1. © 2010 Northern Trust Corporation northerntrust.com NORTHERN TRUST DEFINED CONTRIBUTION SOLUTIONS THE PATH FORWARD Designing the Ideal Defined Contribution Plan Presenting the Results of Northern Trusts 2010 Defined Contribution Industry Survey

2. 1 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 Total U.S. Pension Assets 1999 vs. 2009 % of U.S. DB Participants in a Frozen Plan Probability that Social Security Trust Fund Exhausted Source: Bureau of Labor Statistics, April 2010.Source: Congressional Budget Office, 2009.Source: Towers Watson, January 2010. There is too much riding on the success of the defined contribution system to risk getting it wrong

3. 2 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 Northern Trust launches The Path Forward thought leadership series to pinpoint DC industry challenges and potential solutions The question put to a group of DC plan sponsors and investment consultants How would they design the ideal DC plan if they were free from all existing regulations, laws, structures, history and standard industry practices? Participants included some of the largest, most well-regarded firms in the United States and several of the most influential DC investment consultants 50 plan sponsors managing over $100B in assets and representing over 970,000 participants Five leading investment consultants also shared their views Conversations focused on perspectives regarding the design of the ideal DC plan, with a particular focus on these key areas Plan design and features Investment options Employee education and advice Administration Fees Interviews were conducted by Greenwich Associates during July and August of 2010

4. 3 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 Note: Two respondents requested anonymity. Participating firms represent 50 of the largest DC plans and several of the most influential investment consultants in the United States Plan Sponsors Investment Consultants

5. 4 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 The ideal DC plan differs in many ways from our current DC construct In general, the plan sponsors and consultants interviewed for the study were in broad agreement about the basic characteristics of the ideal DC plan Simple, automatic and cost efficient DC plan participants Required to participate Able to contribution post-tax dollars without restriction Prevented from taking loans DC Plan sponsors Required to contribute to employees plans Allowed to share decision-making power with participants Held accountable for providing high levels of fee transparency Plan sponsors and consultants had differing views regarding enrollment, contribution levels and investment options Plan sponsors suggest broader investment line-ups Consultants promote greater levels of corporate paternalism regarding participation and investment decision-making

6. 5 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 1. Mandatory Participation for all Employees Employees are automatically enrolled into the plan on their first day of employment with no election to opt out, thereby ensuring immediate savings Optional Participation in DC Plan? Plan Sponsors Optional Participation in DC Plan? Consultants Source: Greenwich Associates Research, 2010.

7. 6 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 2. Default employee contributions of 5-6% of salary Source: Greenwich Associates Research, 2010. Default Employee Salary Contribution for Auto-Enrollment? Plan Sponsors Default Employee Salary Contribution for Auto-Enrollment? Consultants This contribution rate automatically increases on an annual basis until it reaches 11-12% of salary, the contribution level commonly recommended for retirement security

8. 7 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 3. No limit on post-tax employee contributions Though limits on employer matching contributions and government-sponsored tax deferral are acceptable, unlimited post-tax employee contributions encourages higher levels of saving Restriction on Maximum Employee Contribution? Plan Sponsors Restriction on Maximum Employee Contribution? Consultants Source: Greenwich Associates Research, 2010.

9. 8 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 4. Immediate vesting of employer contributions Source: Greenwich Associates Research, 2010. Immediate vesting allows todays more mobile workforce to recognize immediate benefit from plan participation How Long Before Fully Vested? Plan Sponsors How Long Before Fully Vested? Consultants

10. 9 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 Prohibiting loans removes participant temptation from drawing upon balances for non-retirement related expenses, however those due to hardship are the likely exception to this rule Allowed to Take Loans Against Account Balances? Plan Sponsors Allowed to Take Loans Against Account Balances? Consultants Source: Greenwich Associates Research, 2010. 5. Participant loans are not permitted, unless under duress

11. 10 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 Participants are responsible for investments and asset allocations within guidelines established by sponsors, which enables participants to control their money while ensuring adherence to prudent investment practices Who holds the decision-making power? Plan Sponsors Who holds the decision-making power? Consultants Source: Greenwich Associates Research, 2010. 6. Continuation of shared decision-making between plan sponsor and participant

12. 11 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 Ideal Number Investment Options Offered to Employees? Plan Sponsors Ideal Number Investment Options Offered to Employees? Consultants Source: Greenwich Associates Research, 2010. 7. Optimized investment menus Investment line ups are required to include asset allocation funds like target date or other managed options, but can also include more flexible options for more informed or active participants

13. 12 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 8. Broad-based advice for participants Source: Greenwich Associates Research, 2010. Participants have access to advice that not only focuses on investment products, but also long-term financial planning, offered in an environment of reduced concern about potential liability Types of Advice Offered in Ideal DC Plan? Plan Sponsors Types of Advice Offered in Ideal DC Plan? Consultants

14. 13 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 9. High levels of fee transparency Participants receive clear and concise information regarding administration expenses, investment management fees and participant-initiated transaction fees What Fees Need to be Communicated? Plan Sponsors What Fees Need to be Communicated? Consultants Source: Greenwich Associates Research, 2010.

