DC Plan Investment Menu Best Practices

Date

Copyright 2010. T. Rowe Price. All rights reserved.

2

Investment Menu Review

• Considerations for Investment Menu Design– Regulatory Issues

– Company Culture and Employee Desires

– Industry Trends

• Best Practice Investment Menu Construction

• Investment Menu Assessment

3

Investment Menu Design Considerations

Company Culture

Employee Desires

Best Practices

Industry TrendsRegulatory Issues

4

Regulatory Issues

• ERISA 404(c) Compliance

• Fiduciary Concerns and Responsibilities of Plan Sponsors

• Fee Compression and Disclosure

5

Company Culture and Employee Desires

• Plan Objectives– Is there a DB Plan as well?

– Is the DC plan the sole source of retirement income?

• Corporate Culture – Paternalistic?

– Individualistic?

• Demographics of the Participant Population – Manufacturing or Professional

– Level of Education

• Participant Utilization and Investment Behavior– Participant count and assets invested in each option

– Participant exchange/transfer activity among investments

6

Industry Trends

• Behavioral Finance– Has shown that too many investment options can negatively impact participation

– Participants utilize naive diversification strategies

– The power of inertia

• Number of Options– Industry surveys show a steady reduction in the number of investment options

available in Defined Contribution Plans

• Company Stock– Limiting investment in employer security

• Plan Sponsor Fiduciary Concerns

7

Best Practice Lineup Considerations

1 TARGET DATE OPTIONS

• Serve as the cornerstone of the DC investment menu

• Satisfy 80% of participant populations who prefer to delegate investment decisions to investment professionals

• Meet the QDIA requirements outlined in PPA

2 CORE OPTIONS

3 SELF-DIRECTED BROKERAGE option is also available to participants seeking investments

that may not be appropriate for the core lineup.

• Serve as the cornerstone of the DC investment menu

• Satisfy 80% of participant populations who prefer to delegate investment decisions to investment professionals

• Meet the QDIA requirements outlined in PPA

• Contain a limited range of investment options covering major asset classes

• Enables participants to construct a well-diversifed portfolio while avoiding unnecessary confusion

• Typically composed of approximately 10 investments

The principal value of the Retirement Funds is not guaranteed at any time, including at or after the target date, which is the approximate year an investor plans to retire (assumed to be age 65) and likely stop making new investments in the fund. If an investor plans to retire significantly earlier or later than age 65, the funds may not be an appropriate investment even if the investor is retiring on or near the target date. The funds' allocation among a broad range of underlying T. Rowe Price stock and bond funds will change over time. The funds emphasize potential capital appreciation during the early phases of retirement asset accumulation, balance the need for appreciation with the need for income as retirement approaches, and focus on supporting an income stream over a long-term post-retirement withdrawal horizon. The funds are not designed for a lump sum redemption at the target date and do not guarantee a particular level of income. The funds maintain a substantial allocation to equities both prior to and after the target date, which can result in greater volatility over shorter time horizons.

8

Investment Menu Assessment

• Number of Investment Options – Is your plan above or below the Industry Average?

• Life Style Funds – Do you offer life style or life cycle funds?

• Core Fund Line-up– Primary asset classes and Morningstar style box well covered

– Actively managed and passive options available

– Is there overlap in the core space with multiple funds available in the primary asset classes and style/capitalization categories for US equity funds (confusing to participants)

• Sector/Regional Funds– Sector funds may not be appropriate for the majority of participants

9

Investment Menu Assessment

VALUE BLEND GROWTH

LAR

GE

MED

IUM

SM

ALL

Where do your U.S. equity investments fit?

Lifestyle Funds Income Funds Stability Funds

Company Stock

International Funds

Sector Funds

Do you offer additional investments in these or other asset classes?

10

Suggestions for Possible Improvement

• Eliminate Redundancies in Options Available in Asset Categories– Offer one core fixed income/bond option

– Check for overlap in the equity options based on the style box spaces

– Offer one international option

• Eliminate Sector Funds and Other Specialty Products

• Consider the Addition of Brokerage Window– This allows for the elimination of the redundant funds and sector funds while

minimizing participant complaints

– Provides access to additional options for those more sophisticated investors in your plan while eliminating confusion for those less sophisticated investors

– Decide mutual fund only or mutual fund and individual securities

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Call 1-800-638-7890 to request a prospectus, which includes investment objectives, risks, fees, expenses, and other information that you should consider carefully before investing.

These materials have been prepared by T. Rowe Price Retirement Plan Services, Inc., for informational purposes only. T. Rowe Price Retirement Plan Services, Inc., its affiliates and its associates do not provide legal or tax advice. Any tax-related discussion contained in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties, or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this communication.

T. Rowe Price Investment Services, Inc., distributor. T. Rowe Price mutual funds.