LTSave New Retirement Seminar Presentation

The New Retirement

Portfolio Management Strategies for Personal Retirement Planning

October 4, 2006

© LTSave, Inc., Company Confidential Materials 2006-10-04

University of Massachusetts | Page 2

Today’s Discussion

• Mega-trends

• Market responses: Accumulation Phase

• Constructing the Accumulation Phase retirement portfolio

• LTSave advice sequence

• Constructing the Distribution Phase retirement portfolio

• Distribution Phase advice, investment and planning products

• Summary

• About LTSave



The Personal Retirement Planning Landscape: Mega Trends

• Market forces and legislative developments have combined to drive intense development and marketing activity in retirement investment products and planning services:

70+ million baby boomers nearing/beginning retirement

» Many significantly unprepared and under-capitalized for retirement

Competition for huge outflow of money from 401(k), 403(b) and traditional pension plans

» Client/capital retention for incumbent providers

» Client/capital acquisition for others




Pronounced shift from traditional defined benefit pension plans to defined contribution (DC) plans such as 401(k) and 403(b)

» Trend is accelerating due to:

– Competitive pressures

– Complex funding and accounting rules

»Volatile year-to-year cash requirements/accounting results

– Compliance/risk exposures

Employers’ desire to provide tools and education to help employees deal with completely shifted, unpooled investment risk inherent with DC plans

» HR policy makers are advocating more corporate responsibility to optimize DC outcomes now that DB plans no longer cover large segments of the work force



Employees Need Help Preparing for Retirement• Only 19% of retirees in the US have properly planned for retirement1

• Investment concepts are difficult for the average person

• Most have limited or no background in investing

• Many employees:

Rely on family and coworkers for investment advice

Are misinformed about common investment risks

Are overwhelmed with choices and information

Choose conservative investment options because they are ‘safe’

• Research shows that participants often use naïve or unsophisticated techniques in making investment decisions2

• Few employees monitor or adjust their investments over time, despite changing market, economic and personal circumstances

1. Financial Literacy and Planning: Implications for Retirement Well-being, Lusardi and Mitchell, Pension Research Council, University of Pennsylvania, 2006

2. Source: Shlomo Benartzi and Richard H. Thaler,The American Economic Review (March 2001).




• Impact of Pension Protection Act of 2006

Investment advice

» Clear legal authority for plan sponsors to provide retirement investment advice through third parties

» Protection to fiduciaries who prudently select and implement a compliant advice program

Automatic enrollment safe harbor helps plan sponsors to:

» Instill savings behavior

» Automatically grow the savings rate

» Avoid certain compliance tests

Default investment safe harbor

» Provides guidance and protection to plan sponsor



Market Response: Advice and Investment Products

1.Third party, independent investment advice providers

2.Mutual fund and other investment companies

3.Broker/dealers

4.Non-financial advice




1. Third party, independent investment advice providers

Unaffiliated with investment companies

Advice engine is typically computer based

Web delivery complemented by on-site enrollment and call center support

Fees are independent of investments selected

Self-directed advice and ‘managed account’ services

Under ‘managed account’ approach advice provider

» Gives specific portfolio mix and fund recommendations from among investments available

» Makes initial rebalancing transactions

» Rebalances each quarter as needed to restore originally recommended portfolio mix




2. Mutual fund and other investment companies are offering target date and lifestyle funds and/or third party, captive investment advice

» Target date funds (also called life cycle or age-based funds)

– Professional management of asset allocation in fund becomes more conservative as retirement ‘target date’ nears

– Most often a ‘fund of funds’

» Lifestyle funds:

– Professional management of asset allocation in fund to match investors particular life stage and risk profile at time of initial investment

– Overall portfolio mix does not typically change over time

– Most often a ‘fund of funds’

» Third party ‘captive’ investment advice

– Examples: Fidelity offers Financial EnginesTIAA-CREF offers Morningstar/Ibbotson




3.Broker-dealers, others with products to sell:

One-on-one planning and advice

» Some use computer-based tools for consistency

» Sales agenda for particular investment products

4.Non-financial advice:

Emergence, proliferation and marketing of tools, education, and services that provide broader planning assistance by life stage but whose typical goal is investment product placement/asset gathering:

» Life stages typically covered

– Just starting out

– Intense savings years

– Near retirement years

– Early / active retirement



Market Responses: Plan Sponsors and Investors

• Many employers now offering retirement investment advice to optimize value and performance of their DC retirement plans through:

Captive mutual fund advice providers, or

Independent advice providers

• Trend likely to accelerate given PPA clarifications /protections for fiduciaries

• Investors are attracted to target date and life stage funds because of their simple to understand design and their auto-pilot approach

Recent research by Financial Research Corporation shows that:

» Assets in target-date retirement funds have risen dramatically from $14.5 billion in 2002 to $86.7 billion in May 2006

» Assets in lifecycle funds have risen from $54.6 billion in 2002 to $145.9 billion in May 2006



Constructing the Accumulation Phase Retirement Portfolio1. Personalized Retirement Plan

Annual income at retirement from retirement plan, Social Security, and other retirement assets

Comparison of current and recommended portfolio

2. Portfolio Construction and Security Selection

Asset allocation based on investment options available in buy-list

Specific fund recommendations and allocations based on client goals and risk profile

