - Instl. $16,785,773 0.11% $18,464 0.00% $0 0.11% $18,464Vanguard Federal Money Market Fund $81,612,706 0.11% $89,774 0.00% $0 0.11% $89,774TIAA Traditional - RC & RCP $113,631,861 0.32% $363,622 0.15% $170,448 0.47% $534,070PIMCO Total Return Fund $13,873,949 0.47% $65,208 0.00% $0 0.47% $65,208DFA Inflation-Protected Securities Portfolio $8,726,034 0.12% $10,471 0.00% $0 0.12% $10,471Nomura High Yield Fund $11,432,485 0.58% $66,308 0.00% $0 0.58% $66,308T. Row e Price Instl. Large Cap Grow th Fund $16,226,007 0.56% $90,866 0.00% $0 0.56% $90,866Diamond Hill Large Cap $17,550,802 0.58% $101,795 0.00% $0 0.58% $101,795William Blair Small/Mid Cap Grow th Fund $11,220,070 0.95% $106,591 0.15% $16,830 1.10% $123,421DFA U.S. Targeted Value $23,201,483 0.37% $85,845 0.00% $0 0.37% $85,845Dodge & Cox Global Stock Fund $26,166,304 0.53% $138,681 0.10% $26,166 0.63% $164,848Harding Loevner International Equity Instl. $7,711,004 0.68% $52,435 0.15% $11,567 0.83% $64,001MFS International Value Fund $23,340,581 0.66% $154,048 0.00% $0 0.66% $154,048Laudus Mondrian Emerging Markets Instl. $1,286,676 1.20% $15,440 0.00% $0 1.20% $15,440Cohen and Steers Instl. Realty Shares $15,628,640 0.75% $117,215 0.00% $0 0.75% $117,215Mutual Fund Window $6,234,285 0.00% $0 0.00% $0 0.00% $0Total $1,016,520,080 0.19% $1,948,324 0.02% $225,011 0.21% $2,173,335Without Brokerage $1,010,285,795 0.19% $1,948,324 0.02% $225,011 0.22% $2,173,335

31



32


Discussion Topics








33


Vanguard Target Retirement Funds

All of the Vanguard Target Retirement Funds produced positive results during the second quarter

– The shorter-dated Funds, with their greater exposure to fixed income, posted the lowest absolute returns The Bloomberg Barclays U.S. Aggregate Float Adjusted Index returned 1.5% while its

international counterpart, the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted Index Hedged, returned 0.7%

– The longer-dated Funds, with their greater exposure to international equity, posted the highest absolute returns The Vanguard Total International Stock Index Fund advanced 5.8% while the Vanguard Total

Stock Market Index Fund advanced 2.7% For the twelve months ended June 30, 2017, results were positive across the series and ranked

favorably among their respective peer-groups

– Returns ranged from 5.2% for the Income Fund to 17.1% for the 2060 Fund

The Funds’ longer-term results continued to exhibit a modest level of tracking error due to the underlying component Fund’s investment management fee and the impact of “fair value” pricing adjustments

– The impact of “fair value” pricing was most visible in the longer-dated funds due to their sizeable allocation to the Vanguard Total International Stock Index Fund

The Vanguard Target Retirement Trusts remain “Buy” rated by our Global Investment Management Research Team

34


Vanguard Target Retirement Fund Update

1. On July 21, 2017:

– The Target Retirement 2010 Fund merged into the Target Retirement Income Fund

Investors in the 2010 Fund received shares of the Income Fund in the same share class and had the same aggregate net asset value as the shares of the acquired fund they held on the merger date

– The 2065 Fund was added to Vanguard’s Target Retirement Funds series to maintain a 12 fund target-date series

Aimed at investors who plan to retire and leave the workforce in or within a few years of 2065

2. On July 26, 2017, Vanguard reduced the fees of their Institutional Target Retirement Series from 0.10% to 0.09%

– Earlier this year, the shorter-dated Funds were reduced to 0.09%, while the longer-dated Funds with more exposure to equities remained at the 0.10%

– Following this decision, the entire suite will have a consistent fee of 0.09%

35


Vanguard Group Flash Report

On July 13, 2017, Vanguard announced that F. William “Bill” McNabb will relinquish his role as the firm’s Chief Executive Officer (CEO) on January 1, 2018

– Mr. McNabb will remain at Vanguard and retain the title of Chairman of the Board

Vanguard’s current Chief Investment Officer, Tim Buckley, will be promoted to CEO

As a result of Tim Buckley’s ascension to CEO, Vanguard announced that Greg Davis, the Global Head of Fixed Income, will assume the position of Chief Investment Officer (CIO)

After careful review, our Global Investment Management Research Team believes that these transitions reflect a thoughtful transition management at the firm

– No ratings changes are required at this time

A Flash report detailing our observations is included in Section 4 of this presentation

36


PIMCO Flash Report

On June 13, PIMCO announced that Jay Jacobs, President and Managing Director, will retire effective September 30, 2017

– He will continue as advisor to CEO Manny Roman until at least September 2018

Prior to Mr. Roman being named CEO, PIMCO separated the roles of the CEO and President positions to allow Mr. Jacobs to focus on internal functions

PIMCO is now adopting a more traditional structure promoting Ms. Shanahan and Mr. Strelow to the roles of Co-Chief Operating Officers, reporting to Emmanuel Roman

Our Global Investment Management Research Team is not changing any of PIMCO’s ratings as a result of these changes


37


Nomura High Yield Fund

While positive in absolute terms, the Fund’s performance lagged the return of its benchmark, the BofAML US High Yield Master II Index, by 0.7 percentage point during the second quarter

The Fund’s underperformance was primarily attributable to:

– An underweight allocation to BB rated securities

– A shorter than benchmark duration positioning as credit spreads narrowed

– An overweight allocation to energy, specifically, within the exploration and production sector

Partially offsetting the period's negative results was positive security selection within the building & construction, health facilities, packaging, pharmaceuticals, and telecommunications sectors

For the trailing one-year period, the Fund generated a return of 12.2% versus the benchmark’s return of 12.7%

The strategy remains “Buy” rated by our Global Investment Management Research Team

38


William Blair & Company

On May 30, 2017, William Blair announced that Karl Brewer, co-portfolio manager for the SMID Cap Growth strategy, announced his intent to retire from the firm

– Mr. Brewer will be transitioning into a portfolio advisory role on June 30, 2017 in preparation for his retirement on December 1, 2017

On June 5, 2017, our GIM Equity Team conducted an annual onsite visit and met with Karl Brewer to further discuss his transition into a portfolio advisory role and upcoming retirement

– Mr. Brewer will continue to serve as a resource to the team on specific stocks and industries of which he had particular expertise, though his interactions with clients will gradually decrease as he nears his retirement date

– Rob Lanphier and Dan Crowe will co-manage the SMID Growth portfolio while Mr. Brewer’s role on the portfolio will not be directly replaced

After careful review, our GIM Equity Team believes the remaining team members are well-positioned to manage the research and portfolio construction approaches with a high degree of skill and continuity

The strategy remains “Buy” rated by our GIM Equity Team. As such, we recommend the Committee take no action


39


DFA U.S. Targeted Value

The Fund’s performance lagged the return of its benchmark, the Russell 2500 Value Index, by 0.9 percentage points during the second quarter


– The portfolios greater emphasis on low relative price (value) stocks

– Negative stock selection within the energy sector

– An underweight allocation to REITs

Partially offsetting the period’s negative relative results was the portfolios inclusion of mid-cap stocks as larger stocks generally outperformed smaller stocks during the quarter

For the twelve months ended June 30, 2017, the Fund generated a return of 21.5% versus the benchmark’s return of 18.4%

With the exception of the trailing three-year period, longer-term results remained favorable relative to the benchmark and peer group average


40


Dodge & Cox Global Stock Fund

The Fund’s performance lagged the return of its benchmark, the MSCI All Country World Index, by 1.3 percentage points during the second quarter


– Weak relative returns from holdings in the energy, financial, and information technology sectors

– Notable detractors included Weatherford International (-42%), Itau Unibanco (-7%), Hewlett Packard Enterprise (-6%), Twenty-First Century Fox (-13%), and Liberty Global (-11%)

Partially offsetting the manager’s lagging results was underweighting to the health care sector, positive stock selection within the materials sector, and strong returns from the Fund’s emerging market holdings


Longer-term results remain positive on both an absolute and relative basis


41


Harding Loevner International Equity Instl.

