Due Diligence Report - WikiLeaks QTR due diligenc… · Due Diligence conference call at 1 p.m. Eastern/10 a.m. Paciﬁc on Thursday, August 23. You’ll have the opportunity to ask

Due Diligence Report Second Quarter 2007

R E T I R E M E N T P L A N S

About the Due Diligence Report

The Standard is proud of the care that goes into selecting and monitoring the investment options offered through our group annuity contract separate account. Standard Insurance Company works

closely with StanCorp Investment Advisers, Inc., to select quality funds. Then, we hold our mutual fund partners accountable for providing competitive returns and staying true to the funds’ stated investment styles. When a fund fails to perform, no longer meets our monitoring criteria or drifts from its stated style or investment objective, we end the relationship.

Important Note

We recommend you review this report carefully as an important step in fulfilling your fiduciary responsibilities to the plan and its participants. You can easily document that you have reviewed and evaluated this information by signing and dating the cover of this document, then filing the report with your plan’s important records.

The report is intended for distribution only to existing contractowners who are also clients of StanCorp Investment Advisers, Inc. Do not distribute this report to plan participants.

Table of Contents

About the Due Diligence Report. . . . . . . . . . . . . . . . . . . .2

Market Commentary. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Fund Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Watch List. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Statistical Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Fund Monitoring Summary. . . . . . . . . . . . . . . . . . . . . . .12

Due Diligence Program . . . . . . . . . . . . . . . . . . . . . . . . .57

Glossary of Terms and Tools . . . . . . . . . . . . . . . . . . . . .62

About StanCorp Investment Advisers . . . . . . . . . . . . . .63

Conference Call Scheduled

Plan sponsors and participants should consider the investment objectives, risks, and charges and expenses of the investment options offered under the retirement plan carefully before investing. The prospectuses for all investment options contain this and other information. Prospectuses may be obtained by calling 877.805.1127. Please read the prospectus carefully before investing. Investments are subject to market risks and fluctuate in value.

Learn more about the investment options offered by The Standard. Participate in our quarterly Due Diligence conference call at 1 p.m. Eastern/10 a.m. Pacific on Thursday, August 23. You’ll have the opportunity to ask questions of Julie Grandstaff, vice president and managing director of StanCorp Investment Advisers, Inc., who will also discuss the fund monitoring process and comment on market conditions and individual funds.

Dial-in number: 800.230.1766

Name of call: StanCorp Investment Advisers Due Diligence Call

A replay of the call will be available from 3:15 p.m. Thursday, August 23, through midnight Pacific time September 23, by dialing 800.475.6701 and entering code 882267.

3

Market Commentary – July 26, 2007By Julie Grandstaff, CFA

A fter a rocky first quarter, the markets took off in the second quarter. By mid April it was hard

to remember there had been a significant sell off in February. All of the major equity categories were up for the quarter, led by growth stocks. The S&P 500 was up 6.28 percent for the quarter and more than 20 percent for the 12 months ending in June.

The best performing equity category this quarter was large cap growth. The return on the Russell 1000 Growth Index was 6.86 percent. Mid and small cap growth returns were very near this level. International stocks, as measured by the MSCI EAFE Index, were up 6.40 percent for the quarter. Over the last year, the best performing category was international stocks, posting a 27 percent one-year return. Mid cap value was the best U.S. category with a better than 22 percent return for the year. The bond markets had a tough quarter with bond yields rising 0.38 percent over the quarter. The Lehman Brothers Intermediate Government Credit index declined 0.15 percent for the quarter; over the last year, the index was up 5.76 percent.

Since quarter’s end, the markets reached record highs and then dropped off again. As of July 19th, the S&P 500 was up 3.31 percent from the end of the quarter, but by July 26th, it had lost that and more. Quarter to date, the S&P is down 1.29 percent. Initially strong first quarter corporate profits and continued stability in the U.S. economy buoyed the equity markets. Earnings for the companies in the S&P 500 Index rose by 8.2 percent from the first quarter of last year. Strong overseas demand, dollar weakness and share buybacks were some of the factors contributing to earnings growth. While these factors remain in place this quarter, the markets have become concerned about rising financing costs. Credit spreads (the difference between the borrowing rate for non government issuers and government issuers) have widened significantly in the last two months. Continued problems in the sub prime mortgage market have

caused investors to take a second look at how they are pricing risk. In addition, early second quarter earnings releases have been mixed.

While moderate growth is still expected for the remainder of the year, rising costs may be creating a headwind for the economy. Higher food and energy costs are dampening consumer spending, and weakness in the housing market is translating into weakness in related sectors, such as furniture. So far the actual data on inflation has shown it to be relatively tame, but near the Federal Reserve’s upper bound of comfort. At the end of April, the markets were expecting the Fed to cut interest rates by the end of the year due to slowing economic growth and the weak housing market. More recently, markets placed a greater probability on there being an increase in the federal funds rate target than on there being a decrease. Tight job markets and increasing labor costs are among the chief drivers of inflation concerns.

There has been little to worry about on the inflation front for the last 10 years. Globalization of the economy has kept prices in check. Cheap labor in China and other developing economies not only produced cheap imports, but also ensured continued development of more efficient technologies here at home. A number of prominent economists see this era coming to a close. Now the forces that contributed to stable to declining prices are contributing to inflation as geographically diverse businesses compete for the same global resources. Growing wealth around the world is increasing demand and allowing workers to win wage increases.

So far, it looks like the economy is moving in the direction Federal Reserve Chairman Ben Bernanke predicted, with growth picking up this quarter and positive indications for the rest of the year. If inflation can be kept in check, this will be positive for the markets. However the market has found much to worry about in the last couple of weeks.

4

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2.421.76

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4.424.14

5.277.32

5.305.64

6.197.70

6.285.93

6.166.69

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Percent

Total Return April 1, 2007 - June 30, 2007

Large Cap Growth - MedianLarge Cap Blend - MedianLarge Cap Value - MedianIndex: Standard & Poor's 500Mid Cap Growth - MedianMid Cap Blend - MedianMid Cap Value - MedianIndex: Russell Mid-Cap Small Cap Growth - MedianSmall Cap Blend - MedianSmall Cap Value - MedianIndex: Russell 2000Foreign Large GrowthForeign Large BlendForeign Large ValueWorld Stock - MedianIndex: MSCI EAFE Balanced - Moderate Allocation Index:60% S&P/40% LB Int GCBalanced - Conservative AllocationIndex:40% S&P/60% LB Int GCIntermediate Bonds - MedianIndex: LB Interm Gov't/Cred

Total Return for QuarterApril 1, 2007 – June 30, 2007

Percent

5.765.57

11.6910.27

14.6614.86

27.0023.85

26.7626.54

26.1816.4316.3816.2616.26

20.8321.16

20.0419.11

20.5920.91

19.4616.98

0.00 5.00 10.00 15.00 20.00 25.00 30.00

Percent

Total Return July 1, 2006 - June 30, 2007

Large Cap Growth - MedianLarge Cap Blend - MedianLarge Cap Value - MedianIndex: Standard & Poor's 500Mid Cap Growth - MedianMid Cap Blend - MedianMid Cap Value - MedianIndex: Russell Mid-Cap Small Cap Growth - MedianSmall Cap Blend - MedianSmall Cap Value - MedianIndex: Russell 2000Foreign Large GrowthForeign Large BlendForeign Large ValueWorld Stock - MedianIndex: MSCI EAFE Balanced - Moderate Allocation Index:60% S&P/40% LB Int GCBalanced - Conservative AllocationIndex:40% S&P/60% LB Int GCIntermediate Bonds - MedianIndex: LB Interm Gov't/Cred

Total Return for YearJuly 1, 2006 – June 30, 2007

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These returns are not indicative of any particular investment.

