deferred compensation plan overview Building an Investment Strategy Building an investment strategy that meets your risk Understand Your tolerance and investment objectives is critical to Investment Options successfully preparing for retirement. The Deferred Compensation Plan includes There are three key steps to building an investment investment options that fall within three broad asset strategy: classes: Understand your investment options. Cash equivalents (stable value and money market funds), Determine the investment mix (asset allocation) that will best help you achieve Bond funds, and your goals. Stock funds. Select an investment path to fulfi ll your asset These asset classes have different risk and return allocation objective. characteristics, as shown in the chart below. Risk and Return Characteristics of the Three Main Asset Classes Higher Potential Risk Higher Potential Return Descriptions of these asset classes are provided on page 25. Stock Funds Bond Funds RETURN Cash Equivalents Lower Potential Risk RISK Lower Potential Return 24 deferred compensation plan overview ASSET CLASSES AVAILABLE UNDER THE WRS DEFERRED COMPENSATION PLAN CASH EQUIVALENTS: MONEY MARKET FUND STOCK (EQUITY) FUNDS: LARGE-CAP, AND STABLE VALUE FUND INTERNATIONAL/GLOBAL, MID-CAP, AND SMALL-CAP6 Cash equivalents typically invest with the objective of Large-Cap Stock Funds providing stable income with very little capital risk. Large-capitalization funds generally invest in the Money market funds invest in commercial paper, stock of companies with market values of greater notes, and other instruments with short durations. than $10 billion. Stock investors receive dividends Stable value funds may invest in a variety of if they are paid and share in the gain or loss if the investment contracts issued by major fi nancial price of the stock goes up or down. institutions and typically have longer durations than International Stock Funds/Global Stock Funds investments in money market funds. International stock funds generally invest in the stock BOND (FIXED INCOME) FUNDS of companies located outside the United States. Bond funds typically invest with the objective of Global stock funds generally invest in the stock of providing stable income with lower capital risk. companies both inside and outside the United States. Bond funds can consist of debt obligations of the Mid-Cap Stock Funds federal government, agencies, or corporations, pools of mortgages, and various other debt-related Mid-capitalization funds generally invest in the instruments. stock of companies with market values in the $2 billion to $10 billion range. REAL RETURN FUNDS A multi-asset class strategy that is designed to Small-Cap Stock Funds protect investors against rising infl ation. It may Small-capitalization funds generally invest in invest in Treasury Infl ation Protection Securities companies with a market value below $2 billion. (TIPS), fi xed income, commodities, stocks, real estate investment trusts and cash. BALANCED FUNDS Balanced funds invest in both stocks and bonds. You can obtain more detailed information about the available investments by reviewing Investment Options At a Glance, the fund fact sheets, and/or the fund prospectus. In addition, WRS regularly holds seminars that cover a variety of pre-retirement planning topics, including investment information. 6 Source: Lipper, a Reuters company. Determine the Asset allocation rather than by specifi c fund selections or Allocation That Will “market timing” (trying to time the purchase or sale Best Help You Achieve of investments on the basis of market conditions).7 Your Goals The amount of risk and expected return in your 457 How you allocate your money among the asset Plan account are determined by the percentage classes in the 457 Plan is one of the most important of your account you invest in each broad asset investment decisions you will make. This is called category. For example, if you invest all of your “asset allocation.” Studies show more than 90% of 7 Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower, a long-term investor’s returns are driven by asset “Determinants of Portfolio Performance II: An Update,” Financial Analysts Journal, May/June 1991. 25 deferred compensation plan overview account in bond funds, your account can be The “pre-mixed” path allows you to be less involved described as conservative, with low risk and low in the details of managing your retirement assets potential return. because a professional investment manager is making most of your investment decisions for By diversifying your 457 Plan account among the you. Pre-mixed funds contain more than one asset three main asset classes — as opposed to investing class — meaning they are a pre-mix of stock, your account in only one asset class — you can take bond and/or cash equivalent funds. Investing in a advantage of the fact that different asset classes pre-mixed fund can be a convenient way to achieve do not always react in the same way to market diversification. A professional investment manager conditions. When one asset class is doing poorly, selects a variety of funds from different asset it is possible a different asset class may be doing classes and regularly “rebalances” your portfolio, well. Combining asset classes can be a good way to making all asset allocation and fund decisions for manage the risk of your total portfolio. you. The pre-mixed funds offered in the WRS 457 Select An Investment Plan are known as “target date portfolios”. Path to Fulfill Your Asset Target date portfolios are designed to provide Allocation Objective you with a comprehensive investment solution in Under the Deferred Compensation Plan, there are one fund with an investment mix that will change two ways to fulfi ll your asset allocation objective: throughout each stage of your life. The year in the name of the target date portfolio represents the You can invest in a well-diversifi ed “pre-mixed” approximate year when you plan to retire. Each portfolio, or target date portfolio is broadly diversified and You can control the allocation yourself by designed for the time horizon indicated by the selecting from the “mix-your-own” fund choices. year in the fund’s name. You select a target date portfolio based on the year you expect to retire, THE PRE-MIXED PATH The Deferred Compensation Plan Pre-Mixed Fund Options This relative risk/return meter Relative Risk/Return Meter offers one way to gauge the risk and return potential of the pre- Target Date Date Tar mixed fund options in the Deferred get get ar 2030 D T ate 025 20 Compensation Plan. te 2 35 T a a D rg t e e t rg 0 2 D a 2 0 a T 0 4 t 2 0 e e T t a a r D g t 5 2 e t e 1 0 g 0 4 D r 2 5 a a t T e T e a t t r n a g e 2 D e 0 m t t 5 e D e r 0 g i a t r t e e a T R Lower Potential Risk/Return Higher Potential Risk/Return This relative risk/return meter is illustrative only. It is not comparable to the risk/return meter for the mix-your-own funds or any other risk/return meter. 26 deferred compensation plan overview and it will gradually and automatically become more represent a range of asset classes and investment conservative as you move toward your retirement management styles. You can obtain prospectus year. As time passes, the managers of the target information for these funds on the Web site, and date portfolios gradually shift the investment performance information can be found in the back mix from a greater concentration of higher-risk pocket of this guide. investments (namely stock funds) to a greater The risk tolerance quiz on page 22 is designed to concentration of lower-risk investments (bond funds help you determine the general asset allocation that and money market instruments). is right for you on the basis of your risk tolerance You can obtain information about the target date and investment horizon. portfolios offered in the Plan on the Web site, and The sample portfolios in the following pages show performance information can be found in the back how the mix-your-own funds can be combined to pocket of this guide. create a diversified portfolio. As you review them, you may want to have the results of your risk THE MIX-YOUR-OWN PATH tolerance quiz at hand. The “mix-your-own” approach is appropriate if If you do not want to create your own portfolio, you you want control: You review and select your may want to consider the pre-mixed path. investments, and manage your account on an ongoing basis. The 457 Plan offers you the opportunity to create a custom asset allocation from a menu of available fund options. The funds The Deferred Compensation Plan Mix-Your-Own Approach This relative risk/return meter Relative Risk/Return Meter offers one way to gauge the risk and return potential of the mix- Larg your-own fund options in the 457 e Co Asset . I Plan. eal Stock nte R rn a d S tio n to n Bo ck a l M e C i l o d - b . S a e S t lu t i o z S a e V c k S m y t S a e e t o l n k l r c o C k a o M M . Lower Potential Risk/Return Higher Potential Risk/Return This relative risk/return meter is illustrative only. It is not comparable to the risk/return meter for the pre-mixed funds or any other risk/return meter.