The Fund’s performance lagged the return of its benchmark, the MSCI All Country World ex-U.S. Growth Index, by 1.0 percentage point during the second quarter


– Negative stock selection within the information technology, industrials, and energy sectors

– Negative stock selection within Japan and Europe ex-EMU

Partially offsetting the period's negative relative results was positive stock selection within the financials, materials, and consumer staples sectors and an overweight allocation to the information technology sector


Longer-term results remained favorable relative to the benchmark and peer group average


42


Laudus Mondrian Emerging Markets Instl.

The Fund’s performance lagged the return of its benchmark, the MSCI Emerging Markets Index, by 2.4 percentage points during the second quarter


– An underweight position to India and an overweight position to China

– Negative stock selection within Korea, specifically within the utilities sector

– An underweight position to the growth orientated information technology sector

Positive stock selection within Brazil and holdings within the financials sector helped to mitigate some of the period’s relative underperformance

For the trailing one-year period, the Fund generated a return of 14.4% versus the benchmark’s return of 23.7%

– The manager’s focus on low relative price (value) stocks has come up short, as smaller, less-profitable and more-cyclical stocks have driven the market to new highs

Longer-term results continued to underperform the benchmark and peer group average


43



44


Discussion Topics








45

Aon Hewitt 21 July 2017 Retirement and Investment

Risk. Reinsurance. Human Resources.

Flash Report

Vanguard Group, Inc. – CEO Transition Recommendation On July 13, 2017, the Board of Directors of Vanguard Group announced several management transitions that will take effect on January 1, 2018. The most significant announced change regards F. William “Bill” McNabb who will relinquish the title of CEO. The Board of Directors simultaneously announced the elevation of Vanguard’s current Chief Investment Officer, Tim Buckley, to the role of CEO. After careful review, Global Investment Management believes that these transitions reflect thoughtful transition management at the firm and we have concluded that no ratings changes are required at this time.

Please contact a member of the GIM Equity or Fixed Income Teams if you have any questions.

Background Bill McNabb, CEO and Chairman of the Board, will transition the title of CEO to Tim Buckley, current Chief Investment Officer, on January 1, 2018. While no longer serving as CEO, Bill McNabb will remain at Vanguard and retain the title of Chairman of the Board. As a result of Tim Buckley’s ascension to CEO, Vanguard has announced one additional management transition. Greg Davis, the Global Head of Fixed Income at Vanguard Group, will assume the position of Chief Investment Officer. Mr. Davis has been at the helm of the firm’s Fixed Income Group (since 2014) where he managed portfolio management, strategy, credit research, trading, and planning roles within the group.

Mr. Buckley has been an employee at Vanguard Group since 1991, when he was hired as an assistant to the firm’s first chairman, John C. Bogle. Over his long tenure at the firm, he has risen through the ranks and has served as a member of Vanguard’s senior leadership team since 2011. His current position as Chief Investment Officer was the result of a promotion in 2013. Once Greg Davis assumes the role as Chief Investment Officer, he will oversee more than $3.8 trillion in assets managed by Vanguard’s Fixed Income, Equity Index, and Quantitative Equity Groups. Biographies for select Vanguard Group employees are below:

F. William “Bill” McNabb

Mr. McNabb is the CEO and Chairman of the Board for the Vanguard Group. He has served in this capacity since 2008. Prior to this role, he served as head of the Client Relationship Group and Managing Director of Institutional and International Businesses at the Vanguard Group from 1995 to 2008. Mr. McNabb joined The Vanguard Group, Inc. in 1986 and he has remained at the firm throughout the course of his professional career. Before joining the firm, Mr. McNabb earned an M.B.A. from the University of Pennsylvania - The Wharton School and before that earned an A.B. degree from Dartmouth College.

Mortimer J. “Tim” Buckley

Mr. Buckley is a managing director and Vanguard's Chief Investment Officer, overseeing the company's internally managed stock, bond, and money market portfolios as well as managing the firm’s investment research and methodology. He first joined the firm in 1991 and has held a number of senior leadership positions, including

46

Aon Hewitt Retirement and Investment

Flash Report – Vanguard 2

Chief Information Officer from 2001 to 2006 and head of the Retail Investor Group from 2006 to 2012. He holds an A.B. in economics from Harvard College and an M.B.A. from Harvard Business School.

Gregory Davis, CFA

Gregory Davis, CFA, has been Principal at The Vanguard Group, Inc. since 2007 and currently serves as its Global Head of Fixed Income. He joined Vanguard in 1999 and is responsible for the fixed income group's portfolio management, strategy, credit research, trading, and planning functions. Prior to joining Vanguard Group, he worked at Merrill Lynch as an Associate in global debt markets. He holds the Chartered Financial Analyst designation and earned a B.S. in Insurance from Pennsylvania State University and an M.B.A. in Finance from the University of Pennsylvania - The Wharton School.

47


Flash Report – Vanguard 3

Disclaimer

This document has been produced by Aon Hewitt’s Global Investment Management (GIM) Research Team, a division of Aon plc and is appropriate solely for institutional investors. Nothing in this document should be treated as an authoritative statement of the law on any particular aspect or in any specific case. It should not be taken as financial advice and action should not be taken as a result of this document alone. Consultants will be pleased to answer questions on its contents but cannot give individual financial advice. Individuals are recommended to seek independent financial advice in respect of their own personal circumstances. The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto. The information contained herein is derived from proprietary and non-proprietary sources deemed by Aon Hewitt to be reliable and are not necessarily all inclusive. Aon Hewitt does not guarantee the accuracy or completeness of this information and cannot be held accountable for inaccurate data provided by third parties. Reliance upon information in this material is at the sole discretion of the reader. This document does not constitute an offer of securities or solicitation of any kind and may not be treated as such, i) in any jurisdiction where such an offer or solicitation is against the law; ii) to anyone to whom it is unlawful to make such an offer or solicitation; or iii) if the person making the offer or solicitation is not qualified to do so. If you are unsure as to whether the investment products and services described within this document are suitable for you, we strongly recommend that you seek professional advice from a financial adviser registered in the jurisdiction in which you reside. We have not considered the suitability and/or appropriateness of any investment you may wish to make with us. It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction, including the one in which you reside. Aon Hewitt Limited is authorized and regulated by the Financial Conduct Authority. Registered in England & Wales No. 4396810. When distributed in the US, Aon Hewitt Investment Consulting, Inc. (“AHIC”) is a registered investment adviser with the Securities and Exchange Commission (“SEC”). AHIC is a wholly owned, indirect subsidiary of Aon plc. In Canada, Aon Hewitt Inc. and Aon Hewitt Investment Management Inc. (“AHIM”) are indirect subsidiaries of Aon plc, a public company trading on the NYSE. Investment advice to Canadian investors is provided through AHIM, a portfolio manager, investment fund manager and exempt market dealer registered under applicable Canadian securities laws. Regional distribution and contact information is provided below. Contact your local Aon representative for contact information relevant to your local country if not included below. Aon plc/Aon Hewitt Limited Registered office The Aon Centre The Leadenhall Building 122 Leadenhall Street London EC3V 4AN

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Copyright © 2017 Aon plc

48


Discussion Topics








49

Aon Hewitt June 2017 Retirement and Investment

Flash Report

PIMCO – Jay Jacobs Retirement Recommendation On June 13, 2017, PIMCO announced that Jay Jacobs, President and Managing Director, will retire effective September 30, 2017. He will remain an advisor to Emmanuel Roman, CEO and Managing Director, until at least September 2018. Global Investment Management is not changing any of PIMCO’s current ratings due to this announcement.

