CALLAN ASSOCIATESINC

Knowledge for Investors

May 8, 2008

Callan Associates Inc.120 N. LaSalle St. Suite 2100Chicago, IL 60602312.346.3536 www.callan.com

Optimal Plan Design for Auto Enrollment Plans after PPA

Lori Lucas, CFAExecutive Vice President

Callan Associates

2CALLAN ASSOCIATESINC

Knowledge for Investors

Forces at Work in Today’s DC Environment

Shift from DB to DC environment Increased employer paternalism

The Pension Protection Act Automatic enrollment incentives Automatic enrollment safe harbor Qualified default investment alternative regulations

Fee environment Lawsuits Pending regulation and legislation

3CALLAN ASSOCIATESINC

Knowledge for Investors

Has the DC Paradigm Changed?

The study: “The Impact of Employer Matching on Savings Plan Participation under Automatic Enrollment.” (Beshears et al)

Examined the impact of match structures on opt-out rates under automatic enrollment in 401(k) plans.

Conclusions: The success of automatic enrollment in increasing

participation in defined contribution plans is only marginally dependent upon whether the plan has a company matching contribution.

Moving from a typical matching structure of 50% on the first 6% of pay contributed to no match at all reduces savings plan participation under automatic enrollment by 5 to 11 percentage points.

Non-contingent employer contributions only weakly crowd out employee participation.

4CALLAN ASSOCIATESINC

Knowledge for Investors

New Company Contribution Paradigm

Under automatic enrollment, are there “better” ways to deploy employer monies: Create an employer-sponsored retirement “floor”

for all employees. Reduce or eliminate participant-paid DC fees. Enhance other benefits.

5CALLAN ASSOCIATESINC

Knowledge for Investors

“Old” Forces Still in Play

Some of the traditional forces that made matching programs attractive to employers are still at play: Match viewed as means of attracting and retaining

employees. Extra percentage points of participation may make

the difference between passing and failing non-discrimination testing.

6CALLAN ASSOCIATESINC

Knowledge for Investors

New DC Paradigm

Has the DC paradigm changed in other ways?

7CALLAN ASSOCIATESINC

Knowledge for Investors

Loans and withdrawals essential to make plan attractive

Brave New DC Environment

Participants encouraged to roll over assets.

Investment menu sensitive to performance chasing.

Education used to encourage behavior.

Match necessary to increase participation.

New Reality?Old Assumption

Participants encouraged to stay in plan.

Equitable fee payment sought, or payment by plan sponsor.

Inertia allows investments to be geared to DB-ize plan.

Education used to help participants be comfortable with status quo.

Automatic enrollment unwind is essential.

Automatic enrollment weakens need for match.

Fees paid by plan participants through revenue sharing.

8CALLAN ASSOCIATESINC

Knowledge for Investors

Conclusions

Factors such as the PPA change the DC equation. Plan sponsors may wish to use a new framework

in DC decision making. At least, they may wish to challenge the old

framework.