5

Fund Commentary

The following comments summarize the review of funds in our lineup whose returns, risk statistics or

composition over one or more important time periods is below expectations.

• The Harbor Bond fund is maintaining a sizeable short-term fixed income position of more than 57 percent. The average duration of the portfolio remains in line with intermediate bond funds, though the manager is working to shorten the duration. The primary causes of underperformance have been exposure to agency-issued residential mortgage debt and a lower than average exposure to investment grade corporate bonds. Agency mortgage-backed securities have underperformed the general bond market due to the increased volatility in interest rates as well as an increase in extension risk due to somewhat higher yields. The fund’s performance was in the top half in the 36th and 25th percentile over the last three- and five-years, respectively.

• The Harbor Capital Appreciation fund returns have fallen below median in the five-year time period following below-median returns year to date and in 2006. The fund’s three-year returns are in the top half of the category. This fund is an aggressive growth fund – the manager focuses on strong revenue growth and company earnings that grow faster than the S&P 500. The fund holds just under 30 percent in the top 10 holdings, with its largest holding in Google.

• The American Century Value fund returns are below median in the three-year time period following below-median returns in the first half of 2007 and in 2005. The fund’s five-year returns are in the 32nd percentile of the large value category. The management team focuses on companies that are valued in the bottom one-third of the market on at least two valuation measures. The fund currently has a lower allocation to technology, which performed better than the overall market year to date.

• The Fidelity Adv Equity Income fund returns are below median in the three-year time period following below-average returns in the first half of 2007 and in 2006. The fund’s five-year returns are in the top half of the category. Over the last

two quarters the manager has trimmed some of his smaller cap holdings following the assignment of another large cap value fund to him. Overall, the move away from smaller names may have hurt relative performance year to date.

• The Hotchkis Wiley Large Value fund returns have fallen below median in the three-year time period following below-average returns in the first half of 2007 and in 2006. The fund manager’s approach seeks companies with above-average normalized earnings growth and focuses on those that also have above-average normalized earnings yield and dividends. Recent returns have been hurt by a well below-average allocation to energy stocks and continued holdings of some prominent home builders. The fund’s five-year returns are in the top decile of the category.

• The Brandywine fund’s five-year returns are below median. Weak relative performance in 2004 and 2003 has caused the five-year ranking to fall below median. The fund’s three-year returns are in the top quartile of the mid cap growth category. Recently a heavy allocation to technology has contributed to strong performance. The return is in the top 25 percent for the quarter and top half year to date.

• The three-year returns for the Aston/Optimum Mid Cap fund are below average. The fund underperformed by a wide margin in 2005 pulling down the three-year percentile rank. The manager’s approach is relatively aggressive for the category. The fund is concentrated and often makes significant sector bets. The manager looks for companies with rapid sales growth, low debt and reasonable valuations. Currently, the fund has about three times the category average exposure to technology stocks. The fund’s five-year returns are in the top quartile of the category and year-to-date returns are in the top 25 percent for the category.

• The Wells Fargo Advantage Mid Cap Discipline fund returns are below median in the three-year time period following below-median returns in the first half of 2007 and in 2005. The fund is underweight in technology relative to the peer group and has no exposure to energy. Both sectors were significant contributors to market

6

performance during the quarter and year to date. The fund’s five-year returns are in the top 27th percentile of the category.

• The Neuberger & Berman Genesis fund has moved well into mid cap growth territory. The managers have utilized a steady investment strategy that seeks out small companies with good cash flow and a dominant position in a niche market. In addition they focus on the less cyclical sectors, and currently have an overweight position in healthcare and energy stocks. The approach is also low turnover, and winners are allowed to run. As a result, about 49 percent of the portfolio is now in mid cap stocks while 48 percent of the fund is in small cap stocks. The remainder is in large cap. Performance is in the top 10 percent for the category year to date.

• The Fidelity Adv Diversified International fund returns are below the median for the three-year time period due to weak relative performance in 2006. The manager has overweight positions in Germany and Japan. While the German allocation has paid off, the Japanese allocation hasn’t worked as well. In addition, the manager reduced exposure to emerging markets and energy too soon and missed some significant performance in those areas. The fund performance was above the median in each of the five calendar years prior to 2006. The fund’s five-year returns are in the top 15 percent of the category.

• The American Century Real Estate fund returns are below the median for the three-year time period due to weak relative performance year to date, in 2006 and 2004. The underperformance has been driven by security selection since this manager maintains sub-sector allocations close to the benchmark. The fund’s five-year returns are in the top 33 percent of the category.

• A number of the Index Funds continue to have below-median returns over one or more measurement periods. These funds are not held to the same criteria as the actively managed funds. They are only required to perform in line with their stated index. All of the funds are performing as expected relative to the index they are intended to replicate.

7

About the Watch ListPlacing an investment option on the Watch List is one action that can be taken if a fund falls short of our monitoring criteria. A fund may be placed on the Watch List for many reasons, including

• fund manager change

• style drift

• poor performance

• a change in the investment objective or operations of the fund

Being placed on the Watch List is not a “death sentence” for the fund; it indicates an event has occurred with the fund that merits a higher level of monitoring than other investment options. A fund

will be placed on the Watch List for a period not to exceed four quarters. If the fund’s management takes action that can reasonably be expected to satisfy our monitoring criteria within the time specified, the fund will be removed from the Watch List without action.

Plan sponsors using fund’s that have been placed on the Watch List in the Asset Allocator portfolios may wish to consider replacing the Watch List fund for that purpose.

While new clients cannot use Watch List funds in the Asset Allocator portfolios, we do not remove them from existing portfolios unless requested to do so.

The Watch List• TCW Select Equities: This fund will remain on the

Watch List. The fund’s three-year returns remain below the median after very weak returns in 2006 and in 2005. Second quarter returns were strong and within the top 10 percent of the category. Year-to-date returns have recovered to above median. This fund is concentrated and therefore volatile. To be reinstated in the lineup, the one-year return and the three- or five-year return as of the first quarter of 2008 must be above the median.

• T. Rowe Price Growth Stock: This fund will remain on the Watch List. On October 1, 2007, Rob Bartolo will assume the portfolio manager role for the fund. Rob stepped down as co-manager of the Media & Telecommunications fund on May 1, 2007. Rob has served as a member of the advisory committee for the large cap growth portfolios at T. Rowe Price, including growth stock. However, given that he has no track record in the large growth category we decided that it was prudent to place the fund on the Watch List. We will continue to monitor the transition.

• Franklin Small-Mid Cap Growth: The fund will remain on the Watch List. The fund now meets both the three- and five-year monitoring criteria after achieving top one-third returns for the year to date. The fund is significantly overweight in technology, specifically hardware, and has a smaller average market capitalization than its peer group. The fund was originally placed on the Watch List

due to weak relative returns in three of the last five years. To be reinstated in the lineup, the one-year return and the three or five-year return as of the fourth quarter of 2007 must be above the median.

• Oppenheimer Quest Balanced: The fund will remain on the Watch List. The fund’s returns are below median in the three-year time period. Recent returns have shown an improvement. The three-month return is in the top 3 percent of the category and the year-to-date return is in the top one-third. The equity portion of the portfolio is concentrated, and as a result, the fund tends to be more volatile than its peers. The fund will remain on the Watch List through the fourth quarter of 2007. To be reinstated in the lineup, the fund return must be above the median over the previous one year and above the median in the three- or five-year time period.