Background Jay Jacobs, President and Managing Director, has decided to retire from PIMCO at the end of September 2017. He will continue to serve as an advisor to Emmanuel Roman, CEO and Managing Director, until at least September 2018. In January 2018, he will join Georgetown University’s Center for Financial Markets and Policy as a Distinguished Global Fellow. Mr. Jacobs was also recently appointed to the Board of Directors of The Peterson Institute for International Economics. Both institutions are based in Washington, DC.

Prior to Mr. Roman being named CEO, PIMCO had separated the responsibilities of the CEO and President positions to allow Mr. Jacobs to focus on internal functions and former CEO Doug Hodge to focus on external functions. PIMCO is now moving to a more traditional structure whereby Robin Shanahan, Managing Director and Global Head of Human Resources, and Peter Strelow, Managing Director and Chief Administrative Officer and Global Head, Funds, will assume the roles of Co-Chief Operating Officers, and report to Mr. Roman. Ms. Shanahan and Mr. Strelow are experienced executives, and have been at PIMCO for 10 years and 15 years, respectively.

Biographies for select PIMCO employees are below:

Robin Shanahan

Ms. Shanahan is a managing director and the head of human resources for the firm. She is responsible for leading the global human resources team and implementing PIMCO’s talent management initiatives globally. Prior to joining PIMCO in 2007, she was with UBS as a director in human resources based in their New York, Zurich and London offices. She has 20 years of investment and financial services experience and holds an undergraduate degree from the University of South Carolina.

Peter G. Strelow

Mr. Strelow is a managing director in the Newport Beach office, PIMCO’s chief administrative officer and global head of funds. He is president of PIMCO-sponsored mutual fund, ETF and closed-end fund complexes in the United States and trustee of the fixed income and ETF trusts. Mr. Strelow joined PIMCO in 2002 to help manage back office operations, focusing on continuous improvement initiatives. He worked in the executive office on communications and strategic initiatives from 2003 to 2006. Prior to PIMCO, he worked in product management at Siebel Systems. He holds an MBA from the Harvard Business School and an undergraduate degree from the University of California, Berkeley.

Risk. Reinsurance. Human Resources. 50


Jay Jacobs, CFA

Mr. Jacobs is PIMCO's president and a managing director in the Newport Beach office. Before being elected president, he served the company in multiple senior management roles. Most recently, he was the global head of human resources, leading the firm’s talent management and human capital initiatives. Prior to that, he was the head of PIMCO’s Munich office, overseeing the firm’s business in Germany and serving as a senior member of the European management team. He joined the firm in 1998 as a member of the Executive Office, working closely with the leadership team in Newport Beach. He has 22 years of investment experience and holds an MBA from Georgetown University. He received his undergraduate degree from Washington University in St. Louis.

Flash Report – PIMCO 2

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Disclaimer

This document has been produced by Aon Hewitt’s Global Investment Management (GIM) Research Team, a division of Aon plc and is appropriate solely for institutional investors. Nothing in this document should be treated as an authoritative statement of the law on any particular aspect or in any specific case. It should not be taken as financial advice and action should not be taken as a result of this document alone. Consultants will be pleased to answer questions on its contents but cannot give individual financial advice. Individuals are recommended to seek independent financial advice in respect of their own personal circumstances. The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto. The information contained herein is derived from proprietary and non-proprietary sources deemed by Aon Hewitt to be reliable and are not necessarily all inclusive. Aon Hewitt does not guarantee the accuracy or completeness of this information and cannot be held accountable for inaccurate data provided by third parties. Reliance upon information in this material is at the sole discretion of the reader. This document does not constitute an offer of securities or solicitation of any kind and may not be treated as such, i) in any jurisdiction where such an offer or solicitation is against the law; ii) to anyone to whom it is unlawful to make such an offer or solicitation; or iii) if the person making the offer or solicitation is not qualified to do so. If you are unsure as to whether the investment products and services described within this document are suitable for you, we strongly recommend that you seek professional advice from a financial adviser registered in the jurisdiction in which you reside. We have not considered the suitability and/or appropriateness of any investment you may wish to make with us. It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction, including the one in which you reside. Aon Hewitt Limited is authorized and regulated by the Financial Conduct Authority. Registered in England & Wales No. 4396810. When distributed in the US, Aon Hewitt Investment Consulting, Inc. (“AHIC”) is a registered investment adviser with the Securities and Exchange Commission (“SEC”). AHIC is a wholly owned, indirect subsidiary of Aon plc. In Canada, Aon Hewitt Inc. and Aon Hewitt Investment Management Inc. (“AHIM”) are indirect subsidiaries of Aon plc, a public company trading on the NYSE. Investment advice to Canadian investors is provided through AHIM, a portfolio manager, investment fund manager and exempt market dealer registered under applicable Canadian securities laws. Regional distribution and contact information is provided below. Contact your local Aon representative for contact information relevant to your local country if not included below. Aon plc/Aon Hewitt Limited Registered office The Aon Centre The Leadenhall Building 122 Leadenhall Street London EC3V 4AN




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Aon Hewitt July 2017 Retirement and Investment

Flash Report

William Blair & Company LLC – Ratings Update for Small Cap Growth and SMID Cap Growth Strategies Recommendation The ratings for the Small Cap Growth and SMID Cap Growth strategies remain a Buy. While we believe that the departure of Karl Brewer cannot be diminished, given his tenure with the Growth team and impact on the success of both strategies, we also have confidence that the remaining team members are well-positioned to manage the research and portfolio construction approaches with a high degree of skill and continuity. However, we will continue to monitor the strategies closely as Mr. Brewer nears his retirement date. Additionally, we have expressed our concerns to William Blair about the relatively short notification period around Mr. Brewer’s transition timeline and look to gather more information as it works to solidify additional parameters around future retirements.

Please contact a member of the GIM Equity Team if you have any questions.

Background On June 2, 2017, the GIM Equity Team communicated that Karl Brewer, co-portfolio manager for the Small Cap Growth and SMID Cap Growth strategies, had announced his intent to retire from William Blair & Company LLC and the investment management industry. Since that announcement, the following events have occurred or are forthcoming:

• Mr. Brewer formally transitioned out of his portfolio management role into a portfolio advisory role, which effectively removed him from a decision making capacity for both the SMID Growth and Small Cap Growth strategies. He will continue to serve as a resource to the team on specific stocks and industries of which he had particular expertise, though his interactions with clients will gradually decrease as he nears his retirement date.

• Portfolio management teams for both SMID Growth and Small Cap Growth portfolios have been formalized per our initial communication. Rob Lanphier and Dan Crowe will co-manage the SMID Growth portfolio while Mike Balkin and Ward Sexton will co-manage the Small Cap Growth portfolio. Mr. Brewer’s role on both portfolios will not be directly replaced.

• On December 1, 2017, Mr. Brewer will fully retire from his role at the firm and will pursue interests outside of the investment management industry. He will not be bound to non-compete or non-solicit agreements upon his retirement.

Following the initial announcement, the GIM Equity Team conducted an onsite visit with the Growth team to further discuss Mr. Brewer’s decision to retire, his transition into a portfolio advisory role and retirement, and the impact of his retirement on team structure going forward. Notable items include the following:

• Mr. Brewer confirmed that his retirement will be both from the firm and the investment management industry, so we should not expect him to assume a similar role in the foreseeable future. His retirement is

Risk. Reinsurance. Human Resources. 54


not indicative of any concerning issues as they relate to culture or structure at William Blair, but rather, driven by a desire to explore personal interests outside of the industry.

• Prior to his retirement announcement, the Growth team had approached succession planning by implementing a structure across the Growth suite of products that included two co-portfolio managers and an associate portfolio manager. However, an associate portfolio manager will not be assigned to the SMID Growth and Small Cap Growth portfolios going forward as the firm believes that the depth and seniority of the analyst pool can sufficiently accommodate the responsibilities associated with the associate portfolio manager role.

