GSAM MenuLogixTM Considerations for DC Menu Design

This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. Agenda

GSAM MenuLogixTM: Considerations for DC Menu Design

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Key Survey Five Consulting Action Steps Findings Ideas

Source: GSAM 2015 Investment Menu Design Survey For illustrative purposes only

FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 1 GSAM’s Study of DC Investment Menu Design

Background

Purpose of Survey

. Learn how retirement specialist advisors and platform specialists approach Survey defined contribution (DC) menu design - including the way a menu is Demographics structured, the number of funds offered, asset class coverage, investment vehicles and share classes used 126 surveys . Establish a framework for menu design . Develop practice tools and resources for advisors to implement 37 actionable ideas interviews

24 Methodology years industry . Partnered with DC consultant (Ann Schleck & Co.) experience

. Facilitated qualitative interviews and an online survey with 163 retirement industry experts (advisors, consultants and recordkeepers) with 24 years $580M of experience on average Average AUA . Conducted in the second half of 2015

For illustrative purposes only

FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 2 Key Survey Findings Notable Survey Highlights

of plans made a menu change 88% 83% 40% last year

of advisors think fund menu of advisors think fund menu design is an important fiduciary design affects participant 72% of advisors added R6 or zero revenue responsibility outcomes share classes 63% streamlined the menu 62% added passive options Top trends advisors expect more of in the next 5 years 3 47% moved to open architecture . Zero Revenue Share/Institutional pricing . Custom target date funds and model portfolios . Heightened target date fund due diligence Most common investment types in 5 401(k) plans

94% Index Funds 5 Top Plan Objectives Advisors Say are Important to Sponsors 91% R6 or Zero Revenue Share Class . Concern about participant outcomes 69% CITs or Separate Accounts . Concern about fiduciary risks . Philosophy on how to plan for plan costs 60% Proprietary Funds . Desire to offer a broad range of fund choices 45% Custom Portfolios . Appetite for simplicity

Source: GSAM 2015 Investment Menu Design Survey For illustrative purposes only

FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 4 Key Takeaway: Sponsors May Drive Better Participant Outcomes with Strategic Menu Design

Industry professionals periodically revisit the plan’s investment menu to determine if it remains appropriate; advisors can use certain events to trigger an investment review: believe reviewing fund menu . Investment performance issues design is an important or very 88% important part of their . A significant shift in participant demographics responsibility . M&A activity or major business changes at the plan sponsor . A sponsor’s desire to align more closely with industry of industry professionals think developments 83% fund menu design impacts participant outcomes

The Most Frequently Mentioned Reasons for Investment Menu Reviews

Most Frequently 2nd Most Frequently 3rd Most Frequently Considered Considered Considered Periodically as part of the relationship plan 57% 16% 11% Fund performance issues 17% 29% 19% Shift in participant demographics 10% 15% 18% Align with industry trends 7% 14% 11% M&A activity or major business change 4% 6% 8% Major market or industry disruption 2% 20% 26%

FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 5 Five Consulting Ideas 5 Ideas, One Theme: Subtle Changes Can Be Significant

Current Practices Potential Changes

1 Drive outcomes with automatic features Design menus that incorporate participant needs

2 Leverage style boxes to cover Complement style boxes with goals asset classes based insights

3 Streamline to remove redundancies Adopt more sophisticated approaches to streamlining to improve choices

4 Manage costs with index funds Use a range of tactics to address costs

5 Prioritize open architecture Consult on the trade-offs between price and choice

Source: Based on findings from GSAM 2015 DC Investment Menu Design Survey. For illustrative purposes only There is no guarantee that these objectives will be met.

FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 7 1. Incorporate Plan Sponsor an Participant Considerations Within an Comprehensive Plan Design Strategy

Begin with the end in mind; understand plan sponsor goals and objectives and synthesize with participant needs to build more impactful investment menus

Sample Sponsor Considerations Sample Participant Considerations . Total Benefit Program . Investment Utilization (e.g., average number of . Industry alignment/benchmarking funds held, trading activity, exposure to equity and fixed income) . Workforce Demographics . Access to professional advice/managed accounts . Participant Outcomes . Access to education and financial wellness – Participation and Savings Rates programs – Income Replacement Ratios . A range of choices to meet a variety of savings – Effectiveness of investment education and investing behaviors and needs – Participant engagement metrics

consider plan sponsor consider workforce 90% concern about participant 95% demographics when constructing outcomes to be important fund menu design

Source: GSAM For illustrative purposes only

FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 8 2. Complement Style Boxes with Goals and Participant Insights

Understand plan sponsor priorities and goals for the plan. Analyze participant demographics and investment behavior. Start with tools like Morningstar style boxes and enhance of advisors say they would menu design with perspective on participant outcomes. Some be likely to use a new examples of factors for consideration are included below. 79% fund menu design tool if available

Target-Date Fund Series

Simplicity: Simplicity:

More Choices Focus on Cost Objectives Based Active/Passive Tiers QDIA

. Morningstar asset class . Morningstar asset class White-label fund of funds White-label fund of funds coverage coverage . Growth . Active Tier – Global Equity, . Capital Preservation – Passive funds . Income Global Fixed Income, . Guaranteed Income – R6 share classes Specialty . Real Return – CIT vehicles . Passive Tier – Global Equity, Core Menu Core . Capital Preservation Global Fixed Income . Capital Preservation . Capital Preservation

Advice/Managed Accounts Advice/Managed Accounts Advice/Managed Accounts Advice/Managed Accounts Guaranteed Income Brokerage Window Brokerage Window

Other Brokerage Window

Source: GSAM For illustrative purposes only

FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 9 3. Adopt More Sophisticated Approaches to Streamlining

Offering an investment menu that is “user friendly” is important. We observed a number of ways advisors are streamlining fund menus to provide better choices for participants.

