Benchmarking Your DC Plan - Bridgebay Financial, Inc. AFP Conference Benchmarking Your Defined Contribution Plan Presented by Linda Ruiz-Zaiko President Bridgebay Financial, Inc. Brad

2007 AFP Conference

Benchmarking Your Defined Contribution Plan

Presented by

Linda Ruiz-ZaikoPresidentBridgebay Financial, Inc.www.bridgebay.com

Brad Vollmer, CFAAssistant TreasurerSun Microsystems, Inc.www.sun.com

Sue WuthrichDirector, Global BenefitsGoogle Inc.www.google.com

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2007 AFP Conference

Benchmarking Your Defined Contribution Plan Costs

Linda Ruiz-ZaikoPresident

Bridgebay Financial, [email protected]

www.bridgebay.com

3

Bridgebay Financial, Inc.

Launched in 1987, Bridgebay Financial, Inc. has been redefining the standard of excellence in institutional investment strategies for the past 20 years. Bridgebay's client list includes some of the most prestigious Fortune 500 and NASDAQ companies. Bridgebay Financial, Inc. is a registered investment advisor under the Investment Advisor Act of 1940.

Each of our consultants has over 20 years of Wall Street experience advising institutional investors, corporations, foundations and endowments. Our talented dedicated team of professionals have the practical experience at major global institutions in addition to holding MBAs and are CFA charter holders. These credentials empower us to create pragmatic solutions to a diverse range of consulting engagements.

We also advise defined benefit plans. In addition, we have been retained to provide the following consulting services for multi-employer 401(a), 457, 457(b) and 457(f) plans: initial assessment and analysis of plans, benchmark current plan providers, fee analysis, fund lineup, pre-screen and conduct a customized RFP provider search to enhance services, fee and contract negotiation, pricing, and selection of a diversified fund array.

© 2007 Bridgebay Financial, Inc.4

Factors Influence Plan Costs

Plan CostsPlan Costs

RegulatoryUpdates

Compliance

RegulatoryUpdates

ComplianceInvestmentStructure

InvestmentStructure

EducationCommunication

EducationCommunication

Recordkeeping/ AdministrationRecordkeeping/ Administration


Fee Transparency

Recent revenue sharing lawsuits name plan sponsors and providers• Fiduciary duty to manage plan costs

Unreasonable expenses and hidden fees• Company stock• ERISA 404( c)

Failed to adequately discloseAllege no Safe Harbor protection

GAO Study on Plan ExpensesNew IRS 5500 Fee DisclosuresPotential conflicts of interest for Plan Sponsor• Revenue sharing can shift costs from sponsor to

participants• ERISA Section 404(a)(1): “Exclusive Benefit Rule”


Types of Fees

Billed expenses• Fee is itemized and charged for specific services

Participant-based• Fees charged per participant• Asset-based fees - % plan assets• Expense ratios, netted against participant accounts

Direct expenses Indirect or embedded expenses


Revenue Sharing

The key players• Investment management• Recordkeeping• Third party administration• Trustee Services• Legal counsel• Education and communications• Investment consultant• Financial advisor

Unbundled providersBundled providers


Typical Revenue Sharing

Plan Sponsor pays expensesPlan Sponsor

pays expenses

Participants payexpenses

Participants payexpenses

Participants pay investment expenses,

net returns

Participants pay investment expenses,

net returnsRecordkeeper/Administrator

Recordkeeper/Administrator

Investment fund revenue share pays expenses*

Investment fund revenue share pays expenses*

*When revenue share exceeds plan recordkeeping/administrative fees, excess revenue share can be applied to plan expenses or rebated to participants.

Direct Expenses

Indirect Expenses


Revenue Sharing Disclosures

Revenue share is derived from:• 12(b)-1 fees• Investment management fees• Administrative services charges• Multiple share classes• Sub-transfer agent fees• Finder’s fees• Overrides, volume, asset incentives• Asset charges or wrap fees• Group annuity contract charges

Disclosure of revenue share $ amounts as % of assets• Use of outside funds• Proprietary funds• Expected future revenue share payments


Benchmarking Categories

Plan Features• Employer match• Participation loans• Contributions • Asset allocation

Provider Organization• Commitment to business base• Organization structure• Staff experience, turnover• Resources



Trustee• Functions• Financial strength• Audited internal controls

Technology• Internet, IVR, live representatives• Multi-lingual• Compliance• Data back-up and disaster recovery


Benchmark Administration

Administration• Flexible plan designs • Systems flexibility• Plan level reporting• Participant reporting• Transactions timeframes• Types of processing• Troubleshooting procedures• Personnel experience, turnover• Performance assurances