• The transition timeline for retirement has been led by Mr. Brewer with the firm’s full support. However, while the firm believes that the timeline is appropriate, it has also acknowledged that future retirements may require a longer notification and transition period to better meet the needs of clients. As such, future retirements will come with a 12 month notification period.

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Disclaimer This document has been produced by Aon Hewitt’s Global Investment Management (GIM) Research Team, a division of Aon plc and is appropriate solely for institutional investors. Nothing in this document should be treated as an authoritative statement of the law on any particular aspect or in any specific case. It should not be taken as financial advice and action should not be taken as a result of this document alone. Consultants will be pleased to answer questions on its contents but cannot give individual financial advice. Individuals are recommended to seek independent financial advice in respect of their own personal circumstances. The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto. The information contained herein is derived from proprietary and non-proprietary sources deemed by Aon Hewitt to be reliable and are not necessarily all inclusive. Aon Hewitt does not guarantee the accuracy or completeness of this information and cannot be held accountable for inaccurate data provided by third parties. Reliance upon information in this material is at the sole discretion of the reader. This document does not constitute an offer of securities or solicitation of any kind and may not be treated as such, i) in any jurisdiction where such an offer or solicitation is against the law; ii) to anyone to whom it is unlawful to make such an offer or solicitation; or iii) if the person making the offer or solicitation is not qualified to do so. If you are unsure as to whether the investment products and services described within this document are suitable for you, we strongly recommend that you seek professional advice from a financial adviser registered in the jurisdiction in which you reside. We have not considered the suitability and/or appropriateness of any investment you may wish to make with us. It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction, including the one in which you reside. Aon Hewitt Limited is authorized and regulated by the Financial Conduct Authority. Registered in England & Wales No. 4396810. When distributed in the US, Aon Hewitt Investment Consulting, Inc. (“AHIC”) is a registered investment adviser with the Securities and Exchange Commission (“SEC”). AHIC is a wholly owned, indirect subsidiary of Aon plc. In Canada, Aon Hewitt Inc. and Aon Hewitt Investment Management Inc. (“AHIM”) are indirect subsidiaries of Aon plc, a public company trading on the NYSE. Investment advice to Canadian investors is provided through AHIM, a portfolio manager, investment fund manager and exempt market dealer registered under applicable Canadian securities laws. Regional distribution and contact information is provided below. Contact your local Aon representative for contact information relevant to your local country if not included below. Aon plc/Aon Hewitt Limited Registered office The Aon Centre The Leadenhall Building 122 Leadenhall Street London EC3V 4AN




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Quarterly Update Third Quarter 2017

Aon Hewitt Retirement Legal Consulting & Compliance

Notes From Your EditorSummer’s here and the time is right for settling pension obligations. Last quarter we discussed actions that can be taken in advance to prepare for an eventual plan termination. This quarter we focus on preparation to implement alternative settlement actions that do not result in terminating the entire plan. There can be a lot of cost savings when certain obligations are settled.

Another method to save money in defined benefit plan administration is to do a mortality study and determine whether the plan could benefit by adjusting mortality assumptions using plan-specific information. The requirements for doing this have been dramatically loosened and many plans that did not previously meet the requirements will now be eligible to capitalize on this opportunity.

We continue to get guidance from courts, the Internal Revenue Service (IRS), and the Department of Labor (DOL) on topics such as defined contribution plan investment options, calculating permissible loan amounts in defined contribution plans, and whether plans qualify for “church plan” status.

As part of the elimination of the determination letter program for ongoing, individually designed plans, the IRS issued new procedures for obtaining opinion letters on pre- approved plans. We also discuss how to calculate the appropriate remedial amendment period for fixing plan qualification errors now that the five-year cycles have been eradicated.

Fiduciary issues are frequently on our minds. The DOL has allowed part of the new fiduciary investment advice rule to take effect on June 9, 2017. The remainder will become effective on January 1, 2018, if further action is not taken. We also report on a recent case in which the Second Circuit Court of Appeals has reformed a plan’s benefit formula to provide greater benefits to participants due to misleading plan communications. This change will have a large cost impact and is a warning to plan sponsors when communicating with participants.

If you have any questions or need any assistance with the topics covered, please contact the author of the article or Tom Meagher, our practice leader.

Regards,

Jennifer Ross Berrian Partner Aon Hewitt [email protected]

In this Issue2 Pension Liability Settlements—

Positioning for Success

3 New Opportunity for Defined Benefit Plan Sponsors to Lower Costs

3 No Fiduciary Duty to Choose “Cheapest” Investment Fund

4 New Guidance on Calculating Permissible Loan Amounts

5 What’s Next in the IRS Approval Process for Pre-Approved Plans?

5 Misleading Cash Balance Conversion Disclosure Punished

6 Helpful Supreme Court Decision on Church Plan Status

7 More Guidance Issued Relating to New Fiduciary Rules

8 Important Changes to Remedial Amendment Period

9 Quarterly Roundup of Other New Developments

10 Recent Publications

Prior IssuesPrior issues can be found on aon.com.

Four most recent issues - Click hereSelect “Newsletters” Older editions - Click hereSelect “Retirement Practice LegalConsulting & Compliance QuarterlyUpdate” in the Newsletters section.

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Pension Liability Settlements—Positioning for Successby Rick Jones

We continue to receive news regarding the settlement of pension liabilities. These programs have been embraced by defined benefit pension plan sponsors to reduce pension headcounts, liability, and the resulting exposure to financial volatility.

Thus far, these efforts have generally been targeted and opportunistic, with the settlement of certain segments of

a plan rather than a full plan termination. Our calculations suggest that 6% of corporate defined benefit plan obligations have been settled in the last five years. Lump-sum window programs and retiree annuity purchases have been the two most prevalent approaches to settling liability. Based on the Aon Hewitt 2017 Hot Topics in Retirement and Financial Well-Being survey, 67% of plan sponsors have recently offered a lump-sum window program. As a result of this significant number of lump-sum windows offered in recent years, we have seen their implementation rates slow and expect that slowdown to continue—especially once the required life expectancy tables for lump-sum distributions are updated by the IRS to reflect longer life expectancies.

Another common pension settlement opportunity picking up steam is the retiree annuity purchase or “lift-out.” This typically involves the purchase of annuities by the plan to cover benefits in pay status for existing retirees. As examples, Sears Holdings Corporation announced a $515 million deal in May with MetLife for 51,000 retirees, and The Hartford inked a $1.6 billion deal for 16,000 retirees with Prudential in June. Aon Hewitt’s experience and calculations suggest that these annuity purchase strategies can reduce economic cost expectations by 5%–7% (or more), particularly for plans paying low monthly benefits to a large number of participants.

Given the trends, what actions do we suggest to protect against legal, fiduciary, and compliance risks?

• Plan investment strategy. Carrying out a pension settlement may require fiduciaries to examine investment strategies to ensure they are appropriate—not only to effectuate the settlement, but also to ensure compliance for the portion of the plan remaining afterward.

• Plan design and operation. Are there aspects of the plan design and operations that warrant inspection and analysis prior to a settlement? For example, are life expectancy factors for alternative benefit selections appropriate and fair to all cohorts? The IRS requires that reasonable actuarial factors be used in the conversion of optional forms of benefit (e.g., from a single life annuity to a joint and survivor form of benefit). Are current factors fair? Will they continue to be appropriate if used by an insurer in a buy-out in the future?

• Spousal consent and QDROs. Changes in marital status should be maintained and updated when possible; the implications of domestic relations orders also should be evaluated and recorded so that future payments or settlement strategies are undertaken with a current understanding of marital status and the rights of alternate payees to be part of any such settlement strategy.

• Plan communications. Any communication with participants should be viewed as fair and unbiased. Ensuring participants have accurate and understandable information to make the right decision is the standard. In our experience, clear information tends to produce relatively predictable results.

• Independent fiduciaries. Many plan fiduciaries function in dual roles—as both corporate decision-makers and fiduciaries looking after participants’ interests. Despite the best of intentions, this bifurcation of roles can produce conflict-of-interest risks. For this reason, some organizations hire independent fiduciaries that can advise the other fiduciaries, serve as a voting member of the committee, or be the final decision-maker.