3. Ongoing Account Management

Quarterly analysis and rebalancing of portfolios



Constructing the Accumulation Phase Retirement Portfolio Using Modern Portfolio Theory (MPT)• Advice is developed around return

and risk expectations for broad asset classes

• Six broad asset classes cover majority of clients’ needs and can be expanded

• Risk is controlled by diversifying among asset classes

• Recommended portfolio is matched to client’s risk tolerance

• Client’s retirement horizon is one consideration in determining risk tolerance

• Mutual funds chosen are representative of the asset classes

• Funds with glaring faults are avoided

• Portfolio optimizer is used to make final selection and to weight funds appropriately

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

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

Risk

Return

All Bonds

All Stocks

Risk-Return Spectrum (Efficient Frontier)



Outcome Analysis Utilizes Stochastic Modeling

• Investment returns are treated as uncertain

• Two thousand return scenarios are run to calculate possible wealth outcomes for client

• The median outcome (50th percentile) is taken as the forecast of the client’s portfolio value at retirement

• The 5th percentile outcome (“Downside”) quantifies the risk of loss

• Both are displayed in an easy-to-comprehend format

• Process represents “best-in-class” investment practice used for financial planning

Stochastic Distribution of Wealth Outcomes



Solution is Personalized to Client

Optimization and Solution

Profile

Define Goals

Risk Tolerance

Current Investments

• Based on personal goals for desired retirement age and income level

• Reflects appropriate risk level for each user

• Takes current account holdings into consideration

• Includes estimated Social Security income and may include other tax-deferred assets, rollover, IRA, Pension

• Includes benefits and Social Security income for a spouse or domestic partner

• Establishes appropriate portfolio allocations for all investment assets

• Selects specific investments to create the recommended portfolio

• Provides specific buy/sell instructions to achieve desired result



Fund Selection

Application to Portfolios

Buy-list

Screen

Rank within Asset Class

Determine Optimal Asset Allocation

• Review investments available in buy-list

• Apply quantitative and qualitative criteria applied to create a list of appropriate investments for portfolio construction

• Rank screened investments by criteria including tracking error with respect to asset class benchmarks and expense ratio

• Run portfolio optimizer to determine asset allocations and specific investments for each portfolio

• Generate appropriate solution for each user. Implement and store in database. Review quarterly and implement changes if necessary.

















Constructing the Distribution Phase Retirement Portfolio

• Similar to Accumulation Phase approach but special attention paid to:

Re-measurement of risk profile (usually more conservative)

Safe withdrawal rates considering

» Longevity risk

» Retirement lifestyle and related income needs

Inflation protection

Long term care risk

Survivor benefits/income

Required minimum distributions



Distribution Phase Advice, Investment, Planning Products

• Mutual fund, other investment companies and advice providers are now offering automated distribution phase planning tools

» Typically used by an adviser not the consumer

» Usual goals:

– Incorporate retirement spending patterns and special expenditures

– Take into account all sources of retirement income

– Optimize draw down among available assets, e.g.,

» Maximize duration of tax deferred accounts

» Minimize taxes

– Anticipate and handle Required Minimum Distributions (after age 70 ½)

– Preserve portfolio value to guard against outliving assets

– Inflation protection

– Client/capital retention for incumbent providers



Distribution Phase Advice, Investment, Planning Products

• Emergence and proliferation of tools, services and education that provide lifestyle planning assistance, for example:

Retirement readiness and goal setting

New careers / education

Fitness, sports, health

Volunteering

Retirement real estate / communities

Travel



Summary

• Mega trends are driving intense marketplace activities

• Market responses clarifying around distinct phases:

Accumulation Phase

Distribution Phase

• Advice and investment services differentiated by:

Fee for service providers

Product sellers / asset gatherers

• Investment advice increasingly available to mass affluent as part of employer’s retirement plan bundle

Pension Protection Act of 2006 will accelerate plan sponsor adoption



Summary• Most advice available through employers uses similar approach:

Computer model delivered over the web Participant risk profiling and income needs analysis Modern Portfolio Theory Captive investment line-up under employer’s retirement plan Monte Carlo simulation

• Major differences between Accumulation Phase and Distribution Phase portfolio construction: Re-measurement of risk profile Safe withdrawal rate/portfolio preservation Longevity risk Inflation protection Survivor income

• New services and products focus on lifestyle and other non-financial aspects of retirement



About LTSave

• Provides investment advice services to help employees cost-effectively plan and manage assets for retirement

• Uses proprietary computer-based model

• Independent of fund companies and remains objective in providing investment advice

• SEC-registered investment advisor. Acts as a co-fiduciary for its advice



Selected Research on Current Trends in Retirement Planning

• “An Update on Private Pensions,” by Alicia H. Munnel and Pamela Perun, Boston College Center for Retirement research at Boston College, August 2006, http://www.bc.edu/centers/crr/ib_50.shtml

• “Managed Accounts and Participant Portfolios,” Vanguard Center for Retirement Research, July 2006, http://vocuspr.vocus.com/vocuspr30/Temp/Sites/51047/523ba23c1f5047e292c5f110d0358939/CRR%20Managed%20Accounts%2007-2006.pdf

• “Plan Investment Options and Participant Behavior,” by Mimi Lord, TIAA-CREF Institute, June 2006, http://www.tiaa-crefinstitute.org/research/surveys/rs060106.html

• “Optimizing the Retirement Portfolio: Asset Allocation, Annuitization, and Risk Aversion,” by Wolfram J. Horneff, Raimond Maurer, Olivia S. Mitchel, and Ivica Dus, July 2006, http://www.tiaa-crefinstitute.org/research/grants/comp2_horneff.html

LTSave New Retirement Seminar Presentation

Documents

retirement investment

retirement investment

investment concepts

investment decisions

selfdirected advice

retirement years

common investment risks

retirement competition