Moderator:

- Roger Williams, CFA, SVP, Segal Rogerscasey

Speakers:

- Thomas VanWort, Retirement Plan Manager, BMW Group

- Ed Waldvogel, VP Pension Investments, The Kroger Co

- Glenn Dial, Head of US Retirement, Allianz Global Investors

- Frank van Etten, Deputy CIO Multi-Asset Strategies & Solutions, ING US IM

Custom target-date funds: Opportunities and challenges

Custom target-date funds:

Opportunities and challenges

A Case Study: Should I create a custom

Target-Date Fund series?

– Another plan sponsors' perspective

– Issues to consider

– Glide path construction

Special thanks to our Diamond Sponsor

Custom target-date funds: Opportunities and challenges

Custom Target-Date Funds:1. We have them now

2. We don’t offer them, but I am open to the subject

3. No way, no how

Special thanks to our Diamond Sponsor

Custom target-date funds: Opportunities and challenges

What is the Cutoff for Offering Custom Target-Date Funds?

1. Over $750 million in TDF assets

2. Between $500 - $750 million in TDF

3. Between $100 - $250 million in TDF

Special thanks to our Diamond Sponsor

Custom target-date funds: Opportunities and challenges

What Concerns You Most About Offering Custom Target-Date Funds?

1. Increased fiduciary exposure

2. Operational Issues

3. Don’t see the value added over off-the-shelf offerings

Special thanks to our Diamond Sponsor

Custom target-date funds: Opportunities and challenges

What is the Most Important Reason for Offering Custom Target-Date Funds?

1. Custom glide path

2. Open platform – Managers and Asset Class

3. Lower fees

Pension & Investments – Tom VanWort

BMW Group USA Savings Plan

• Single Plan Covers all BMW Operating

Companies in the US

• Approximately 8,000 Participants

• 16% of all assets in TDF/ 33% of Contributions

• Auto enroll at 6% of pay with a 60% company

match.

BMW Group USA Savings Plan

• Mixed Needs of Participants

– Some have a company provided DB plan.

– Some have a company provided DC plan.

• Wide variety of occupations and careers

– Relatively young workforce

– Young average retirement age

BMW Group USA Savings Plan

• Participants may remain in plan after

retirement or termination.

• Seeking improved Investment Performance

– Best in Class Funds

– Lower Fees

– Income Options

Pension & Investments – Ed Waldvogel

Agenda

• 2006 > RSA > Target-Date Funds (TDFs)

• Why Custom?

• Benefits of Delegation

• Tactics

• Costs

• Advantages – Future Changes

2006 - RSA

• In 2006, our 401(k) plan became our primary

Retirement Savings Plan (RSA) as our Defined

Benefit (DB) plan was closed.

• As such, we concluded TDFs were the answer

for efficient diversification, yet simplicity to

participants.

• Make them QDIA for plan

Why Custom?

• Fiduciary duties under ERISA – Act with care, skill,

prudence and diligence under circumstances then

prevailing that a prudent person acting in a like

capacity and familiar with such matters would use in

the conduct of an enterprise of a like character with

like aims.

• In DB plans we were continually diversifying our

assets with emphasis on active asset management.

• Why would we do differently in a DC plan?

Benefits of Delegation

• We can mitigate Fiduciary risk by employing

delegated investment services. A Customized

solution provides access to high quality

institutional investment managers with buying

power cost savings, provides comprehensive

governance support, and increases potential

for increased diversification.

Tactics

• RFI vs RFP – looking for expertise, not looking to

save money

• Hire glide path manager – “Through” not “to”

Retirement (we expect our retiree’s will be loyal

Kroger customers!)

• Hire ERISA 3(38) Fiduciary Investment Manager

• Committee provides ongoing guidance and

monitoring at quarterly RSA meetings

Costs

• Fund expense ratios range from 0.31% -

0.44% vs Custom “median” cost of 0.59% -

0.79% yet much higher than “off the shelf”

TDF’s with passive investments costing

0.07% - 0.18%

Note: Stable value = 0.42% (incl. wrap fees)

Advantages

• Accomplished diversification with a mix of 15 different

investments, including index funds, active managers,

Real Estate, commodities, EM, along with normal mix

of stocks and bonds.

• Returns have been great, earning 18.5% in 2013 and

averaged 14.9% per year over last 5 years.

• TDFs now represent 54% of our RSA assets and

68% of new contributions to plan. Our TDF assets

have grown 67% over the last two years!

Future

• We will consider adding/encouraging

Guaranteed income, Risk Parity and even

Hedge funds if vendors can get the liquidity,

risks and fees under control.

• Participants may need education on benefits of

“risk diversifiers” and deferred GIC. Losing

less in a down cycle is under appreciated!

Pension & Investments – Glenn Dial

Conservative

Aggressive

New and Different Products on the Shelf

Data as of 12/31/2013. “To” and “Through” target-date fund labels based on Morningstar definition. When Morningstar definition is not available, funds with a glidepath that plateaus at target date are considered “To” funds. Shaded “To” and “Through” quadrants are for illustrative purposes only, reflect the opinion of Allianz Global Investors and do not indicate a designation by Morningstar or any other organization.

2015 Target-Date Funds

Blueprint for Creating Custom

Target-Date Solutions

Act

Understand

Basic

Custom

Options

Advanced

Custom

Options

Client Discovery

Client’s Custom Solution

Behavioral Profile

Investment Profile

Glidepath Design

Investment Menu

Expense Target

Investment Vehicle

Manager Selection (multi-manager)

Management Style (Strategic or Tactical)

Alternative Strategies

Dynamic Portfolio Management

Tail Risk Hedging

Participant Level Models

Retirement Income Solutions

Pension Investments – Frank van Etten

Designing a Custom Glide Path

Defining the Inputs

Modeling Analysis Selection

Factors in Custom Glide Path Design

Numerous factors effect the outcome of a target-date glide path; however, we believe the most important drivers are:

1. Understanding of Participants & Benefit Plans

Labor Income Profile

Benefit plans’ details

Assumptions

2. Capital Market Assumptions

Labor Income Profile

1. Average real income

2. Temporary & permanent shocks

3. Correlation of income to equity markets

The Labor Income Profile is the projected distribution* of participants’ future income broken down into 3 components:

* Simulated using 10,000 randomly generated scenarios based on forward-looking assumptions

** Source: Cocco, J. F., Gomes, F. J., & Maenhout, P. J. (2005). Consumption and portfolio choice over the life cycle. Review of financial studies.

1

1.1

1.2

1.3

1.4

25 30 35 40 45 50 55 60 65

No

rma

lize

d S

ala

ry

Age

Average Labor Income Profile **

Evaluating Glide PathsGlide paths should reflect the optimal trade-off

between expected IRR and shortfall risk in IRR

Worst IRR Outcomes

Expected IRR Highest Risk

Tolerance

Lowest Risk Tolerance

IRR Efficient Frontier Framework

% EquityAllocation Highest Risk

Tolerance

Lowest Risk Tolerance

Age

Glide Path Framework

Optimal range

Optimal range