• Documentation of actions taken. Despite efforts to make the correct decision, the absence of a strong written record can undermine even the most prudent decisions. In documenting the action taken, it is important that the record indicate the capacity in which the decision-makers acted (settlor vs. fiduciary), the documentation considered and relied upon, alternatives considered, and any independent third parties brought in to advise decision-makers. This record will go a long way toward supporting the prudence of the action taken.

Pension settlements can be a great way for plan sponsors to appropriately manage liabilities and risks. A few small steps along the way can ensure success. Aon Hewitt’s Retirement and Legal Consulting & Compliance consultants would be pleased to assist with your review and analysis and the execution of any pension settlement programs.

“Pension settlements can be a great way for plan sponsors to appropriately manage liabilities and risks. ”

Quarterly Update | Aon Hewitt | Third Quarter 2017 259

New Opportunity for Defined Benefit Plan Sponsors to Lower Costsby Matthew Bond

Sponsors of large U.S. qualified pension plans may now have a new opportunity to study their mortality experience and adjust their mortality assumptions for certain purposes. For many years, the Internal Revenue Service (IRS) has prescribed standard mortality assumptions for determining funding requirements and Pension Benefit Guaranty Corporation (PBGC) insurance premiums. Under prior rules, few plans experienced enough deaths to use plan-specific assumptions.

The IRS has proposed new mortality regulations that are tentatively expected to be finalized in 2017 and effective in 2018. Under those regulations:

• The standard assumptions will reflect more up-to-date life expectancies for a typical population, increasing cash and PBGC premium requirements significantly for most plans.

• In order to qualify for incorporation of plan-specific mortality assumptions, plans must experience at least 100 male deaths (or 100 female deaths) over a five-year period. This is 10% of the prior requirement; the new threshold is much easier for plans to meet.

• A plan sponsor can first study its mortality experience, then decide whether or not to incorporate that experience.

Due to escalating PBGC premiums, even a modest reduction in associated liabilities would allow many plans to quickly recoup the

cost of a mortality study. This is especially likely for plan sponsors with hourly or union participants, relatively low pay or benefit amounts, and/or participants concentrated in regions with shorter life spans. Beyond the regulatory opportunity, mortality studies also provide a better understanding of a plan’s true liabilities and funded percentage, which improves the accuracy and stability of accounting results. Better information also supports effective risk management and plan design choices.

Given new regulations and growing rigor in measuring plan costs, the business case for mortality studies is stronger than ever before. Plan sponsors should consider proactively studying mortality now in order to position themselves to capitalize on the regulations when they are finalized.

Click here to read the full version of this article on the Aon Hewitt Retirement and Investment Blog. You may need to scroll down to view the article.

No Fiduciary Duty to Choose “Cheapest” Investment Fundby Tom Meagher

On May 25, 2017, the U.S. District Court for Minnesota issued a decision in Meiners v. Wells Fargo & Company in favor of Wells Fargo. The plaintiff’s claim stated that Wells Fargo plan fiduciaries breached their fiduciary duties when they continued to invest plan assets in Wells Fargo investment funds that underperformed comparable Vanguard funds and were more expensive than both Vanguard and Fidelity funds.

The case is noteworthy in that it represents one of the few recent cases involving the financial services industry to have been resolved in favor of the financial institution. The court’s reasoning is also quite instructive—the court noted that the plaintiff was attempting to hold Wells Fargo’s fiduciaries liable for failing to choose the

“cheapest” investment fund. The court also noted that to require plan fiduciaries to select the cheapest fund would suggest that fiduciaries should ignore other shortcomings with the investment fund. Moreover, the court noted that Wells Fargo’s fiduciaries’ selection of its own affiliated funds for a default investment option

“While plan fiduciaries are not required to select the least expensive investment fund, they should be prepared to support why a more expensive fund is appropriate for the plan. ”

“Due to escalating PBGC premiums, even a modest reduction in associated liabilities would allow many plans to quickly recoup the cost of a mortality study.”


https://retirementandinvestmentblog.aon.com/BlogHome/Blog/June-2017/U-S-Plan-Specific-Mortality-Studies%E2%80%94A-Call-to-Acti.aspx

New Guidance on Calculating Permissible Loan Amountsby Susan Motter

was not, in and of itself, a breach of fiduciary duty, given there was no indication that the selection was due to Wells Fargo’s own self-interest as opposed to legitimate fiduciary considerations.

The court decision dismissing the case against Wells Fargo (with prejudice) underscored the importance of having strong plan governance and following a prudent fiduciary process. The court indicated that nothing in the plaintiff’s complaint suggested that the investment funds offered by Vanguard or Fidelity were appropriate comparators to the investment funds offered by Wells Fargo—indeed, the court noted that different investment funds have different investment philosophies and would be expected to achieve different investment results. What was important for the court was whether the plaintiff had alleged that Wells Fargo’s fiduciary decision-making process was flawed. The court concluded that there were no allegations of an improper fiduciary process, and thus the complaint was dismissed.

While plan fiduciaries are not required to select the least expensive investment fund, they should be prepared to support why a more expensive fund is appropriate for the plan. This may be due to any number of reasons including differences in services offered, administrative capabilities, experience with plans of a comparable size, ability to interface with existing payroll and client systems, and particular investment philosophies.

Aon Hewitt’s Retirement Legal Consulting & Compliance consultants are pleased to work with plan sponsors in reviewing and revising plan governance and decision-making processes. Having (and following) a robust plan governance and decision-making process will assist in building a strong record to support fiduciary decisions and help protect plan sponsors from litigation risk.

On July 26, 2017, the Internal Revenue Service (IRS) issued final guidance to assist its agents in determining the maximum amount a participant may borrow from a defined contribution plan if the participant has already received multiple loans. This guidance applies to qualified retirement plans with audits open on and after July 26, 2017.

Generally, a loan to a defined contribution plan participant is treated as a taxable distribution unless the loan meets the requirements of Internal Revenue Code Section 72(p)(2). One of the basic requirements of this section is the limitation on the amount a participant may borrow. Under this limitation, a participant may generally borrow up to the lesser of $50,000 (reduced by certain outstanding loan balances), or the greater of 50% of the present value of his vested benefit or $10,000. If an outstanding loan balance existed during the preceding 12 months, the $50,000 cap is reduced by the difference between (i) the highest outstanding loan balance during the 12-month period; and (ii) the outstanding loan balance on the date the loan was made. The reason for adjusting the cap is to prevent a participant from effectively maintaining a permanent outstanding $50,000 loan balance.

The guidance illustrates two permissible methods for adjusting the $50,000 cap for the highest outstanding loan balance by providing the following example. A participant borrows $30,000 in February and fully repays the loan in April. The participant then borrows $20,000 in May and fully repays that amount in July. When the participant applies for a third loan in December of that year, the highest outstanding loan balance for the year must be determined. Under one method, the plan may determine that no further loan is available, since the cap is reduced to $0. Alternatively, the plan may identify the highest outstanding loan balance as $30,000 and permit a third loan in the amount of $20,000. If an agent determines that one of these two methods was used by a plan in determining the maximum amount a participant may borrow, the agent is not required to make any further inquiry during the audit.

Although this guidance is intended for internal IRS use, it is helpful to clients seeking assurance that their method for determining the maximum amount a participant may borrow would satisfy IRS scrutiny under audit. Aon Hewitt’s Retirement Legal Consulting & Compliance consultants can assist plan sponsors in evaluating their qualified retirement plan loan programs for compliance.


What’s Next in the IRS Approval Process for Pre-Approved Plans?by Linda M. Lee

The Internal Revenue Service (IRS) has announced major changes to the approval process for pre-approved qualified retirement plans. Part of the change involves combining the master and prototype and volume submitter programs into a new “Opinion Letter” program.

