The Executive Nonqualified “Excess” Plan SM Advisor name, title(s), Firm RVP Name, Title, the Principal Financial Group  Date NONQUALIFIED DEFERRED COMPENSATION (NQDC) Updated November 2015

The Principal The Principal Financial Group ® has worked with thousands of employers to provide design, implementation, financing and internet-based, plan-level administrative services and support for nonqualified executive benefit programs. The Principal Financial Group is the No. 1 Provider of NQDC plans* * Based on total number of NQDC plans, PLANSPONSOR 2015 NQDC Buyer’s Guide

Tax reforms Qualified retirement plans The Challenge 1974ERISA1988TAMRA 401(k)(m) Testing 1976TRA OBRA 1981ERTA1990RRA 1982TEFRA1993 OBRA 93 $235,840 to $150, TRA SBJPA 1986 TRA 86 & OBRA $30,000 to $7, EGTRRA

2016 and future limitations Qualified plan limitations The Challenge 401(k)/403(b) Plan Deferral/“Age 50” Catch-Up: 2016: $18,000/$6,000 Max. Compensation: 2016: $265, : Indexed 401(k) plan average deferral limit 2% Max. Defined Benefit 2016: $210,000 at age : Indexed Max. Contributions Lesser of 100%-$53,000 Deductible IRA (Indexed) contributions Limited for higher adjusted gross income (AGI)

The retirement gap

Replacement ratio analysis* * Hypothetical analysis prepared by the Principal Financial Group, Inc.

Findings in today’s market 97% of plan sponsors likely to continue to offer NQDC 62% provide a company contribution / 61% offer matching contributions 79% package a nonqualified plan with qualified plan 89% of participants say NQDC plans important in reaching retirement goals. 35% plan to increase NQDC contributions Top reasons to offer a NQDC plan –Help key employees save for retirement in excess of qualified plan limits –Provide a competitive benefits package when recruiting –Help retain key employees Source: Principal Financial Group/Boston Research Group: 2012 Trends in Nonqualified Deferred Compensation, March 2013.

Growth in Top Hat Plans Cumulative Plans Adopted Since 1994 source: U.S. Dept. of Labor

Benefits & Issues to Consider “EXCESS” PLAN THE EXECUTIVE NONQUALIFIED “EXCESS” PLAN SM

Benefits for the plan participant Plan participant makes an election to defer compensation on a pre-tax basis. The income is deferred prior to it being earned. Potential earnings accumulate tax deferred. No contribution limitations. The plan participant can defer up to 100% of his/her compensation. No minimum withdrawal at age 70 ½.

No 10% IRS early withdrawal penalty High-quality account information similar to a 401(k) program The ability to design an individualized investment strategy Benefits for the plan participant

Issues to consider for the plan participant Contractual obligation vs. fiduciary liability Assets are owned by the company and are subject to company’s creditors Nonqualified deferrals may reduce wages for qualified plan contributions Election to defer income only once per year in advance of earning income No loan provisions No rollover provisions into an IRA, a qualified plan or a nonqualified plan

The plan can help “solve a problem” for some of the most important key employees of the company Company contributions disallowed due to IRS restrictions in qualified retirement plans can be restored Assets informally financing the plan owned as corporate assets Potential earnings from assets may accumulate tax deferred depending on the plan financing option Benefits for the company

Depending on plan design, the company may recover all costs to run the plan, cost neutral Company has discretion to make matching or incentive profit sharing contributions to recruit, retain or reward Plan is simple: no testing, no required audit, no 5500 reporting Benefits for the company

Issues to consider for the company Deferred vs. current income tax deduction –Accrue future deduction as a deferred tax asset to reflect timing difference Plan-level administrative fees Human resource time to communicate plan

Financing “EXCESS” PLAN THE EXECUTIVE NONQUALIFIED “EXCESS” PLAN SM

Plan financing options An “Excess” plan is an unfunded & unsecured contractual obligation (liability) to pay a future benefit. The company finances this liability in one of three ways: –Unfinanced –Taxable investments –Variable COLI The best approach depends on the company’s: 1.Income tax bracket 2.Long-term cost of money 3.Earnings assumption 4.Realized vs. unrealized distributions 5.Cash flow requirements

Unfinanced approach Plan financing options Advantages Simple Company benefits from ROA greater than growth in participant accounts Provides cash to grow the company Disadvantages Liquidity (increased risk to participant) Company liable for benefit regardless of earnings “Legacy vs. liability” Leaving future management the responsibility for cash flow to pay benefit liability

Financed with taxable investments Plan financing options Advantages Many investment options Direct link of earnings on assets to plan liabilities Disadvantages Highest cash flow to support tax on earnings Transaction accounting and record keeping may be difficult

Financing with Variable Corporate-Owned Life Insurance (COLI) Advantages Earnings accumulate “tax deferred” Tax-free distributions (subject to contract limitations/charges) Tax-free life insurance death proceeds (subject to rules regarding selection of insureds and consent requirements) Disadvantages Policy charges Process of underwriting Education Plan financing options

Nonqualified plan administrative services system “EXCESS” PLAN THE EXECUTIVE NONQUALIFIED “EXCESS” PLAN SM

Concentric system design Plan management system

Sample Plan Participant Website Screenshot

Sample Plan Employer Website Screenshot

Highly compensated employees who are limited in the company’s qualified retirement plan –2.0% average deferral percent test –$18,000 maximum deferral limit in 2016 –$265,000 eligible wage limit in 2016 Qualified plan carve-out Selective contributions to recruit, retain or reward valuable executives Problems to solve Summary

Disclaimer The subject matter in this communication is provided with the understanding that The Principal ® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. Before investing, carefully consider the investment option objectives, risks, charges, and expenses. Contact a financial professional or visit principal.com for a prospectus or, if available, a summary prospectus containing this and other information. Please read it carefully before investing. Insurance products issued by Principal National Life Insurance Co (except in NY) and Principal Life Insurance Co. Plan administrative services offered by Principal Life. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities offered through Principal Securities, Inc., , Member SIPC and/or independent broker/dealers. Principal National, Principal Life, Principal Funds Distributor, Inc. and Principal Securities are members of the Principal Financial Group ®, Des Moines, IA No part of this presentation may be reproduced or used in any form or by any means, electronic or mechanical, including photocopying or recording, or by any information storage and retrieval system, without prior written permission from the Principal Financial Group ®. Copyright ©2015 Principal Financial Services, Inc. BB | 11/2015 | t to

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