• Fidelity Advisor Mid Cap: This fund was categorized as a mid cap blend fund, but it was reclassified as a growth fund a few quarters ago. The manager’s benchmark is the S&P 400 mid cap index. On a holdings-based analysis, the fund has moved squarely into growth territory, but past returns indicate more of a blend orientation. As a result the historical returns look great in the growth category. Year to date, growth has performed somewhat better than blend and value, and this fund did not do as well as its more growth-oriented peers. Second quarter and year to

8

date returns were below average for the category. However, the one-year return is in the 11th percentile. This fund will be moved to the mid cap growth category and will remain on the Watch List until the change can be completed. We are recommending the Federated Mid Cap Index as a replacement. Plan sponsors will be notified about the timing and process shortly.

• Oppenheimer Small & Mid Cap Value: The fund moved from the small-cap blend to the mid-cap blend category in Morningstar as predicted. The fund meets the criteria that the one-year performance relative to the mid cap blend category be above average, and therefore we will be moving the fund to the mid cap blend category. The fund will remain on the Watch List for group annuity plans until the change can be made. We are recommending Oppenheimer Mainstreet Small Cap as the replacement in the small cap blend category. Plan sponsors will be notified about the timing and process shortly.

• Allianz CCM Emerging Companies: The fund is being added to the Watch List. The fund’s three- and five-year returns have fallen below median after very weak performance year to date and in 2006. The quantitative score is well below acceptable levels. The below average market cap of the fund has been a detractor in the current market environment, but the primary driver of underperformance has been disappointing stock selection. 2006 was the first year of underperformance after six straight years of above-median performance. The fund will remain on the Watch List through the first quarter of 2008. To be reinstated in the lineup, the fund’s return must be above the median over the previous one-year and above the median in the three- or five-year time period.

• Oppenheimer Capital Appreciation: This fund has been added to the Watch List after the announcement of Bill Wilby’s retirement. Co-manager Marc Baylin has taken the reigns, making this the second manager change in two years. Three-year returns are below the median, but five-year returns remain above the median. The fund is in the top one-third year to date.

• Templeton Growth: We are adding this fund to the Watch List. It has failed the three- and five-year performance screen for the first time after very weak performance year to date, in 2005 and in 2003. Templeton Growth has a relatively low allocation to

emerging markets, which has held it back against its peer group. A further detractor has been stock selection in some of the large mega cap value names. The fund will remain on the Watch List through the first quarter of 2008. To be reinstated in the lineup, the fund return must be above the median over the previous one-year and above the median in the three- or five-year time period.

• Calamos Growth: The Calamos Growth Fund will be removed from the lineup. The fund moved from the mid cap growth to the large cap growth category in Morningstar as predicted. In the large cap growth category, its relative performance is strong largely due to its previous mid cap bias. However, based on unsatisfactory conference calls with the manager and the abrupt and significant change in strategy, we have decided to remove the fund. We are recommending Neuberger Berman Manhattan as the replacement. Plan sponsors will be notified about the timing and process shortly.

• TCW Value Opportunity: The TCW Value Opportunity fund will be removed from the lineup. After one year on the Watch List, the fund continues to underperform its category. A replacement fund will be named and plan sponsors will be notified about the specific timing shortly.

• T. Rowe Price Small Cap: The fund will be removed from the lineup. After one year on the Watch List, the 12-month returns for the fund remain in the 74th percentile, and the three- and five-year returns remain below the median. We are recommending Oppenheimer Main Street Small Cap as the replacement. Plan sponsors will be notified about the timing and process shortly.

As previously disclosed, the following funds will be terminated from the lineup on August 20, 2007.

• American Century Ultra – We are recommending T. Rowe Price Blue Chip as the replacement.

• GE US Equity – We are recommending Vanguard Index 500 as the replacement.

• American Century International Growth – We are recommending VanKampen International Growth as the replacement.

• Neuberger Berman Focus – we are recommending Vanguard Index 500 as the replacement.

9

Asset Classes

Asset classes represent a method of characterizing investment options with similar investment styles and similar holdings. These characteristics can be used to anticipate the performance of the investment option during different market and economic cycles.

The asset classes are listed below from most conservative to most aggressive.

Stable Value

A low-risk investment. Securities in this class provide a steady stream of current income and tend to have little or no change in value over the life of the investment.

Intermediate Bond

More volatile than the Stable Value class with the potential for a slightly higher return or a possible loss of principal. These investments are intended to provide current income and growth potential.

Funds that invest in bonds are subject to certain risks including interest-rate risk, credit risk and inflation risk. As interest rates rise, the prices of bonds fall.

Balanced

Combines both stocks and bonds in order to achieve a moderate risk/moderate return objective. This option provides an avenue for investors who want professionals to manage their asset allocation.

U.S. Stocks

Stock funds have three basic investment objectives:

1. Growth – invests in firms that are expected to grow more rapidly than other firms; much of the value of such stocks is represented by the firm’s prospects for future growth.

2. Value – invests in stocks of out-of-favor firms that nevertheless offer a good long-term return; the assumption is that the value inherent in these firms will eventually be recognized.

3. Blend – combines elements of both growth and value funds.

Market capitalization, called “market cap” for short, is a measure of the size of a stock. It is calculated using this simple formula: share price times the number of shares outstanding (those offered by the firm through the financial markets). Stocks are usually grouped under three headings based on market capitalization:

Large Cap: the top 5 percent of all stocks;

Mid Cap: stocks that are smaller than the top 5 percent, but still among the top 20 percent;

Small Cap: the bottom 80 percent of stocks. Small company investing involves specific risks not necessarily encountered in large company investing, such as increased volatility.

Foreign Stock

Typically, invests at least 90 percent of assets in companies domiciled outside the United States. Foreign markets are exposed to different fundamental economic and structural factors than the U.S. markets. As a result, these funds provide greater diversification, and more risk, than a U.S.-only portfolio. International investing involves such risks as currency fluctuations, economic instability and political developments.

The following pages contain a statistical analysis of each of the separate account investment options

offered by The Standard to its retirement plan clients.

Each option is compared to an index considered by the Due Diligence Committee to be an appropriate measure of the manager’s ability to add value through stock picking. Further, each chart provides information about the universe of peer funds. This report is prepared using data from Morningstar.

Organization of Statistical Analysis data

1. Performance – reflects performance over the reporting period and longer periods

2. Calendar Year Performance – describes performance for each of the last five calendar years

3. Risk Statistics – evaluates the risk of each fund in comparison with key measurements

4. Fund Statistics – provides comparative information on each fund’s holdings

5. Industry Diversification – illustrates each fund’s holdings by industry

6. Regional Exposure – identifies the percentage of stocks invested in each geographical region

Statistical Analysis

10

Russell 1000 Growth: Market capitalization-weighted index of those Russell 1000 firms with higher price-to-book ratios and higher forecasted growth values. The Russell 1000 measures the performance of the 1,000 largest companies in the Russell 3000. The Russell 3000 represents approximately 98 percent of the investable U.S. equity market.

Standard & Poor’s 500: A market capitalization- weighted index of 500 widely held stocks. The index is designed to measure performance of the broad domestic economy through changes in the market value of 500 stocks representing all major industries.

Barra Large Cap Growth: Market capitalization-weighted index of the stocks in the Standard & Poor’s 500 Index having the higher price-to-book ratios. The index consists of approximately half of the S&P 500 on a market-capitalization basis.

MSCI US Prime Market Growth: Market capitalization-weighted index of stocks in the US Prime Market 750 Index (aggregation of the Large Cap 300 and Mid Cap 450 Indices) having higher forecasted growth values.

MSCI US Prime Market Value: Market capitalization-weighted index of stocks in the US Prime Market 750 Index (aggregation of the Large Cap 300 and Mid Cap 450 Indices) having lower forecasted growth values.

Russell 1000 Value: Market capitalization-weighted index of those Russell 1000 firms with lower price-to-book ratios and lower forecasted growth rates. The Russell 1000 measures the performance of the 1,000 largest companies in the Russell 3000. The Russell 3000 represents approximately 98 percent of the investable U.S. equity market.