Reporting and Compliance• IRS and DOL updates• Discrimination testing • Government reporting • Annual summary reports• SPDs


Benchmarking Investments

Investments• Asset allocation • Variety of fund families• ERISA Section 404 (c)• Performance• Lifestyle funds• Flexibility to change• Outside funds window

Indexed • Actively managed• Company stock• Brokerage accounts• Institutional or retail funds• Share classes• Investment fees



Education and Communications• Enrollment, re-enrollment• Multiple media• Intranet/Internet• Seminars, investment education• Financial planning• Asset allocation

Fee analysis• Direct fees• Indirect fees• Revenue-sharing disclosure• Form 5500 fee disclosures• Cost comparisons


Administration Recordkeeping Fees

Current Plan Plan Sponsor

Eligible Employees 11,001

Plan Participants 9,903

DescriptionCurrent

Provider Industry Average Provider A Provider B Provider C

Annual Base Fee

Billed Expenses

Indirect Fees

Per Eligible Fee

Per Participant Fee

Provider Administration/Recordkeeping Fees


Average Plan Expense Ratios

Description Current Provider Average Provider A Provider B Provider C

Average Equity Expense Ratio 0.00% 0.00% 0.00% 0.00% 0.00%

Average Bond Expense Ratio 0.00% 0.00% 0.00% 0.00% 0.00%

Average Money Market / Stable Value Expense Ratio 0.00% 0.00% 0.00% 0.00% 0.00%

Average Additional Asset Management Rate 0.00% 0.00% 0.00% 0.00% 0.00%

Average Expense Ratios


Compensation for Service Provider

Amount % Amount % Amount % Amount % Amount %

Investment Manager

Trustee/Custodian

Advisor

Recordkeeper

Administrator

Legal - Plan Amendments

Accounting

Participant Communications

Total Annual Compensation

Provider B Provider C

Compensation for Service Provider - Revenue Share

DescriptionCurrent Provider Industry Standard Provider A



Plan FeaturesProvider OrganizationTrusteeTechnologyAdministrationReporting / ComplianceInvestmentsEducationCommunicationFee analysis


Profit sharing/401(k) Council of America 2006 401(k) Plan Survey

2006 401(k) Plan Survey1,000 plans $600 billion in assets

41.3% of plans - automatic enrollment18.4% of plans - Roth 401(k)

11.6% eligible participants use optionCompany contributions

Average 4.7% of payrollHighest - Profit sharing plans average 9.2% of payLowest - 401(k) plans average 3% of pay

Investment options2006 - Average 19 options2004 – Average 18 options2003 – Average 17 options

Asset Allocation70% Equities – 30.6% active domestic equity mutual funds


Employee Benefit Research InstituteInvestment Company Institute

Survey 1999-200653,931 401(k) plans 20 million 401(k) plan participants$1.2 trillion in assets

Account balancesAverage account grew 8.7% per yearAverage grew + 79% to $121,202 Median grew +168% to $66,650

Employer stock holdings dropped13% 1999 to 11% 2006


Recommendations

Retain independent, third party to benchmark costsVerify

Fees, expenses, revenue sharing Institutional share classes from providers

Use institutional share class no retail fundsUse expense reimbursement accountsRequire providers to disclose all compensationRenegotiate asset-based fees as plan growsBenchmark services and fees• Develop a benchmarking peer group• Renegotiate for additional services


Additional Resources

• “Uncovering and Understanding Hidden Fees”http://www.401khelpcenter.com/pdf/mdh_understanding_fees_v2.pdf

• Plan Fees Disclosure Form www.dol.gov/ebsa/pdf/402krefm.pdf

• “Understanding Plan Fees and Expenses”www.dol.gov/ebsa/pdf/undrstndgrtrment.pdf

• GAO Study on Fees• “A Look at 401k Plan Fees for Employees”

www.dol.gov/ebsa/publication/401k_employee.html


Additional Resources

Defined Contribution Fee Disclosure Best Practices (April 2006• (www.afponline.org/pub/pdf/Fee_Disclosure_Primer_Final.pdf)

Understanding Retirement Plan Fees And Expenses • (www.dol.gov/ebsa/publications/undrstndgrtrmnt.html)

Allocation of Expenses in a Defined Contribution Plan (FAB 2003-3) • (www.dol.gov/ebsa/regs/fab_2003-3.html)

“Report of the Working Group on Fee and Related Disclosures• (www.dol.gov/ebsa/pdf/ac_111704_report.pdf)

Profit Sharing and 401(k) Plan Cost Disclosure Worksheet• (http://www.psca.org/pdfs/feeworksheet.pdf)

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Linda Ruiz-ZaikoPresident

Bridgebay Financial, Inc.Retirement Plan Group

[email protected]

1

Brad Vollmer, CFAAssistant TreasurerSun Microsystems, Inc.