Revenue Procedure 2017-41, issued on June 30, 2017, provides for changes to the approval program with respect to the

qualification of a pre-approved plan’s form. Highlights of these changes include:

• Eliminating the distinction between master and prototype and volume submitter plans—pre-approved plans will now be either standardized (meeting specific requirements with respect to employee eligibility, participation, and benefits) or nonstandardized (permitting some flexibility with respect to the use of total compensation and the use of optional or automatic safe harbor provisions).

• Modifications to allow greater flexibility in the design of pre-approved plans.

• The ability to combine 401(k) or profit sharing plans with money purchase plans in the same pre-approved plan document.

• Permitting nonstandardized plans that contain a cash balance formula to permit interest credit rates based on the actual return on plan assets.

• Permitting plan sponsors to submit applications for opinion letters regarding issues on a non-electing church plan’s status.

In addition, the IRS and Treasury have reached out to obtain comments on how to address the retention of legacy benefits when an individually designed plan is converted to a pre-approved plan. The resolution of how legacy benefits could impact the use of a pre-approved plan may prove quite helpful to employers considering the benefits of an IRS opinion letter over a customized plan design.

Aon Hewitt offers pre-approved plans to assist your organization with meeting IRS plan qualification requirements. We are pleased to review the benefits of such a plan with clients interested in considering a possible change.

Misleading Cash Balance Conversion Disclosure Punishedby Dan Schwallie

On July 6, 2017, in the class action lawsuit Osberg v. Foot Locker, the Second Circuit Court of Appeals affirmed a district court ruling that reformation of the plan’s benefit formula was required in order to provide plaintiffs with appropriate equitable relief. “Reformation” for this purpose means to effectively revise the plan terms to conform to plan participants' reasonably mistaken expectations.

The plan sponsor converted its traditional defined benefit formula to a cash balance formula in 1996. The conversion provided that a participant’s benefit was the greater of the participant’s benefit under the plan formula as of December 31, 1995, and the participant’s benefit under the cash balance formula on the participant’s annuity starting date. The district court found that the “greater of” formula—combined with the facts that (i) initial account balances were calculated using a 9% interest discount rate, and (ii) cash balance accounts were increased using a 6% interest crediting rate—resulted in no additional accrued benefit for most plan participants, even after many years of additional employment covered by the plan. This type of formula is referred to as a “wear-away” formula because the participant receives no new benefits until the cash balance benefit exceeds the participant’s prior formula benefit; in this case, frozen as of December 31, 1995.

The courts did not find that wear-away itself was an issue in the case. Prior to enactment of the Pension Protection Act of 2006, there was

“Foot Locker failed plan participants not only by failing to disclose the fact of wear-away, but also by suggesting to participants that they had introduced a more competitive benefits package in which they would see their account balance grow each year.”


no express prohibition against wear-away in a cash balance conversion. The district court found-and the Second Circuit Court of appeals affirmed-that the plan sponsor had violated the Employee Retirement Income Security Act of 1974 (ERISA) by both failing to disclose and actively concealing the wear–away resulting from the conversion to a cash balance formula. For example, the court noted that in an announcement dated September 15, 1995, senior management was “excited” to introduce “important changes” that would give participants “a more competitive retirement benefits package” and that participants would be able “to see their individual account balance grow each year, and know its value,” even though management understood that the conversion would effectively result in frozen benefits for most participants.

The court found that the plan sponsor repeatedly and intentionally provided false and misleading information. The Second Circuit Court of Appeals stated that, “Foot Locker failed plan participants not only by failing to disclose the fact of wear-away, but also by suggesting to participants that they had introduced a more competitive benefits package in which they would see their account balance grow each year.”

The Second Circuit Court of Appeals affirmed the district court’s reformation of the plan’s benefit formula. After reformation, participants will receive the sum of an “A benefit” and a “B benefit.”

• The A benefit consists of an initial account balance calculated as the present value of a participant’s accrued benefit as of December 31, 1995, using a 6% interest rate rather than the 9% interest rate originally used.

• The B benefit consists of the pay and interest credits (and application of a one-time seniority enhancement for those at least age 50 with 15 years of service on December 31, 1995) added to the initial account balance (the A benefit) after December 31, 1995.

This generally larger “sum of” benefit replaces the “greater of” benefit intended by the plan sponsor.

Failure to disclose important plan changes and providing false and misleading information regarding those changes can result in violations of ERISA requirements. Such violations can lead to participant litigation and, as we have seen here, reformation of the plan to conform to participants’ reasonable expectations. Aon Hewitt’s Retirement Legal Consulting & Compliance consultants can help plan sponsors strategize about plan design, communication, and implementation to reduce the risk of litigation and sanctions.

Helpful Supreme Court Decision on Church Plan Statusby Dick Hinman

Employers maintaining employee benefit plans that have been treated as church plans (and, thus, exempt from many of the requirements of the Employee Retirement Income Security Act of 1974 (ERISA)) received good news from a June 5, 2017 U.S. Supreme Court decision in Advocate Health Care Network v. Stapleton. The Court rejected the plaintiffs’ contention that the retirement plan at issue was not a church plan because it was not established by a church. However, the Court stated that a plan that was not established by a church must meet other requirements in order to qualify as a church plan.

Supreme Court Ruling Beginning in 2013, dozens of similar class action lawsuits were filed challenging the church plan status of pension plans sponsored by large church-affiliated health care organizations. The lawsuits asserted that plans that had not been established by a church could not be church plans. If these challenges had been successful, then a number of pension plans maintained by church-affiliated health care organizations could no longer have been treated as church plans because the plans were not established by a church. Some of these employers would have needed to make large contributions to comply with the ERISA minimum funding requirements, among other ERISA requirements.

The Supreme Court ruled that a plan may be exempt from ERISA as a church plan if the plan is maintained by a “principal purpose organization,” whether or not a church had established the plan. A principal purpose organization is an organization (e.g., a church pension board) whose primary purpose is the administration or funding of the pension plan covering employees of the church-affiliated health care organization. The principal purpose organization must either be “controlled by” or “associated with” (i.e., “shares common religious bonds and convictions”) the affiliated church.

Church Plan Status Still Unsettled in Some Cases Church-affiliated health care organizations should not assume that the Supreme Court’s ruling means the church plan status of their pension plans is settled. The following should be considered:

• If an employer’s pension plan was not established by a church, then the employer may not be able to demonstrate that the plan is being maintained by a principal purpose organization.

• In some cases, it may not be clear whether a plan satisfies the principal purpose organization exemption. The Supreme Court explicitly refrained from attempting to resolve a number of questions related to this exemption, such as the following:


– Whether the principal purpose organization maintaining the church plan can be an internal benefits administration committee instead of a separately organized church board.

– Whether the principal purpose organization shares “common religious bonds and convictions” with the church.

• In addition, the Court did not decide whether ERISA’s exemption for church plans violates the First Amendment’s prohibition on the establishment of religion, as was alleged in some of the lawsuits.

While the ruling makes it harder for employees to challenge the church plan status of their pension plans, a lawsuit challenging the plan’s reliance on the maintenance by a principal purpose organization exemption might be successful in some situations.

Recommendations Religiously affiliated health care organizations should take the following steps:

• An employer sponsoring a plan treated as a church plan that was not established by a church should review its plan governance practices to determine whether the plan is maintained by a principal purpose organization.

• Some organizations that have not treated their existing plans as church plans because the plans were not established by a church may wish to reevaluate whether it is now possible to treat these plans as church plans and enjoy the associated design and funding flexibility. However, there are likely to be challenges and unsettled issues when attempting this sort of conversion.

• Employers should also review their other retirement and health and welfare plans to determine whether those plans qualify as church plans.

Aon Hewitt’s Retirement Legal Consulting & Compliance consultants can help with these issues. In addition, our actuaries and other consultants can help employers evaluate the potential advantages of church plan status and the impacts of the loss of that status.

More Guidance Issued Relating to New Fiduciary Rulesby Elizabeth Groenewegen

The Department of Labor (DOL) recently announced that the application of certain of the fiduciary investment advice rules will not be further delayed beyond June 9, 2017. Field Assistance Bulletin 2017-02, issued May 22, 2017, also included an updated temporary enforcement policy and new interpretive guidance referred to as “Conflict of Interest FAQs.”