Barra Large Cap Value: Market capitalization-weighted index of the stocks in the Standard & Poor’s 500 Index having the lower price-to-book ratios. The index consists of approximately half of the S&P 500 on a market-capitalization basis.

Standard & Poor’s MidCap 400: Consists of 400 domestic stocks chosen for market size, liquidity and industry representation. Companies meeting the selection criteria, but already in the S&P 500, are excluded. Designed to measure the performance of the mid-cap segment of the U.S. equity market.

Russell Mid Cap Growth: Market-weighted total return index that measures the performance of the companies within the Russell Mid Cap Index having higher price-to-book ratios and higher forecasted growth values.

Russell Mid Cap Index: Measures the performance of the 800 smallest companies in the Russell 1000 Index. The Russell Mid Cap Index represents approximately 25 percent of the total market capitalization of the Russell 1000 Index.

Russell Mid Cap Value: Market-weighted total return index that measures the performance of the companies within the Russell Mid Cap Index having lower price-to-book ratios and lower forecasted growth values.

Wilshire 4500: Measures the performance of all small- and mid-cap U.S. stocks. It is constructed from the Dow Jones Wilshire 5000 index, with the stocks in the S&P 500 removed.

Standard & Poor’s Completion: Measures the performance of small- and mid-cap U.S. stocks. The index is a subset of the S&P Total Market Index, excluding S&P 500 companies.

Russell 2000 Growth: Market-weighted total return index that measures the performance of the companies within the Russell 2000 Index having higher price-to-book ratios and higher forecasted growth values.

Russell 2000: Measures the performance of the 2,000 smallest companies in the Russell 3000 Index. The Russell 2000 represents approximately 8 percent of the total market capitalization of the Russell 3000 Index.

MSCI US Small Cap 1750: Market capitalization-weighted index of the 1,750 smallest companies in the MSCI US Investable Market 2500 Index. The MSCI US Small Cap 1750 represents approximately 12 percent of the U.S. equity universe.

Barra Small Cap Value: A market capitalization- weighted index of the stocks in the Standard & Poor’s SmallCap 600 having the lowest price-to-book ratios. The index consists of approximately half of the S&P 600 on a market-capitalization basis.

Description of the indexes

11

MSCI US Small Value: Market capitalization-weighted index of stocks in the US Small Cap 1750 Index having lower forecasted growth values.

Russell 2000 Value: Market-weighted total return index that measures the performance of the companies within the Russell 2000 Index having lower price-to-book ratios and lower forecasted growth values.

MSCI EAFE (Europe, Australasia and Far East): The Morgan Stanley Capital International EAFE Index is an aggregate of 21 individual country indexes that collectively represent many of the major markets of the world. This index is widely accepted as a benchmark for international stock performance.

MSCI World: The index includes all 23 MSCI developed market countries.

Lehman Brothers Intermediate Government/ Corporate Index: Index includes both corporate and government securities, including bonds with maturities up to 10 years.

Standard & Poor’s Health Care: Market capitalization-weighted index designed to measure the performance of U.S. publicly traded health care companies.

FTSE4Good US Select: Market capitalization-weighted index composed primarily of large- and mid-cap stocks that have been screened for certain social and environmental criteria.

Wilshire REIT: Market capitalization-weighted index designed to measure the performance of U.S. publicly traded equity Real Estate Investment Trusts.

Goldman Sachs Technology Industry Composite: Market capitalization-weighted index designed to measure the performance of U.S. publicly traded equity technology companies.

Lehman Brothers Long-Term Credit: Index includes investment grade bonds with maturities greater than 10 years.

12

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a fu

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has

bee

n p

lace

d on

the

Wat

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falls

sh

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f our

mon

itor

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crit

eria

. “T

” in

dica

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that

a fu

nd

term

inat

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om o

ur li

neu

p.

Ret

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is th

e to

tal r

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arn

ed b

y th

e fu

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duri

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the

peri

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his

incl

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cap

ital

app

reci

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n p

lus

divi

den

ds a

nd

capi

tal g

ain

s di

stri

buti

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if a

ny.

Shar

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atio

is a

mea

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of r

isk-

adju

sted

ret

urn

. It m

easu

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the

retu

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f th

e fu

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over

an

d ab

ove

the

retu

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on th

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sk-fr

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mon

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per

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it o

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rd

devi

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f th

e fu

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s re

turn

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he

purp

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of th

e m

easu

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to d

eter

min

e w

het

her

the

fun

d’s

risk

is ju

stifi

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y th

e ad

diti

onal

ret

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gen

erat

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he

larg

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e Sh

arpe

rat

io, t

he

bett

er th

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anag

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per

form

ance

.

Exp

ense

Rat

io is

the

rati

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tota

l in

tern

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to fu

nd

asse

ts a

s re

port

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y th

e m

ost r

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nin

gsta

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port

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e ex

pen

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incl

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but

are

not

lim

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ch a

s le

gal a

nd

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net

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Ass

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Yes/

No:

Th

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is o

r is

not

ava

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the

asse

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Yes

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bor B

ond

Yes

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guar

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ond

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Gro

wth

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bor C

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stl

Yes

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Yes

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owe

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row

th

Yes

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angu

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angu

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guar

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row

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dmY

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ndA

mer

Cen

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& G

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ndex

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No

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guar

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alue

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itutio

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No

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all C

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Yes

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Sm

all C

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Yes

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guar

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Yes

Yes

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guar

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all C

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Yes

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unde

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all-C

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YY

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No

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all C

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dex

Yes

Van

guar

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all C

ap In

dex

Adm

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Yes

Dat

a S

ourc

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orni

ngst

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16

Fide

lity

Adv

Div

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Intl

IY

esU

MB

Sco

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tern

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nal

Yes

Fore

ign

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ge V

alue

Alli

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nste

in In

tl V

al I

Yes

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Cox

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erna

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tlY

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orld

Sto

ck

Opp

enhe

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Glo

bal Y

No

No

Tem

plet

on G

row

th A

dvB

alan

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serv

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lloca

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Van

guar

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Am

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alan

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Inst

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odge

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alan

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Yes

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lity

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dY

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gic

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stm

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Yes

Opp

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Que

st B

alan

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Yes

Yes

No

Yes

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Kam

pen

Equi

ty a

nd In

com

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Yes

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guar

d Li

feSt

rat G

row

thN

oV

angu

ard

Life

Stra

t Mod

Gro

wth

No

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guar

d ST

AR

Yes

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guar

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ellin

gton

Yes

Van

guar

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Adm

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Yes

Smal

l Cap

Val

ue

Alli

anz

NFJ

Sm

all C

ap V

alue

Inst

lY

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mer

ican

Bea

con

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l Cp

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Inst

Yes

Van

guar

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all C

ap V

alue

Inde

xY

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n L

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Gro

wth

Am

er C

ent I

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TN

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an K

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tern

atio

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Yes

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Yes

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Yes

Fore

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an B

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tl Eq

Inde

x In

stY

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us In

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man

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ch a

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rat

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ital

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atio

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capi

tal g

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Ran

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sure

of r

isk-

adju

sted

ret

urn

. It m

easu

res

the

retu

rn o

f th

e fu

nd

over

an

d ab

ove

the

retu

rn

on th

e ri

sk-fr

ee a

sset

(de

fin

ed a

s th

e th

ree-

mon

th T

reas

ury

bill)

per

un

it o

f ris

k (d

efin

ed a

s th

e st

anda

rd

devi

atio

n o

f th

e fu

nd’

s re

turn

). T

he

purp

ose

of th

e m

easu

re is

to d

eter

min

e w

het

her

the

fun

d’s

risk

is ju

stifi

ed

by th

e ad

diti

onal

ret

urn

gen

erat

ed. T

he

larg

er th

e Sh

arpe

rat

io, t

he

bett

er th

e m

anag

er’s

per

form

ance

.