. Eliminate redundancies in investment strategies and asset classes . Consolidate styles (e.g., value and growth) and market capitalization (e.g., large and 76% 63% small) coverage into single blended funds . Offer fewer more well-diversified funds using custom model portfolios and white- said that simplifying the fund helped plan sponsors simplify labeled fund of funds, for example menu design is important or their menu design in the last – A series of risk-based multi-asset very important to plan sponsors 12 months portfolios – Core Equity and Core Fixed Income fund of funds . Simplify fee structures; replace share classes that pay revenue share with R6 45% 39% share classes and collective investment trusts to add transparency and potentially lower costs use Custom Model Portfolios use Custom Target-date Funds

Source: GSAM For illustrative purposes only

FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 10 4. Use a Range of Tactics to Manage Plan Costs

There are a range of cost management methods fiduciaries may use to manage plan costs that go beyond indexing Examples Include: 78% . Use R6 or zero/zero share classes, CITs, and the lowest expense ratio share classes available of advisors believe sponsor . Use of ETFs within target-date funds or other fund of funds as an inexpensive philosophy on cost is an important implementation vehicle design driver . Developing strategies that build scale can help plans qualify for better investment pricing cost savings to participants, e.g., offering the same strategies across plans 94% Advisor Ranking of Most Expected Trends in the Next Five Years

Trend #1 Trend #2 Trend #3 of advisors believe low cost options are important to sponsors Zero revenue share or institutional pricing 47% 23% 10% More custom target date funds and model portfolios 13% 12% 14% Heightened target date fund due diligence 11% 20% 21% Retirement income solutions enhancements and 95% 11% 17% 18% adoption

More adoption of index funds 7% 17% 14% believe use of R6 and zero Fewer investment options 7% 7% 17% revenue share classes will increase More fund of funds or white labeling 3% 3% 4%

Source: GSAM For illustrative purposes only

FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 11 5. Understand the Trade-Offs Between Pricing and Choice

Request multiple pricing quotes from providers for sponsors to consider

Proprietary fund usage is expected to decline given the regulatory environment coupled with continued focus on fees, transparency and potential conflicts of 94% interest in selecting investments of advisors either require or prefer open architecture Recordkeeping Fully Bundled with Proprietary / Only / No Proprietary Non-proprietary Proprietary 47% Lower Hard Dollar Higher Hard Dollar Fees to Participants Fees to Participants of advisors saw a shift in the last 12 months to open architecture in their clients’ plans Proprietary Fund Usage by Plan Size

Plan Sizes <$5M $5-24M $25-249M 58% Proprietary/Provider Funds 66% 52% 54% Proprietary/Provider QDIA 54% 37% 30% of advisors think use of providers’ QDIA will be less/significantly less Custom Model 23% 20% 9% prevalent over the next 3 to 5 years

Source: GSAM For illustrative purposes only

FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 12 Action Steps GSAM MenuLogixTM

Considerations for DC Menu Design

The GSAM MenuLogixTM program encompasses: proprietary research, thought leadership, and tools specific to 401(k) core investment menu design: structure, funds offered, asset class coverage, investment vehicles and share classes used.

Promotional Flyer Brochure Tip Sheet Group Presentation

For illustrative purposes only

FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 14 Appendix Plan Objectives That Advisors Say Are Important to Sponsors

Plan Objective Very Important Important Neutral Concern about participant outcomes 48% 42% 9% Concern about fiduciary risks 43% 51% 5% Philosophy on how to pay for plan costs 40% 38% 14% Desire to offer a broad range of fund choices 28% 48% 19% Appetite for simplicity 25% 61% 13% Attitudes about active vs. passive 18% 54% 25% Investment sophistication 16% 48% 26% Appetite for innovation 10% 49% 30% Total plan assets under management 9% 38% 31% Need to keep the status quo 1% 8% 40%

Source: Based on findings from GSAM 2015 Investment Menu Design Survey. For illustrative purposes only

FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 16 Menu Design Elements That Sponsors Care About

believe fear of disrupting the participant 45% experience may delay change

Very Very Unimportant Neutral Important Unimportant Important

Low Cost Options 0% 1% 6% 43% 51%

Simplifying the Menu 0% 5% 20% 59% 17%

Retirement Income Solutions 6% 21% 41% 23% 8%

Custom Funds 13% 25% 34% 19% 8%

Keeping the Status Quo 11% 31% 44% 14% 0%

Managed Account Programs 18% 30% 37% 12% 3%

Bolded numbers are the median response.

FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 17 Menu Design Changes Made in the Last Twelve Months

Percentage of Advisors Who Added/Implemented These Changes With One or More Clients

R6 or Zero Revenue Share Classes 72%

Streamlined the Menu 63% 96%

Passive Funds 62% of advisors made menu Bond Funds 52% design changes Moved to Open Architecture 47%

Off-the-shelf Target-Date Funds 38%

Satellite Strategies (e.g., EME, EMD, High Yield) 22%

Custom Target-Date Funds 22%

International Funds 21%

Custom Funds 13%

Socially Responsible Funds 11%

Source: Based on findings from GSAM 2015 Investment Menu Design Survey. For illustrative purposes only

FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 18 A Guide to GSAM Sales, Service and Support for DCIO

National Sales Manager Sales Desk Manager David A. Solomon Chris Womack [email protected] [email protected] 212-902-2409 312-655-6353

Retirement Directors/Retirement Specialists Retirement Consultants Territories Rick Cortellessa – Director 203-414-4251 [email protected] ME, VT, NH, MA, RI, CT, NY, NJ, Zachary Koch 312-655-5327 [email protected] Dan O’Grady – Specialist 201-625-3597 daniel[email protected] DE, MD, PA, VA, DC Lauren Top – Director 312-505-4757 [email protected] TX, OK, AR, LA, MS, AL, TN, NC, Zachary Koch 312-655-5327 [email protected] Kevin Johnston – Specialist 513-885-6510 [email protected] SC, GA, FL Ryan McComas – Director 773-301-7261 [email protected] Jimmy ND, SD, NE, KS, MO, IA, MN, WI, 312-655-5082 [email protected] Joe Hake – Specialist 303-250-1836 [email protected] Passafiume IL, IN, KY, OH, MI, WV Booth Boughan – Director 480-363-6387 [email protected] Kevin Amoo- kevin.amoo-mensah AK, HI, AZ, CA, NV, NM, CO, UT, 312-655-6391 Nick Reed – Specialist 303-489-5667 [email protected] Mensah @gs.com WY, ID, MT, OR, WA

Washington Vermont Alaska Maine Montana North Dakota Minnesota Oregon Wisconsin New Hampshire Idaho NY South Dakota Massachusetts Wyoming Michigan Rhode Island Pennsylvania Connecticut Iowa Nevada Nebraska NYC/NJ-Metro Indiana Ohio Utah Illinois New Jersey Colorado WV Delaware California Kansas Missouri Virginia Kentucky Maryland North Carolina Washington, DC Oklahoma Tennessee (metropolitan area) Arizona New Mexico South Arkansas Carolina

Hawaii MS AL Georgia Texas

Louisiana Florida * As of May 2016

FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 19 Definitions

Investment menu design: how a defined contribution menu is structured, i.e., number of funds offered, asset class coverage, investment vehicles and share classes used.

Streamlining: the process of reducing the number of funds or asset classes, offering blended funds and diversified fund of funds and using investment vehicles/share classes to simplify fee structures.

Proprietary funds/products: funds proprietary to the plan’s provider or recordkeeper

Open architecture: a provider or recordkeeper platform option that allows investment in proprietary and non-proprietary investment funds without restriction.

R6 or zero revenue share classes: share classes that generally do not pay intermediary compensation, i.e., 12b-1 fees, sub-TA fees, etc.

Collective Investment Trust (CIT): non-registered investment vehicles only available to qualified retirement plans.

Morningstar Style Boxes: A proprietary tool to Morningstar that shows a graphical representation of the investment style of stocks and mutual funds and classifies according to market capitalization and growth and value factors. Fixed income funds are classified according to credit quality and sensitivity to interest rate changes.

Investment menu: the selection of funds made available to participants not in the plan’s QDIA who prefer to select across a range of funds to construct their investment portfolios.

FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 20 Risk Consideration

Fixed income investing involves interest rate risk. When interest rates rise, bond prices generally fall.

High-yield, lower-rated securities involve greater price volatility and present greater credit risks than higher-rated fixed income securities.

Emerging markets securities may be less liquid and more volatile and are subject to a number of additional risks, including but not limited to currency fluctuations and political instability.

FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 21 General Disclosures

Ann Schleck & Co. and Goldman Sachs survey was conducted over the second half of 2015. 29 defined contribution specialist advisors and 8 recordkeeping platforms were interviewed. 129 web-based surveys were completed by retirement specialist advisors. Average AUA was $580mm.

This material is provided for educational purposes only and is provided only on the basis that it is not investment advice and will not be considered in connection with any decision respecting any investor or investment manager. This material does not constitute an offer or solicitation to buy or sell securities.

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This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client's account should or would be handled, as appropriate investment strategies depend upon the client's investment objectives.

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FOR FINANCIAL INTERMEDIARIES USE ONLY – NOT FOR USE AND/OR DISTRIBUTION TO THE GENERAL PUBLIC. 22