15. 14 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 Unbundling enables utilization of best-of-breed providers Ideal DC Plan Service Structures? Plan Sponsors Ideal DC Plan Service Structures? Consultants Source: Greenwich Associates Research, 2010. 10. Unbundled service structures 39 7 1 1 4 1

16. 15 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 Source: Greenwich Associates Research, 2010. Some steps can be implemented in the short-term with minimal costs to employers or participants Path Forward Action Items: Short-Term 1.Automation Plan sponsors should act immediately to adopt automatic enrollment and auto-escalation features. 2.Simplification of investments Plan sponsors must take steps to make plans simpler and more efficient. This can be achieved mainly by reducing the number of investment options to plan participants. 3.Transparency Plan sponsors should be providing all plan participants with detailed information about administrative expenses, investment management fees and participant-initiated transaction fees. 4.Customization of default options Plan sponsors should set an appropriate default contribution level for employees and work with providers to identify proper default investment options.

17. 16 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 Source: Greenwich Associates Research, 2010. Other alterations – in the medium term – will require plan sponsors to make some hard decisions and accept new costs Path Forward Action Items: Medium-Term 1.Employer match Plan sponsors should set a reasonable employer matching contribution level either based on employee contributions or, ideally, independent of employee contribution and tied to employee salary. 2.Improved advice Plan sponsors should provide participants with robust consultative services in the following areas: product-related advice, specific investment strategy advice, general retirement planning advice and broad-based financial planning. 3.Streamline across geographies Plan sponsors should eliminate unnecessary differences in plan structure across geographic regions.

18. 17 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 Source: Greenwich Associates Research, 2010. The ideal DC structure requires regulators/politicians to face up to current shortcomings and change regulatory structures Path Forward Action Items: Long-Term Reduce liability and fiduciary concerns Address liability and fiduciary concerns that discourage plan sponsors from providing participants with robust advice. Encourage more saving Eliminate employee contribution caps so all participants can prepare for retirement to the full extent they are able. Allow annuities in plans Facilitate the inclusion of annuities within defined contribution plans to provide participants with a reliable stream of income post-retirement to plan through retirement rather than to retirement.

19. 18 The Path Forward: Designing the Ideal Defined Contribution Plan October 2010 Key CharacteristicWhy This Makes Sense 1. Mandatory participation for all employees. Employees are automatically enrolled into the plan on their first day of employment, thereby ensuring immediate savings. 2. Initial default employee contributions of 5-6% of salary. This contribution rate automatically increases on an annual basis until it reaches 11% 12% of salary, the contribution level commonly recommended for retirement security. 3. No limit on post-tax employee contributions. Though limits on employer matching contributions and government-sponsored tax deferral are acceptable, unlimited post-tax employee contributions encourage higher levels of saving. 4. Immediate vesting of employer contributions. Immediate vesting allows todays more mobile workforce to recognize immediate benefit from plan participation. 5. Participant loans are not permitted, unless under duress. Prohibiting loans removes participant temptation from drawing upon balances for non- retirement related expenses. Hardship withdrawals are the exception to this rule. 6. Continuation of shared decision- making between plan sponsor and participants. Participants are responsible for investments and asset allocations within guidelines established by sponsors, which enables participants to control their money while ensuring adherence to prudent investment practices. 7.Optimized investment menus. Investment lineups are required to include asset allocation funds like target date or other managed options, but can also include more flexible options for more informed or active participants. 8. Broad-based advice for participants. Participants have access to advice that not only focuses on investment products, but also long-term financial planning, offered in an environment of reduced concern about potential liability. 9.High levels of fee transparency. Participants receive clear and concise information regarding administration expenses, investment management fees and participant-initiated transaction fees. 10.Unbundled service structures.Unbundling enables utilization of best of breed providers. In review, the ideal DC plan contains 10 key characteristics

20. 19 2010 Program Solutions Conference Important Information NOT A SOLICITATION. No information provided herein shall constitute, or be construed as, an offer to sell or a solicitation of an offer to acquire any security, investment product or service, nor shall any such security, product or service be offered or sold in any jurisdiction where such offer or solicitation is prohibited by law or regulation. This material is provided for informational purposes only and does not constitute a recommendation of any investment strategy or product described herein. Opinions expressed are those of the presenter(s) and subject to change without notice.