Monday, October 22, 2012

10:30 – 11:30 am

Vevey 3 & 4

Independent Glide Path Managers Discuss Strategy

Ron Surz

President, Target Date Solutions

Ron@TargetDateSolutions.com

(949)488-8339

Safe Landing Glide Path

Embraces a Universal Objective

Independent of Demographics: it’s for All People

Glide Paths Disagree Near Target

Because of “Demographics”

Poor

Rich

Demographics

Types of Objectives

• Demographic based: Compensate for inadequate

savings: pay replacement and longevity risk

An objective with an impractical plan (one size fits all)

is a Hope.

Save more is the right plan.

• Universal: Bring participants safely to the target

date with appreciated savings intact

Hippocratic Oath: Don’t lose money, especially near the

target date.

CFDD survey of advisors: protect near target.

Patent Pending Safe Landing Glide Path®

Unique Investment Structure

Integrates 2 Nobel prize winning discoveries with 3 principles of modern finance

Benefits of TDFs:

• Diversification

• Risk Control

Separation Principle.

Segments for (1) Growth and (2) Safety

The World Market Portfolio

■ Designed to provide growth potential in early years

– Broad diversification

– US stocks and bonds, Foreign stocks and bonds,

Global real estate and commodities, Opportunistic

– Mostly Passive

The Reserve Portfolio: 15 years from target

■ Designed to preserve assets as retirement nears

– Treasury securities to mitigate credit risk

– TIPS to protect against inflation

– Lock box discipline avoids whipsaws

Liability-Driven Investing & Risk of Loss

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

40 39 38 37 36 35 34 33 32 31 30 29 28 27 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

Po

rtfo

lio A

lloca

tio

n

Years to Target Date

Non-US Stocks

US Stocks

3 Alternatives

Non-US Bonds

US Bonds $

TIPS

Safe Landing Glide Path

Risk Zone Fees: 25 – 60 bps, depending on sleeves used

The Difference

Other Ways to Control Risk: (1) Hedge Tail Risk, (2) Market Time

Managing Tail Risk

Insure Fortify

OR

Risk at Target Date: Equity Allocations of Big 3 are

Way Too High. Proof is 2008.

60 55 55

5

Vanguard T.Rowe Fidelity SLGP

Safe Landing

Glide Path®

(un)Safe Harbors

1) Properly structured TDFs are Qualified Default Investment Alternatives (QDIAs) under the Pension Protection Act of 2006. Form over substance. Fiduciaries are obligated to actually vet their TDF selections and to establish objectives that are truly in the best interests of participants, like don’t lose participant savings, especially near the target date. See Investment Policy Statement for the Safe Landing Glide Path. 2) There is safety in numbers. You can’t go wrong with Fidelity, Vanguard or T. Rowe. Or can you? “No misery” is preferred to “misery loves company.” There is no fiduciary upside to risk taking near the target date – only downside.

Proof statements

Worst Draw-downs in 2010 Funds

from 2007 – 2011 (5 Years)

Amer Fds

T Rowe

Fidelity

Vanguard

JP Morgan

Amer Cen

PIMCO

TIPS

SMART

-38

-37

-35

-30

-29

-25

-24

-10

-14

The worst draw-downs for all funds except SMART occurred in the 16-month period 11/07-2/09. Most of the loss

was in the 12 months of 2008.

The SMART 10% draw-down occurred in the 5 months 7/08-11/08.

TIPS 14% draw-down is for the 7 months 4/08-10/08.

SLGP/ CFDD Survey on Unacceptable Drawdowns

Half said 20% Half said 10%

Source: MPI

Annualized Returns for the 5 Years Ending

12/31/2011

-2

-1

0

1

2

3

4

5

2010 2020 2040

SLGP S&P TD Index Fidelity Vanguard T. Rowe

SLGP track record is Brightscope On-Target Index, developed by Ron Surz, for 10/2006-10/2008

And live SMART collective investment funds for 11/2008-forward

2040

Diversification Helped Risk Control Helped

All have similar equity allocation

Fiduciary’s Choice

There is no fiduciary upside to taking risk at the target date. Only downside. Default investments should protect those at or near retirement.

Similarly, there is no fiduciary upside to extending a glide path beyond the target date because:

1. Most participants withdraw their accounts,

AND

2. There is no glide path that can serve into retirement

AND

3. It extends fiduciary liability beyond working life.

September, 2012

This says it all

It was ever thus in asset management: If you want to understand the future, look less at what plan sponsors are interested in buying and look more at what asset managers are interested in selling.