As a result, the changes defining who is a “fiduciary” under the Employee Retirement Security Act of 1974 (ERISA) and the Internal Revenue Code are now applicable. Those individuals or organizations that offer investment recommendations to retirement plan savers are now uniformly subject to ERISA’s fiduciary duty requirements. Fiduciaries that intend to rely on related prohibited transaction exemptions must now adhere to the Impartial Conduct Standards (which require acting in the best interest of the retirement investor, charging no more than reasonable compensation for their services, and avoiding misleading statements).

Provisions in the fiduciary rules that have not already taken effect will become effective January 1, 2018, unless they are further revised or withdrawn by the DOL before that date.

Many of the new Conflict of Interest FAQs focus on the activities of those offering investment products or investment advice. The market for these services has been evolving and will continue to evolve to address the impact of the new rules. Plan sponsors are generally concerned with whether any of the customary and routine interactions with plan participants might be characterized as “investment advice” (and thereby trigger fiduciary obligations under the new rules).

One FAQ in particular speaks to this concern. FAQ 12 describes specific plan communications that are made through three common modalities (email messages, interactive computer-based tools, and call center conversations). For each, the DOL determined that the communication was not “investment advice” for purposes of the new rules. The DOL’s rationale was based on the distinction between investment advice and non-fiduciary investment education. The fiduciary rules (as published in April 2016) make that distinction, but in a more formal and technical manner. Plan sponsors may find the non-technical examples in the FAQ helpful in shaping plan compliance efforts under the new standards.

Under the temporary enforcement policy, the DOL will not pursue claims against fiduciaries that are working diligently and in good faith to comply with the fiduciary rules and prohibited transaction exemptions during a transition period from June 10 to December 31, 2017. Also, the Internal Revenue Service (IRS) will not take enforcement action during this transition period regarding related nonexempt prohibited transactions, as long as the requirements of the DOL’s policy are met. Failing to make diligent and good faith efforts to comply, however, will result in the loss of the benefit of these non-enforcement policies.

Aon Hewitt will continue to monitor and report on these developments. Unless the DOL makes further changes (which is a possibility), plan sponsors, their recordkeepers, and other service providers now have a firm time frame in which to work on compliance with the new rules.


“Remedial amendment periods are the periods during which qualified retirement plans can be amended retroactively to comply with the qualification requirements of the Internal Revenue Code (Code) and correct any disqualifying provisions.”

Important Changes to Remedial Amendment Periodby Dan Schwallie

In conjunction with the elimination of the five-year determination letter filing cycles for individually designed plans, important changes have been made to the duration of the Internal Revenue Service’s (IRS’s) “remedial amendment periods.” Remedial amendment periods are the periods during which qualified retirement plans can be amended retroactively to comply with the qualification requirements of the

Internal Revenue Code (Code) and correct any disqualifying provisions.

Before the elimination of the five-year cycles, remedial amendment periods generally extended until the end of the applicable cycle, although plan sponsors were required to adopt good faith interim amendments by specific dates. The new rules generally shorten the remedial amendment period and eliminate the requirement that interim amendments be adopted.

Disqualifying provisions include both the presence and absence of plan provisions that cause the plan to fail Code qualification requirements. Except as otherwise may be provided by statute, regulations, or other guidance, the new rules under Revenue Procedure 2016-37 are described below. These rules apply to disqualifying provisions that are first effective on or after January 1, 2016. However, remedial amendment periods are extended to December 31, 2017, in situations in which the original remedial amendment period (under the five-year filing cycle rules) had not expired as of January 1, 2017.

Disqualifying Provisions Due to Changes in Qualification Requirements For changes in qualification requirements that are published in the IRS’s Required Amendments List (RA List), the remedial amendment period expires at the end of the second calendar year after the year the requirement is included in the RA List. This period is extended for governmental plans to 90 days after the close of the third regular session of the legislative body with the authority to amend the plan that begins on or after the date the RA List in which the change in qualification requirements appears is issued, if this date is later. If an amendment timely made to reflect a change in qualification requirements turns out not to satisfy qualification requirements, this remedial amendment period is not further extended.

Disqualifying Provisions Not Published on the RA List Amendments to existing plans that are not required by an RA List may be corrected by the end of the second calendar year following the calendar year in which the amendment is adopted or effective, whichever is later. For governmental plans, the period is extended, if later, to 90 days after the close of the third regular session of the legislative body with the authority to amend the plan beginning after the calendar year in which the amendment is adopted or effective.

Disqualifying Provisions in New Plans The remedial amendment period for a disqualifying provision in a new plan expires on the later of the 15th day of the 10th calendar month after the end of the plan’s initial plan year or a date determined on the basis of the plan sponsor’s deadline for filing its income tax return. For governmental plans, the period is extended, if later, to 90 days after the close of the second regular session of the legislative body with the authority to amend the plan beginning after the end of the plan’s initial plan year.

Plan Terminations The termination of a plan ends the plan’s remedial amendment period. Any retroactive remedial plan amendments, or other plan amendments required to be adopted to reflect qualification requirements that apply as of the date of termination, must be adopted in connection with the plan termination regardless of whether such requirements are included on a required amendments list.

Aon Hewitt’s Retirement Legal Consulting & Compliance consultants can assist plan sponsors in determining whether and when an individually designed plan may need a remedial amendment to timely comply with plan qualification requirements under the new remedial amendment period rules—whether due to qualification requirement changes or a discretionary amendment adopted by the plan sponsor unrelated to qualification changes.


Quarterly Roundup of Other New Developmentsby Jan Raines and Bridget Steinhart

Chevron Prevails Again in Breach Suit The current allegations facing Chevron fiduciaries with respect to the investment options in its 401(k) plan were similar to those we’ve reported over the last several years: excessive administration and investment fees, failure to consider less expensive share classes or options such as collective trust funds, failure to more quickly remove a poorly performing fund, and use of a money market fund instead of a stable value fund. The plaintiffs originally claimed that Chevron breached the duties of loyalty and prudence required by the Employee Retirement Income Security Act of 1974 (ERISA). They then amended their complaint to allege that retaining Vanguard as the plan’s recordkeeper was a prohibited transaction because Vanguard is a significant investor in Chevron. The court reviewed the initial and amended allegations and found no evidence of self-dealing or conflicts of interest, nor of imprudent fiduciary process in decision-making.

The facts showed that, specific to the defense regarding use of a money market fund instead of a stable value fund or similar alternative, Chevron fiduciaries’ written investment policy statement states that at least one fund in the plan will provide for “a high degree of safety and capital preservation.” Judge Patricia Hamilton also determined plaintiffs could not demonstrate quid pro quo with respect to Vanguard’s investment in Chevron, and noted that Vanguard is a “significant shareholder in just about every public company... [and one who] took pro-management positions for all companies across the S&P 500…” In addressing fund fees, one of Judge Hamilton’s initial comments was that “ERISA does not require fiduciaries to scour the market to find and offer the cheapest possible funds (which might, of course, be plagued by other problems).” Importantly, while the amended complaint provided comparisons of fund fees to less expensive options, plaintiffs could not demonstrate that Chevron’s process for fund selection or monitoring was imprudent.

Although another court could have come to a different conclusion, cases such as this underscore the importance of having a well-documented process for making fiduciary decisions, documenting how the process was followed, doing periodic reviews of the potential opportunities available to a plan, and choosing investments consistent with the plan’s investment policy statement. (White v. Chevron Corp., N.D. Cal., May 31, 2017).

A Reprieve from the Government: 2017 Form 5500 Omits Compliance Questions We reported recently on a number of new compliance questions on the 2015 Form 5500, seemingly designed to unearth “plan problems.” While the IRS advised that filers did not have to complete those questions for the 2015 and 2016 plan years, concerns about those questions were raised in the plan sponsor, consultant, and recordkeeping communities.

