Net Asset Value versus “everything else”

1. Net Asset Value versus “everything else” Helping plan sponsors avoid a costly mistake

2. NAV = “Net Asset Value” • Means that the provider is offering true, no-load mutual funds instead of a hybrid investment or insurance-based product (e.g., variable annuity, separate account) • Mutual funds have real ticker symbols (e.g., “VFINX”) which can be looked up on Yahoo or Morningstar • Mutual funds have daily prices like “$18.26” (with 2 decimal places), which can be verified from any outside source (newspapers, financial publications, etc) • With mutual funds, participants know what they are buying • No surprises, no mystery What does NAV mean?

3. Plan sponsors have a fiduciary obligation to understand fees, and ensure they are reasonable and appropriate for a plan of their size • Using an NAV environment forces transparency • When a fee is charged in an NAV environment, it will be visible to the plan sponsor and participants • Mutual fund performance numbers are calculated after the fund’s total expense is deducted • Non-NAV providers often impose a number of difficult-to-discern fees, under various names (annuity fee, mortality charge, separate account fee, group contract charge, etc) • Requires plan sponsor to be very vigilant • Selecting an NAV provider helps you avoid tying your plan up for years by signing a costly, arbitrary “contract” • The only value in this contract is for the insurance company… in keeping you from leaving Why should you care?

4. Truthfully, some plans (e.g., < $500,000) are difficult to service profitably… insurance-based programs may be the only way the firm can offer a solution • However, too many of these programs are still being offered in the $1 - $20 million range • The desire for the selling firm (and the sales rep) to receive the greatest possible compensation • Can quickly become a problem of suitability: • Is the intermediary a fiduciary, who has a duty to act in the best interests of its client, or merely a financial services firm distributing a product? • Aware of these issues, some insurance companies have now begun to offer NAV programs as a second option Why do some firms still offer non-NAV programs?

5. You are asked to sign a “contract” before the plan conversion can begin • Footnotes of the fund performance pages mention “variable annuity”, “separate account”, or allude to a relationship with a life insurance company • Fund names are modified: “Fidelity Contrafund” becomes “SA Fidelity Contrafund” • Fund prices look like 2.176492 instead of $34.08 • Funds may use symbols that look similar to ticker symbols, but aren’t (a real ticker symbol is five letters long and ends in X) What are the warning signs of a non-NAV program?

6. How non-NAV providers operate • An outside mutual fund is held within a variable annuity or separate account. (Outside fund has its own expense ratio; perhaps 100 basis points). • Separate account or variable annuity “wraps” an additional fee around the fund (often in the range of 70 - 150 basis points) • This new “fund” is priced daily by the insurance company, using its own methodology. (may start out at 1.00000 but after a number of years has increased to 2.1874632). • Because the new price is determined each evening after the additional fees are deducted, a large portion of fees are made invisible to the participant. • The insurance company may have several different “versions” of the portfolio, depending on what pricing / compensation structure is presented at the point of sale. Annuity / S.A. fees: (+ .50 to 1.50%) The Mutual Fund (1% fee) Entire new “fund” is re-priced dailyby the insurancecompany

7. Actual examples of non-NAV programs…

8. …but the actual share price of Janus Twenty in the newspaper is $38.61 (!!) How do these reconcile?? Looks like a ticker symbol, but isn’t: real ticker for Janus Twenty is JAVLX. (Fund ticker symbols are fivecharacters long and end in X). Gives illusion that participant is holding a true mutual fund, when in fact this is a variable annuity.

9. Another telltale sign: Using the real name of the fund, but with short acronym in front (“SA35”) – This is a separate account that holds the fund, not the actual mutual fund!

10. Knowing it raises attention, some firms try to avoidshowing you the daily “price”,and show units and dollarsinstead.. But you can easilycalculate it!! $36.93 / 22.4998 = $1.6413 / share, …but price of Fidelity Magellan on 3/31/2002 was $102.55!!

11. This firm created prices that look similar to “real” mutual fund prices… but the six digit unit value makes it clear they are not. Actual price of JAVLX: $32.73 (as of 6/23/2003)

12. ..Another provider, same technique

13. Disclosed? Yes. Clear? The below appeared onpage 27 of a 50 page contract.

14. Provider promotes a “guaranteed account” as something participants should have available as an investment (which of course comes with its own contract and surrender penalty schedule) • Provider encourages you to offer a Joint & Survivor annuity option within your plan (or makes it the “default” election) • Provider offers life insurance for purchase within the plan Other things to be aware of

15. Having to use algebra to interpret a contact is generally a bad sign In today’s age, it’s fair to wonder: Why would ANY plan sponsor agree to a program with surrender penalties??

16. Nationwide (“Best of America”) Manulife Financial MassMutual (CIGNA) Principal Group NY Life Insurance Company TransAmerica Life Lincoln Financial Group Equitable The Hartford ING Great West Life AUL Allmerica Financial Mutual of Omaha Guardian Numerous others Various firms we have seen offering non-NAV investments* * Certain firms listed may offer multiple products, including NAV programs as an alternative. List is based on actual experience in the marketplace, including information provided by the firms themselves, including websites, financial publications, advertisements and other sources. Subject to change over time based on changing marketplace and competitive practices. This slide does not make any characterization or representation concerning the quality of the programs offered by the above firms – it merely identifies the firms as offering non-NAV programs to certain plan sponsors and participants.

17. Different regulatory schemes – NAIC for insurance companies versus SEC and Bank examiners for the rest • Recent financial services reform has focused on specific issues or concerns (e.g., Sarbanes Oxley, Gramm- Leach Bliley) rather than the structural differences among providers • The DOL has attempted to solve the problem by issuing fee disclosure matrix (eight pages long, difficult to complete) • All of this creates a very difficult environment for plan sponsors.. It can be easy to miss the issue entirely when reviewing proposals. Why is this environment allowed to exist?

18. When it comes to a qualified plan, “out of sight, out of mind” is almost never a good thing • Paying an additional 70 – 100 basis points in fees over a 35 year career can easily cost a participant $100,000 or more in their final account balance • Use the vendor cost comparison matrix to get a true, apples-to-apples comparison of all fees (implicit and explicit) • Plan sponsors need to be vigilant, ask the hard questions • Naturally, we hope you choose to partner with us. But even if you don’t, we urge you to select a firm that operates in an NAV environment! Final thoughts