Stan

dard

Dev

iati

on is

a s

tati

stic

al m

easu

re o

f th

e de

gree

to w

hic

h a

n in

divi

dual

val

ue in

a p

roba

bilit

y di

stri

buti

on te

nds

to v

ary

from

the

mea

n o

f dis

trib

utio

n. F

or a

mut

ual f

und

it r

epre

sen

ts h

ow w

idel

y th

e re

turn

s va

ry o

ver

a ce

rtai

n p

erio

d of

tim

e. I

t als

o pr

ovid

es a

pro

babl

e ra

nge

wit

hin

wh

ich

a fu

nd’

s re

aliz

ed

retu

rn is

like

ly to

dev

iate

from

its

expe

cted

ret

urn

.

Info

rmat

ion

Rat

io is

a m

easu

re o

f ris

k-ad

just

ed r

elat

ive

retu

rn. I

t mea

sure

s th

e re

turn

of t

he

fun

d ov

er a

nd

abov

e th

e re

turn

on

an

app

ropr

iate

pas

sive

ben

chm

ark

port

folio

(e.

g., S

&P

500,

Rus

sell

2000

, etc

.) p

er u

nit

of

exce

ss r

isk

take

n (

defi

ned

as

the

stan

dard

dev

iati

on o

f th

e re

turn

of t

he

fun

d re

lati

ve to

the

stan

dard

dev

iati

on

of th

e re

turn

on

the

inde

x). T

he

purp

ose

of th

e m

easu

re is

to d

eter

min

e w

het

her

the

fun

d’s

man

ager

has

bee

n

able

to c

onsi

sten

tly

add

valu

e ov

er th

e pa

ssiv

e be

nch

mar

k po

rtfo

lio. T

he

larg

er th

e in

form

atio

n r

atio

, th

e m

ore

likel

y th

at th

e m

anag

er’s

rel

ativ

e ou

t-per

form

ance

is th

e re

sult

of t

rue

skill

(as

opp

osed

to r

ando

m lu

ck)

and,

th

eref

ore,

rea

son

ably

can

be

expe

cted

to b

e re

peat

ed.

35

T. R

owe

Pric

e Eq

uity

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ome

1.41

6.70

0.79

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60.

4412

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Shar

peSt

dSh

arpe

Std

Shar

peSt

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nd N

ame

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Rat

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11.6

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0418

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Bla

ckR

ock

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e C

ap G

row

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0.70

11.5

00.

6912

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ital A

ppr.

0.50

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4013

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19.9

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ppen

heim

er C

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l App

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atio

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4217

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row

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guar

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0.55

8.93

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1116

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row

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7512

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18.0

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angu

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gan

Gro

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0.80

9.91

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Idx:

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sell

1000

Gro

wth

0.55

8.95

0.55

11.7

40 .

0318

.98

Idx:

Bar

ra L

g G

r/MSC

I Prim

e M

kt G

r 0.

959.

450.

7312

.43

0 .31

18.2

1U

nive

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25th

Per

cent

ile--

----

----

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nive

rse

Med

ian

0.55

10.1

30.

4512

.71

0.08

18.6

4U

nive

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75th

Per

cent

ile--

----

----

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arge

Cap

Ble

n dA

mer

Cen

t Inc

& G

row

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0.97

8.63

0.74

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10.

2915

.14

Dav

is N

Y V

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re Y

1.49

6.46

1 .05

10.5

10.

4214

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GE

U.S

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0.93

6.96

0.56

10.9

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2713

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berg

er B

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an F

ocus

Tru

st0.

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22.9

90.

1426

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Van

guar

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0 In

dex

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7.39

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11.5

70 .

2215

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Van

guar

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0 In

dex

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1.01

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ndex

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017.

390.

6811

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angu

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0.90

9.81

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30.

4218

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Idx:

Sta

ndar

d &

Poo

r's 5

001.

027.

400.

6811

.58

0 .22

15.0

6U

nive

rse

25th

Per

cent

ile--

----

----

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nive

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Med

ian

0.95

7.98

0.63

11.5

50 .

2015

.10

Uni

vers

e 75

th P

erce

ntile

----

----

----

Lar

ge C

ap V

alue

Am

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Cap

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607.

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9A

mer

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246.

700.

8510

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14.4

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lack

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k La

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1.27

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----

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lity

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e I

1.09

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0.73

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80 .

3714

.14

Hot

chki

s Wile

y La

rge

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1.00

9.01

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12.9

80.

4715

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TH

E S

TA

ND

AR

D G

RO

UP

AN

NU

ITY

INV

EST

ME

NT

OPT

ION

SR

isk

Stat

istic

s as o

f Jun

e 30

, 200

7

3-Y

ear

Ris

k St

atis

tics

5-Y

ear

Ris

k St

atis

tics

10-Y

ear

Ris

k St

atis

tics

Dat

a S

ourc

e: M

orni

ngst

ar

36

Van

Kam

pen

Gro

wth

and

Inco

me

I1.

476.

930.

8410

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0.52

12.9

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angu

ard

Val

ue In

dex

1.59

6.96

0.81

12.7

40 .

3115

.27

Van

guar

d V

alue

Inde

x A

dmira

l1.

606.

980.

8212

.74

----

Van

guar

d W

inds

or II

1.60

6.68

0.93

11.2

40.

4213

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Van

guar

d W

inds

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Adm

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1.62

6.69

0.94

11.2

4--

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x: R

usse

ll 10

00 V

alue

1.59

7.07

0.88

11.8

60 .

4314

.10

Idx:

Bar

ra L

g V

al/M

SCI P

rime

Mkt

Val

2.09

7.63

0.97

13.7

20.

5216

.47

Uni

vers

e 25

th P

erce

ntile

----

----

----

Uni

vers

e M

edia

n1.

257.

490.

7211

.91

0.31

14.1

0U

nive

rse

75th

Per

cent

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----

----

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ge C

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(con

tinue

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Shar

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0.97

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6913

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row

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1026

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all M

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2024

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edia

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14.3

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2223

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Uni

vers

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th P

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----

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Cap

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ston

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Cap

I0.

7612

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0.84

17.2

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5318

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ia In

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9710

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12.6

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5617

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Fede

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d M

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dex

0.98

10.5

90.

8512

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kt In

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guar

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rate

gic

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ty0.

9811

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1.04

13.1

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5015

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Idx:

Rus

sell

Mid

-Cap

1.

299.

711.

0712

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0.51

16.0

1Id

x: S

tand

ard

& P

oor's

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400

1.03

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8912

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x: W

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Com

plet

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2312

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1.05

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00.

4222

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TH

E S

TA

ND

AR

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RO

UP

AN

NU

ITY

INV

EST

ME

NT

OPT

ION

SR

isk

Stat

istic

s as o

f Jun

e 30

, 200

7

3-Y

ear

Ris

k St

atis

tics

5-Y

ear

Ris

k St

atis

tics

10-Y

ear

Ris

k St

atis

tics

Dat

a S

ourc

e: M

orni

ngst

ar

37

Smal

l Cap

Ble

ndM

unde

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all-C

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14.7

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5517

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6914

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Sm

all C

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0.97

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8714

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----

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all &

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1.39

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3113

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6815

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0.70

13.2

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6915

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----

Van

guar

d Sm

all C

ap G

row

th In

dex

0.74

14.1

80 .

8215

.32

----

Idx:

Rus

sell

2000

Gro

wth

0.55

15.3

30.

5717

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0.06

25.4

1U

nive

rse

25th

Per

cent

ile--

----

----

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nive

rse

Med

ian

0.57

14.6

30.