AFP October 2007

1

2

Sun Microsystems' Plan• Over $4 billion in Assets

• More than 30,000 participants

• Average account balance >$120,000

• Unbundled Plan

• 15 Investment vehicles> Stable Value (1)> Target maturity (1 fund family with 11 funds)> Fixed income (1)> Balanced (1)> Domestic equity (10)> International (1)> No company stock

3

401K Trends

Past Current Future

Enrollment Individual's choice Enrollment Auto Enrolled Enrollment Auto Enrolled

Record Keeping Bundled Plans Record Keeping Unbundled Record Keeping Unbundled

Tools Tools Tools

Investment Vehicles Investment Vehicles Investment Vehicles Separate accounts

Unsophisticated Lifestyle Unsophisticated Target Maturity Unsophisticated

Moderate Funds Moderate Funds Moderate Plan Funds Sophisticated NA Sophisticated Brokerage Window Sophisticated

Investment Menus None existent Investment Menus Tiering Investment Menus Simplified Tiering

None or limited to Record Keeper

Record Keeper, Financial Engines, Morningstar

Financial Engines, Morningstar

Mutual Funds (limited choice)

Mutual Funds/comingled accounts (too many choices – confusing)

Target Maturity – Customized

Brokerage Window/Alternative Assets

Fee T

ransp

arenc

y

Institutional/penison-like approach needed

4

Future of 401k Plans – 3 Major Trends

1) Auto enrollment

2) Tiering of Investment Choices

3) DB ing of Defined Contribution Plans

5

Auto Enrollment - Default Funds• Increasingly more common

• Requires the following:> No financial penalties or restrictions on the ability of a participant or

beneficiary to transfer the investment from the QDIA to any other investment alternative available

> Funds must be either managed by an investment manager or an investment company registered under the Investment Company Act of 1940

> Funds must be diversified so as to minimize risk of large loss> Participant contributions may not be directly invested in employer

securities> Eligible investments include: life cycle or target date retirement funds,

balanced funds or professionally managed accounts

Auto enrollment ensures that everyone participates in the retirement planning process

6

Tiering – Simplifying the Decision

Reluctant Investor Moderate Investor Passionate Investor

Tier 1 Tier 2 Tier 3

Fund Choices Fund Choices Fund Choices Brokerage Window

Alternative Assets

Fund Choices

Target Maturity / Lifecycle Funds

Passive Separate Accounts (Indexes)

(Built using customized Separate

Active Separate Accounts (Core Funds)

Investment Advice/Tools

Tiering helps frame the choices available to each participant in an easily understood method

7

Db-ing of Defined Contribution Plans• Driver – Economics

> Costs – Separate Accounts can be 10 to 30 bps less than mutual funds> Benefits to Participant – Between $40k and $120k per participant (over 25

years assuming base account return of 10%., 15.5k contribution 7.2k match)

Base 10 BPS 30 BPS

0

250,000

500,000

750,000

1,000,000

1,250,000

1,500,000

1,750,000

2,000,000

2,250,000

2,500,000

2,750,000

3,000,000

3,250,000

3,500,000

Return

Acc

oun

t V

alu

e

Base 10 BPS 30 BPS

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

130,000

140,000

150,000

Return

Invr

em

enta

l Val

ue

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Db-ing of Defined Contribution Plans• Driver – Ability to offer Customized Funds

> Construction of Fund – With separate accounts, there is an ability to construct a fund using multiple managers. In a sector where capacity is an issue, this is a potential solution

> Customized Glide Paths – ability to construct customized target maturity funds

Manager A Manager B Manager C Manager D

Tim

e = 0

Tim

e =

5

Tim

e = 10

Tim

e =

15

Tim

e =

20

Tim

e = 25

Tim

e = 30

Tim

e = 35

0

10

20

30

40

50

60

70

80

90

100

Time

Ass

et

Allo

catio

n

A Treasury department is the right place to deal with customized strategies

9

What does this mean for Treasury

1) Treasury/investment expertise required

2) Opportunity to add value

3) Job enrichment

10

Brad Vollmer

Global Treasury

10

Sue WuthrichDirector, Global Benefits

Evolution of Google’s401(k) Plan

Google Proprietary 2

1998 2000 2003 20052004 2006

?