The American Benefits Council (Council), a national nonprofit organization dedicated to protecting and fostering private retirement

programs, was one of many raising concerns—which included specific technical ambiguities, time needed for recordkeepers to manage systems/data changes in order to respond once the questions were fully developed, and a request for modification of the language expressing that Form 5500 be signed under penalties of perjury. The Council and others have requested revisions, further delay, and relevant guidance. The 2017 plan year forms that were recently submitted for approval do not include these compliance questions. We will continue to monitor new developments regarding Form 5500 requirements.

Gen X—The Sandwich Generation Gets Squeezed Generation X, or “Gen X,” is often defined as an “in between” generation, following Baby Boomers (born 1946–1964) and preceding Millennials (1985–2000 or 1979–2000, depending on the source). Gen Xers, who are roughly between the ages of 33 and 52 today, have been the subject of several recent surveys intended to raise awareness of the special challenges of this group—some of which suggest this group may have been inadvertently forgotten in targeted retirement education.

Gen X faced the 2002 dot-com fallout and the 2007–2009 financial and sub-prime mortgage crises at a time when many were in the early years of developing their retirement accounts. Some Gen Xers in the “sandwich” phase face additional pressures to support aging or ill parents while managing growing children and college savings or debt (both “parent loan” debt and their own student loan debt). The result, according to a Transamerica Center for Retirement Studies (TCRS) survey released last summer, is that the estimated median household retirement savings is $69,000 for Gen Xers compared to $147,000 for Baby Boomers.

TCRS also indicated that 30% of Gen Xers have taken a plan loan or early withdrawal. An IonTuition survey released in 2017 reports that 74% of student loan borrowers over the age of 35 are still repaying loans and 60% of respondents indicated that student loan debt is impacting their ability to save. Potential solutions might include a financial fitness element in retirement education to address debt management and information on balancing retirement and college savings. Organizations interested in a different approach could consider these options: student loan repayment benefit programs, educational programs on higher education alternatives, Coverdell or 529 savings options, general information on estate planning, and supplemental or long-term care insurance for aging parents.

Some Claims Against Universities Dismissed In 2016 and 2017, private university systems became the focus of a number of class action lawsuits that claimed the universities breached their fiduciary responsibilities regarding the 403(b) defined contribution plans offered to their employees. Two of those universities recently enjoyed partial wins when district courts dismissed certain allegations. In Henderson v. Emory University,


Recent PublicationsPost-IRS Determination Letter Updates The plan sponsor world is presently going through a major adjustment since the IRS ended its determination letter program to maintain tax-qualified plans. These articles will reacquaint readers with the events that led to this decision and identify possible strategies for employers to consider in an effort to confirm and protect the tax-exempt status of their qualified plans.

Strategies for the Post-IRS Determination Letter Environment Thomas Meagher and Meghan Lynch Bloomberg BNA Benefits Practice Resource Center, Insights

Click here to read the article. No More IRS Determination Letters-New Strategies for Plan Sponsors Thomas Meagher and Meghan Lynch Bloomberg BNA Tax Management Compensation Planning Journal (Vol. 45, 8, p. 214)

Click here to read the article.

Roth Is on the Rise: Is Roth Right for Your Plan? Dan Schwallie Benefits Quarterly (Second Quarter 2017)

Nearly three out of five defined contribution plans surveyed now offer Roth contributions, and nearly one out of five offers in-plan Roth conversions. Roth can offer participants tax diversification. This article provides an overview of the contribution and conversion rules, and contrasts Roth contributions with traditional after-tax contributions and Roth IRAs.


Is It an Unforeseeable Emergency or a Hardship Distribution? Dan Schwallie Journal of Pension Planning & Compliance (43 Summer 2017)

Many plan sponsors and advisors use the term “hardship distribution” to describe both a hardship distribution from a qualified plan and a distribution due to an unforeseeable emergency from a nonqualified plan. This colloquial use of the term is fine, provided everyone understands the very real differences for such distributions to be compliant.


the court in the Northern District of Georgia dismissed the following claims:

• Claims of imprudence for offering too many investment options, noting that this does not hurt participants; rather, it “provides them opportunities to choose the investments that they prefer.”

• Claims of imprudence where damages occurred more than six years prior to the complaint being filed (specific to a “locked-in” arrangement with TIAA, one of the plan recordkeepers). However, allegations regarding the duty to monitor this arrangement were allowed to proceed.

• Potential prohibited transactions concerning receipt of revenue sharing by the recordkeepers—noting that revenue sharing payments are not plan assets in this instance so this would not be a prohibited transaction.

The court concluded that the other claims, including excessive administrative fees and investment fund fees, use of revenue sharing, process for selecting and monitoring funds, use of multiple recordkeepers, and lack of competitive bidding, will move forward.

In Clark v. Duke University, the U.S. District Court in the Middle District of North Carolina dismissed similar claims regarding the six-year statute of limitations (although there was no mention of the ongoing duty to monitor) and prohibited transactions concerning the proprietary mutual funds offered by the recordkeepers. The third claim dismissed in this case concerned the process for monitoring investment funds,

noting that the complaint did not include sufficient facts to support an imprudent process.

Interestingly, the court in North Carolina is allowing the claim regarding too many investment options to move forward—which is contradictory to the findings in the Emory case (Duke’s plan offers approximately 400 funds to Emory’s 100). Other claims also will move forward.

Snippets—What’s in the News We will follow the progress of these cases and report further as needed.

Guaranteed Investment Contracts Separate class action lawsuits have been filed against two insurance companies regarding the guaranteed investment contracts offered as investments in defined contribution plans sponsored by parties unrelated to the insurance companies. The plaintiffs are plan participants who claim the insurance companies are fiduciaries and have breached their duty of loyalty by their actions regarding these contracts.

Specifically, they claim the insurance companies have the discretion to set the rates paid to participants invested in the contracts, are receiving excessive profits (to the detriment of the participants), do not explicitly define the compensation structure in the contract, impose restrictions on participants regarding transfers to “competing funds” within the plans, and impose restrictions and penalties for contract terminations.


http://www.aon.com/attachments/human-capital-consulting/Strategies_for_Post-IRS_Determination.pdf

http://www.aon.com/attachments/human-capital-consulting/No_More_IRS_Determination_Letters-New_Strategies_for_Plan_Sponsors.pdf

http://www.aon.com/attachments/human-capital-consulting/Roth_is_on_the_Rise_BQ_2_2017_Schwallie.pdf

http://www.aon.com/attachments/human-capital-consulting/Is_It_an_Unforeseeable_Emergency_or_a_Hardship_Distribution_JPPC_Summer_2017_Schwallie.pdf

About Aon HewittAon Hewitt empowers organizations and individuals to secure a better future through innovative retirement, health, and talent solutions. We advise and design a wide range of solutions that enable our clients’ success. Our teams of experts help clients navigate the risks and opportunities to optimize financial security; redefine health solutions for greater choice, affordability, and wellbeing; and achieve sustainable growth by driving business performance through people performance. We serve more than 20,000 clients through our 15,000 professionals located in 50 countries around the world. For more information, please visit aon.com.

© 2017 Aon plc.This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Hewitt’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon Hewitt disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Hewitt reserves all rights to the content of this document. Information is presented by the Aon Hewitt Retirement Legal Consulting & Compliance practice, an Aon Hewitt affiliated entity.

Aon Hewitt Retirement Legal Consulting & Compliance Consultants

Tom MeagherPractice LeaderSomerset, [email protected]

David AlpertSomerset, [email protected]

Hitz BurtonIrvine, [email protected]

Ron Gerard Norwalk, [email protected]

Elizabeth Groenewegen San Francisco, [email protected]

Dick HinmanSan Francisco, CA415.486.6935 [email protected]

Clara Kim Somerset, [email protected]

Linda M. LeeIrvine, [email protected] Meghan LynchWashington, [email protected]

Susan MotterAtlanta, [email protected]

Beverly Rose Austin, TX 512.241.2115 [email protected]

Jennifer Ross Berrian San Francisco, CA [email protected]

Dan SchwallieHudson, OH [email protected]

John Van DuzerLincolnshire, IL [email protected]

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