5517

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0.21

24.7

5U

nive

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75th

Per

cent

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----

----

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peSt

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1.00

10.6

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7913

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0.41

18.3

9U

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75th

Per

cent

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----

----

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id C

ap V

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san

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4410

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1.33

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delit

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1.38

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4816

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921.

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0.61

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5917

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----

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----

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1.27

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1.67

8.51

1.17

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00.

6514

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Uni

vers

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th P

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ntile

----

----

----

Uni

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e M

edia

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179.

420.

9212

.49

0.47

16.0

6U

nive

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75th

Per

cent

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----

----

--

Dat

a S

ourc

e: M

orni

ngst

ar

38

Fore

ign

Lar

ge G

row

thA

mer

Cen

t Int

l Gro

wth

Inv

1.57

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20 .

8412

.89

0.26

18.1

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an K

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n In

tern

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row

th I

1.82

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1812

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0 .36

15.8

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lair

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7510

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1512

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9113

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mer

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1.81

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12.8

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reyf

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tl St

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x1.

749.

341 .

0713

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0.20

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delit

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dv D

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tl I

1.49

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91.

2412

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--- -

UM

B S

cout

Inte

rnat

iona

l1.

7010

.15

1.22

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00.

5213

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Idx:

MSC

I EA

FE

1.80

9.35

1.15

12.9

20 .

2614

.89

Uni

vers

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0.71

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----

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890.

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1.47

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535.

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3810

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4214

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----

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1.40

9.66

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2716

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----

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k St

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5-Y

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Ris

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10-Y

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Ris

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Dat

a S

ourc

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orni

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ar

40

Spec

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mun

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T. R

owe

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e M

edia

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elec

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6013

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2811

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1724

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Uni

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----

----

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Spec

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Fin

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a lB

lack

Roc

k G

loba

l Fin

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0.87

17.6

60.

7820

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MSC

I Wor

ld F

inan

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228.

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6514

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17.6

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0.86

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3317

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Uni

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----

----

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Spec

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0.69

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9.15

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Hea

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are

0.27

9.57

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2115

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Uni

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----

----

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3218

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Uni

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----

----

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Nat

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esV

angu

ard

Ener

gy1.

4719

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1.44

17.7

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6521

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2719

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1.01

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5319

.17

Uni

vers

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----

----

----

Uni

vers

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edia

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1520

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1.02

20.5

30.

4324

.22

Uni

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----

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2.92

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Gol

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com

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630.

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660.

663.

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Van

guar

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tal B

ond

Inde

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2.94

0.36

3.72

0.56

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Idx:

LB

Inte

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Cre

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2.38

0.39

3.32

0.61

3.13

Uni

vers

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----

----

----

Uni

vers

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edia

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2.76

0.36

3.73

0.42

3.70

Uni

vers

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----

----

----

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Ris

k St

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5-Y

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Ris

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10-Y

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Ris

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TH

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TA

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RO

UP

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NU

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INV

EST

ME

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SR

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Stat

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f Jun

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Dat

a S

ourc

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orni

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41

Uni

vers

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erce

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----

----

----

Soci

ally

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V

angu

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Soc

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0.20

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8.94

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s Lon

g C

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247.

150.

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810.

447.

68U

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Med

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0.15

5.22

0.51

7.47

0.37

6.63

Uni

vers

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----

----

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Inte

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Gov

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Bla

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v In

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43.

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62.

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373.

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----

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ond

Gol

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1.43

3.85

1.74

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----

Idx:

LB

US

Hig

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Issu

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ap

1.23

3.86

1.51

5.89

0.37

7.14

Uni

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----

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edia

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187.

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Idx:

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1215

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90 .

6814

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----

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Uni

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6614

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----

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----

Spec

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Alli

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RC

M T

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0.52

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6721

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3822

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ile--

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0.38

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3823

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33.4

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Ris

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5-Y

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Ris

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10-Y

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Ris

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Dat

a S

ourc

e: M

orni

ngst

ar

42

Fun

d st

atis

tics

Th

e fo

llow

ing

six

page

s su

mm

ariz

e ke

y st

atis

tics

of t

he

inve

stm

ent o

ptio

ns

rela

tive

to p

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fun

ds.

Info

rmat

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abo

ut th

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iver

se o

f fun

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ith

sim

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styl

es is

pro

vide

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clud

ing

figu

res

for

fun

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t th

e 50

th

perc

enti

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Inve

stm

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are

liste

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wit

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Plan

spo

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part

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sh

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con

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vest

men

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Th

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vest

men

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ion

s co

nta

in th

is a

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oth

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form

atio

n. P

rosp

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may

be

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by

calli

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877.

805.

1127

. Pl

ease

rea

d th

e pr

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ctus

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eful

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e in

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In

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men

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ubje

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mar

ket r

isks

an

d fl

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in

val

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Glo

ssar

y o

f te

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used

on

the

follo

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ages

Med

ian

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apit

aliz

atio

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an

indi

cati

on o

f th

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f firm

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wh

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fun

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te

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s th

at h

alf o

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e n

et a

sset

s of

the

port

folio

are

inve

sted

in th

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of c

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nie

s la

rger

than

the

med

ian

mar

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apit

aliz

atio

n a

nd

hal

f of i

ts a

sset

s ar

e in

vest

ed in

com

pan

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smal

ler

than

the

med

ian

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ket

capi

taliz

atio

n.

Pri

ce E

arni

ngs

Rat

io (

P/E

) is

the

wei

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e of

the

pric

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s of

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stoc

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tock

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alcu

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div

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g th

e cu

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t pri

ce b

y it

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ailin

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mon

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ear

nin

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per

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as a

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the

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ghte

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the

mat

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of th

e bo

nds

in th

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lio, c

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date

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of t

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secu

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the

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Ave

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Dur

atio

n is

a m

easu

re o

f a fu

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s in

tere

st r

ate

sen

siti

vity

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nge

r th

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rati

on, t

he

mor

e se

nsi

tive

th

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nd

will

be

to s

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inte

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rat

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Ave

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Cre

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pres

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the

port

folio

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edit

qua

lity.

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s an

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ach

bon

d’s

cred

it

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adj

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d fo

r it

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lati

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tin

g in

the

port

folio

.

43

Med

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Fore

ign

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P/E

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Th

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llow

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sifi

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f th

e in

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men

t opt

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pee

r fu

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Info

rmat

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abo

ut th

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se o

f fun

ds w

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sim

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styl

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pro

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d, in

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figu

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for

fun

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t th

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th p

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Inve

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wit

hin

ea

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Info

rmat

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Eco

nom

y

Soft

war

e: C

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s en

gage

d in

the

desi

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nd

mar

keti

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of c

ompu

ter

oper

atin

g sy

stem

s an

d ap

plic

atio

ns.

Har

dwar

e: M

anuf

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rers

of c

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ter

equi

pmen

t, co

mm

unic

atio

n e

quip

men

t, se

mic

ondu

ctor

s an

d co

mpo

nen

ts.

Med

ia: C

ompa

nie

s th

at o

wn

an

d op

erat

e br

oadc

ast

net

wor

ks a

nd

thos

e th

at c

reat

e co

nte

nt o

r pr

ovid

e it

to

oth

er m

edia

com

pan

ies.

Tel

ecom

mun

icat

ions

: Com

pan

ies

that

pro

vide

co

mm

unic

atio

n s

ervi

ces

usin

g fi

xed-

line

net

wor

ks a

nd

thos

e th

at p

rovi

de w

irel

ess

acce

ss a

nd

serv

ices

.