Google evolution: more than just search

2007200220011999


• 10,000+ Googlers

• 40+ offices

• 20+ countries


More than half of our searches come from

outside the United States

5

401(k) has always been an important component of the benefits offering

Since company inception we had a plan with a match

(100% up to $2,200)

Participants immediately eligible

Began with Fidelity’s fully bundled plan

Participation = 50 to 60%

17 investment options, never had company stock in the plan


Benchmarking the Risk Spectrum

Small Cap Equity

Money Market

Lifecycle Funds

Lower Risk

Higher Return

LowerReturn

Higher Risk

Stable Value

Short Duration Bonds

High Yield Bonds

Real Estate

Convertibles/Preferred

Global Equity

International Large Cap Equity

Expected Risk(Standard Deviation)

Expe

cted

Rat

e of

Ret

urn

Large Cap Equity

Mid Cap Equity

Intermediate Duration BondsLong Duration Bonds

International Multi Cap Equity

7

Benchmarking enabled significant changes to our plan

New bundled provider search, enhanced features of the planIndependent investment consultant

Monitoring and plan enhancementsAutomatic enrollmentIntroduced balanced fund as default fundIntroduced on-line financial planning services

Provides individual advice, financial planning, asset allocationEliminated Lifecycle FundsAdded “mix your own” funds using on-line service

Enhanced fund optionsIntroduced index funds

Lower expensesEfficient asset allocation

Selected top-rated actively managed funds for each asset class404(c) intent

8

Auto Enrollment, Default Fund & Advice

Rationale for automatic enrollmentExplosive growth in new hiresEmployee must opt outMany of our new hires are unfamiliar with 401(k) plansWanted to ensure higher enrollment and participation levels

Default FundMoney market was previous defaultReplaced with top-rated balanced fund as default

Conservative and moderate options that still provide growthOn-Line Financial Advice

Employees are highly educated and engagedEngineers that are technologically savvyOnline quantitative system ideal for our populationEnables personal asset allocation

9

Results of Auto Enrollment, Default Fund & Advice

Automatic enrollmentSuccessful – few opt outEmployee satisfaction is highParticipation level soared to ~88%

Default Balanced FundOnce selected limited transfers out of fund

Financial Engines – OnLine AdviceNot as widely used as anticipatedLimited usage and too complex to understandExperienced investors use online services

10

June 2006 added additional features to the plan

Introduced Roth 401(k)Continue to match through the Traditional 401(k) PlanParticipation continues to grow

Implemented After Tax 401(k) contributions

Other plan sponsors benchmark against our plan features

11

What our plan looks like today

Over 9,000 participants with more than $375 million plan assetsIn January 2007, we increased our matching contribution, greater of: 100% up to $2,500 or 50% up to IRS maximum

Participation level is ~96%

16 investment options – better asset allocationDefault fund – balanced fundMoney market fund6 index funds7 actively managed funds1 socially responsible fund


Current Risk Spectrum

Money Market

Lower Risk

Higher Return

LowerReturn

Higher Risk

Stable Value

Short Duration Bonds

High Yield Bonds

REITConvertibles/Preferred

Global EquityInternational Large Cap Equity

Expected Risk(Standard Deviation)

Expe

cted

Rat

e of

Ret

urn

Large Cap Equity

Mid Cap Equity

Intermediate Duration Bonds Long Duration Bonds

Small Cap Equity

Conservative Balanced Moderate Balanced

13

Our plan has seen significant growth over the years

1,4742,556

4,336

7,720 8,180

December December December December March2003 2004 2005 2006 2007

0

2,000

4,000

6,000

8,000

10,000

Number of Participants

$18$45

$97

$190

$274

December December December December March2003 2004 2005 2006 2007

$0

$50

$100

$150

$200

$250

$300

$350Millions

Total Plan Assets

14

We take plan governance seriously

Investment Policy StatementReviewed and updated annuallyWatch list criteria for all fundsSpecific process to watch, retain, and replace fundsIndependent investment consultant as fiduciary

Investment CommitteeQuarterly meetingsHighly involved individualsMeetings have specific agenda set in advance Fund and plan due diligence by investment consultantReview feedback from participants

15

What are we considering for the future?

Continue plan communicationTargeted communication to educate participants on default fund and default contributionsMaximizing match

Implementation of automatic increase in contributions

New investment alternativesFocus on 3 categories: Do nothing investor, Average investor, Advanced investorLifecycle fundsOpen brokerage window

Investigating “live” investment advice

Google Confidential and Proprietary

Thank You!Q&A

Documents

Benchmarking Your DC Plan - Bridgebay Financial, Inc. AFP Conference Benchmarking Your Defined Contribution Plan Presented by Linda Ruiz-Zaiko President Bridgebay Financial, Inc. Brad