Ser

vice

Eco

nom

y

Hea

lthc

are:

In

clud

es b

iote

chn

olog

y, p

har

mac

euti

cals

, re

sear

ch s

ervi

ces,

HM

Os,

hom

e h

ealt

h, h

ospi

tals

, m

edic

al e

quip

men

t an

d su

pplie

s an

d as

sist

ed li

vin

g co

mpa

nie

s.

Con

sum

er S

ervi

ces:

In

clud

es r

etai

l sto

res,

per

son

al

serv

ices

, hom

e bu

ilder

s, h

ome

supp

ly, t

rave

l an

d en

tert

ain

men

t com

pan

ies

and

educ

atio

nal

pro

vide

rs.

Bus

ines

s Se

rvic

es: I

ncl

udes

adv

erti

sin

g, p

rin

tin

g,

publ

ish

ing,

bus

ines

s su

ppor

t, co

nsu

ltan

ts,

empl

oym

ent,

engi

nee

rin

g an

d co

nst

ruct

ion

, sec

urit

y se

rvic

es, w

aste

man

agem

ent,

dist

ribu

tors

an

d tr

ansp

orta

tion

com

pan

ies.

Fina

ncia

l Ser

vice

s: I

ncl

udes

ban

ks, fi

nan

ce c

ompa

nie

s,

mon

ey m

anag

emen

t firm

s, s

avin

gs a

nd

loan

s, s

ecur

itie

s br

oker

s an

d in

sura

nce

com

pan

ies.

Man

ufac

turi

ng E

cono

my

Con

sum

er G

oods

: Com

pan

ies

that

man

ufac

ture

or

prov

ide

food

, bev

erag

es, h

ouse

hol

d an

d pe

rson

al

prod

ucts

, app

arel

, sh

oes,

text

iles,

aut

os a

nd

auto

par

ts,

con

sum

er e

lect

ron

ics,

luxu

ry g

oods

, pac

kagi

ng

and

toba

cco.

Indu

stri

al M

ater

ials

: In

clud

es a

eros

pace

an

d de

fen

se

firm

s an

d co

mpa

nie

s th

at p

rovi

de o

r m

anuf

actu

re

chem

ical

s, m

ach

iner

y, b

uild

ing

mat

eria

ls a

nd

com

mod

itie

s.

Ene

rgy:

Com

pan

ies

that

pro

duce

or

refi

ne

oil a

nd

gas,

oi

lfiel

d se

rvic

e an

d eq

uipm

ent c

ompa

nie

s an

d pi

pelin

e op

erat

ors.

Uti

litie

s: E

lect

ric,

gas

an

d w

ater

uti

litie

s.

51

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The Standard’s due diligence programOverviewThe Investment Due Diligence program is a rigorous selection, monitoring and evaluation system of the separate account investment options offered to retirement plan clients of The Standard. The program is designed to ensure that the investments offered by The Standard to retirement plan sponsors provide competitive performance coupled with adherence to the appropriate investment style.

This system is objective in nature using monitoring tools that are time-tested and recognized as industry standard.

The program is extensive. It includes a review of the long-term style orientation, style drift, manager qualifications and performance of each fund. The process demonstrates The Standard’s commitment to provide a highly competitive and appropriate investment product package to retirement plan clients.

We start with a single asset category, chosen to satisfy portfolio objectives.

Fund performance and risk characteristics are scored to ensure return, risk-adjusted

return and style consistency.

We review fund literature and talk with fund representatives for a comprehensive

evaluation of fund style, management and performance.

We screen for the minimum qualifications: below-median expense ratio, at least three years’ history, returns in the top one-third of its asset class for at least three years and a

proven manager with tenure.

The fund with the best overall quantitative score that also survives the qualitative

review is added to our lineup.

58

Due Diligence Process

The Standard offers clients and plan participants an investment mix specifically designed to meet today’s retirement plan needs.

The investment mix is intended to include a complete array of investment styles allowing plan sponsors to tailor the offerings for their plans.

The Standard Investment Due Diligence program incorporates the following functions:

• funds within the mix are reviewed quarterly for consistency of style

• fund performance is measured quarterly against a commonly accepted universe of similar investments

• the long-term performance of the fund manager is measured quarterly using commonly accepted analytical tools

• funds are evaluated quarterly for continued appropriateness within The Standard’s retirement plans investment mix

• funds are identified for possible replacement or style designation change

• specific and objective criteria are used to evaluate fund candidates for inclusion in the mix

Investment Selection and Due Diligence Committee

The Investment Selection and Due Diligence Committee is made up of senior-level staff as appointed by the respective heads of the Retirement Plans Division and StanCorp Investment Advisers, Inc., a registered investment adviser. The committee meets in the month following quarter-end to review each fund’s performance and status during the preceding quarter. The committee applies to all funds the criteria described in this document and determines any appropriate action.

59

Fund Classification

StanCorp Investment Advisers determines the fund classification for each fund in The Standard’s investment lineup. The classification is based on a combination of holdings-based analysis, returns-based analysis and a qualitative evaluation of the fund managers’ process, intention and internal benchmarks. The qualitative evaluation is given more weight when the holding-based and returns-based analysis produce conflicting results. The StanCorp Investment Advisers’ fund classification serves as the appropriate universe of funds with which each fund’s attributes and performance are compared.

Fund Selection Criteria

Required Attributes

1. Funds will have a multi-year history of performance or managers will have a demonstrated track record with a similar style investment vehicle (e.g., fund is a clone of a closed fund with a favorable track record).

2. Funds will be members of nationally recognized fund families, with wide publication of investment results in local and national media.

3. Funds will demonstrate consistent management style matching the objectives of the search.

A. Funds invest in appropriate asset categories.

B. Funds demonstrate industry diversification (unless the fund specializes in a single industry).

C. Equity funds do not carry excessive cash (greater than 20 percent) for extended periods (fixed-income or balanced/lifestyle funds may periodically hold more cash).

4. Funds will be available to participants on a no-load basis and will have expense ratios that are at or below the median in the lowest cost share class available to The Standard.

5. Funds will have sufficient asset size for adequate diversification within the appropriate universe. Fund minimum assets under management will be $35 million.

6. Funds will be available for “same-day” trading on terms acceptable to The Standard.

Performance-Based Criteria

1. Performance will be consistently in the top half of the category on a calendar year-to-year basis over the tenure of the fund manager. Secondarily, fund performance over the last 12 months will be in the top half of the category, and fund performance over three and, if available, five years will be in the top one-third of the category. If these criteria would exclude a fund with superior year-to-year return consistency, they will be relaxed. Funds with shorter histories will be considered if the manager has a demonstrable track record with a similar investment style.

2. Manager risk adjusted return, as measured by the Sharpe ratio, will be better than the average fund in the appropriate universe.

3. Exceptions to the performance criteria will be made for index funds. Index funds will be expected to perform relative to the underlying index before expenses.

Ongoing Monitoring Criteria

1. The expense ratio is expected to remain below the median for the fund category in the lowest cost share class available to The Standard.

2. Three- or five-year returns are expected to remain above average for the category universe. Should slippage occur, we will ascertain the reason for the slippage and assess the need to take action based on the result of our investigation.

3. The Sharpe ratio is expected to remain above average for the category universe for the three- and five-year periods. Should slippage occur, we will ascertain the reason for the slippage and assess the need to take action based on the result of our investigation.

4. Equity funds are expected to remain fully invested. Should cash levels in an equity fund rise above 20 percent, we will ascertain the reason and assess the need to take action based on the result of

Fund selection and monitoring criteria

60

our investigation. Other fund types such as fixed income funds and asset allocation funds may hold cash as part of the active management of their portfolios; however, a significant and rapid accumulation of cash in these funds also will prompt further investigation.

5. With the exception of funds specializing in a single sector, funds are expected to remain broadly diversified. If a fund were to accumulate a position in a single industry that is significantly larger than the average for the category, we will ascertain the reason for the accumulation and assess the need to take action.

6. Fund styles are expected to remain true to the category for which they were chosen. If a fund’s performance or portfolio composition indicates that the fund’s style may be drifting significantly away from target, we will ascertain the reason and assess the need to take action. If an official style change is announced, we will determine whether to move the fund to the new category or take other action.

7. In general, a management change in which a member of the team is promoted to the team lead will be viewed as less likely to impact the long-term prospects for the fund and we would be inclined to maintain the fund in the investment matrix. In situations where a manager who is very autonomous is replaced, we would be more inclined to place the fund on a watch list and possibly remove the fund from the investment matrix.

8. The Standard reserves the right to remove a fund from the matrix if total investments in the fund do not reach $2.5 million within 24 months from the original offering.

Potential Actions

This list is meant to reflect the realm of possible actions that could be taken should a fund fall short of our monitoring criteria. Actions taken will not necessarily follow the progression presented. In any case, a fund will be removed from the investment matrix if it is in violation of federal and/or state regulations.

1. Formally identify funds that have fallen short of our criteria. The Investment Selection and Due Diligence Committee’s concerns and the results of the investigation of the slippage will be detailed in the quarterly update. In some instances, an interim bulletin regarding our concerns may be issued.

2. Place the fund on a Watch List for a period not to exceed four quarters. If action is taken on the part of the fund management that can reasonably be expected to cause the fund to satisfy the monitoring criteria within the time specified when the fund is placed on the Watch List, the fund will be removed from the Watch List with no further action.

3. Offer an additional fund in the same category to plans utilizing the fund that is under review.

4. Move the fund to a more appropriate category and offer a substitute fund in the category that was vacated by the fund under review to plans utilizing the fund.

5. Suspend further investment in the fund under review, and offer another fund in the category vacated by the fund under review.

6. Remove the fund from plans utilizing it. Investments in the fund will be transferred to the money market alternative or a new fund representing the vacated category as determined by the plan sponsor and/or participants.

61

1. Wide publication of fund results is discontinued.

2. Fee structure is modified to the material detriment of plan participants.

3. Fund manager is replaced with a manager whose skills or experience are not acceptable to the committee.

4. Investments of the fund become inconsistent with the category and are expected to remain that way.

5. Manager demonstrates extreme risk-taking behavior (i.e., large accumulation of cash, large accumulation in a single industry, investments outside those expected for the category, unacceptable increase in relative return volatility, etc.) that is expected to persist.

6. Objective of the fund is changed to a degree that would make the fund inappropriate for the plans in which it is utilized.

7. Investment performance is deemed unacceptable by the committee.

Criteria that Will Lead to Suspension of Further Investment

Removal of Fund from Investment Matrix

If a fund is to be removed from The Standard’s list of investment funds, written notice will be given to the plan sponsor at least 120 days in advance of the planned removal unless the circumstances beyond The Standard’s control prevent such notice.

The notice will identify the effective date of removal. It will inform the plan sponsor of options for substituting funds, which may include transferring all of the plan assets in that fund to another fund designated by the plan sponsor or allowing participants to redirect their account balances in that fund to other funds offered by the plan. The notice will explain that a plan sponsor may object to the proposed removal or the timing of removal. The Standard will then attempt to arrange a satisfactory resolution or provide time for the plan sponsor to convert to a new service provider.

If, however, the fund is being removed for violation of federal or state law, The Standard reserves the right to transfer all fund assets immediately to an interest-bearing account.

62

Appropriate Universe/Category is defined as The StanCorp Investment Advisers’ fund classification. The classification is based on a combination of holdings-based analysis, returns-based analysis and a qualitative evaluation of the fund managers’ process, intention and internal benchmarks. The qualitative evaluation is given more weight when the holding-based and returns-based analyses produce conflicting results.

Expense Ratio is the ratio of total internal expenses to fund assets as reported by the most recent Morningstar report. The expenses include, but are not limited to, items such as legal and custody charges, management fees and sales charges such as 12b-1 fees. Performance statistics are net of the expense ratio.

Fully Invested is defined as a cash position of 20 percent or less for equity funds for the purpose of determining when an investigation is appropriate. Higher cash levels will be tolerated in fixed income or balanced funds if the overall portfolio risk and style remain consistent with the category.

Information Ratio is a measure of risk-adjusted relative return. It measures the return of the fund over and above the return on an appropriate passive benchmark portfolio (e.g., S&P 500, Russell 2000, etc.) per unit of excess risk taken (defined as the standard deviation of the return of the fund relative to the return on the

index). The purpose of the measure is to determine whether the fund’s manager has consistently added value over the passive benchmark portfolio. The larger the information ratio, the more likely that the manager’s relative outperformance is the result of true skill (as opposed to random luck) and therefore reasonably can be expected to be repeated.

Sharpe Ratio is a measure of risk-adjusted return. It measures the return of the fund over and above the return on the risk free asset (defined as the three-month Treasury Bill) per unit of risk (defined as the standard deviation of the fund’s return). The purpose of the measure is to determine whether the fund’s risk is justified by the additional return generated. The larger the Sharpe ratio, the better the manager’s performance.

Style Drift is a departure from the expected investment pattern based on the Fund Classification. The result can be performance that is significantly different from the benchmark and universe average. Early indications of style drift can be detected by examining the holdings and performance statistics of the fund. If the drift is the result of a long-term change in investment philosophy or strategy on the part of the fund manager, it ultimately will result in a change in the Fund Classification.

Glossary of terms and tools used in this report

63

About StanCorp Investment Advisers, Inc.StanCorp Investment Advisers was formed in May 2000 as a wholly owned subsidiary of StanCorp Financial Group, Inc. Staffed with experienced financial professionals, the firm was formed to provide:

• specialized due diligence reports and other financial analysis functions for retirement plan sponsors

• fund selection and investment advice to plan sponsors

• model portfolios for participants

In addition, StanCorp Investment Advisers provides the rigorous analysis and advice behind the due diligence process that uses to select and monitor the mutual funds offered to its retirement plan clients. StanCorp Investment Advisers partners with The Standard’s own staff to ensure the continued high quality of the funds offered.

Clients must sign a service agreement with StanCorp Investment Advisers to receive the firm’s services. While the firm works on a fee-for-service basis, Standard Insurance Company underwrites the cost of providing basic services on behalf of its clients. However, extraordinary services undertaken at the request of clients will be the financial responsibility of the client.

StanCorp Investment Advisers, Inc.Kim W. Ledbetter President StanCorp Investment Advisers

Julie Grandstaff, CFA Vice President and Managing Director StanCorp Investment Advisers

Kim A. Ceserani, CFA Senior Portfolio Manager StanCorp Investment Advisers

Marilyn R. Bishop Assistant Vice President and Associate Counsel Standard Insurance Company

Home Office 1100 SW Sixth Avenue Portland OR 97204

Standard Insurance Company 1100 SW Sixth Avenue Portland OR 97204-1093

www.standard.com For retirement plans: http://retirement.standard.com

StanCorp Equities, Inc., member FINRA/SIPC, distributes group variable annuity and group annuity contracts issued by Standard Insurance Company and may provide other brokerage services. Third party administrative services are provided by Standard Retirement Services, Inc. Investment advisory services are provided by StanCorp Investment Advisers, Inc, a registered investment advisor. Standard Insurance Company, StanCorp Equities, Inc., Standard Retirement Services, Inc., and StanCorp Investment Advisers, Inc. are subsidiaries of StanCorp Financial Group, Inc. and all are Oregon corporations.

Documents

Due Diligence Report - WikiLeaks QTR due diligenc… · Due Diligence conference call at 1 p.m. Eastern/10 a.m. Paciﬁc on Thursday, August 23. You’ll have the opportunity to ask