State Universities Retirement System of Illinois

Transcription

1 State Universities Retirement System of Illinois Serving Illinois Community Colleges and Universities 1901 Fox Drive Champaign, IL (217) (217) (FAX) To: Investment Committee From: Lou Ann Fillingham, CPA Date: April 18, 2013 Re: Fidelity Investments Self-Managed Plan (SMP) Annual Review Investment Department Overview Fidelity Investments became an approved provider for the Self-Managed Plan (SMP) as a replacement for ICMA-RC in April 2003 and ING in December More than 12,200 of the 17,125 SMP members held assets in investment options available through Fidelity as of December 31, Fidelity manages approximately $612 million, or 57.4% of the SMP assets, in 20 investment options. Investments in each account held with Fidelity as of December 31, 2012, are as shown, below. Investment Options Available Through Fidelity Inception Date in the SMP Value as of December 31, 2012 % of Assets Fidelity Managed Income Portfolio April 2003 $21,923, % Spartan U.S. Bond Index Institutional April ,515, % PIMCO Total Return Institutional April ,964, % Fidelity Four In One Index April ,235, % Fidelity Puritan Class K * April ,684, % Ariel Fund April ,658, % American Beacon Large Cap Value Institutional February ,613, % Buffalo Small Cap February ,957, % Hartford Capital Appreciation Y February ,137, % Fidelity Contrafund Class K April ,130, % Fidelity Growth Company Class K April ,553, % Fidelity Low Priced Stock Class K April ,360, % Spartan Extended Market Index Advantage April ,921, % Spartan Total Market Index Institutional April ,488, % Spartan 500 Index Institutional April ,506, % Fidelity Diversified International Class K April ,304, % Spartan International Index Institutional April ,294, % Fidelity Worldwide December ,029, % Fidelity Real Estate Investment February ,487, % Fidelity Freedom K 2000 Fund ** December , % Fidelity Freedom K 2005 Fund ** December , % Fidelity Freedom K 2010 Fund ** December ,564, % Fidelity Freedom K 2015 Fund ** December ,370, %

2 Inception Date in the SMP Value as of December 31, 2011 % of Assets Investment Options Available Through Fidelity (continued) Fidelity Freedom K 2020 Fund ** December ,180, % Fidelity Freedom K 2025 Fund ** December ,598, % Fidelity Freedom K 2030 Fund ** December ,420, % Fidelity Freedom K 2035 Fund ** December ,470, % Fidelity Freedom K 2040 Fund ** December ,567, % Fidelity Freedom K 2045Fund ** July ,780, % Fidelity Freedom K 2050 Fund ** July ,236, % Fidelity Freedom K 2055 Fund ** November , % Fidelity Freedom K Income Fund ** December ,143, % Fidelity Total $611,924, % * SMP default fund prior to July 2006 ** SMP default fund series since July 2006 Organizational Review Mr. Edward C. Johnson II founded the Fidelity Management and Research Company (FMR Co.) in 1946 as an investment adviser to the Fidelity Fund, an investment vehicle begun in Since that time, Fidelity Investments has become one of the largest mutual fund companies in the world and is the leading provider of workplace savings plans in the United States. As of December 31, 2012, assets under administration totaled $3.8 trillion, of which $1.7 trillion was in managed assets. Headquartered in Boston, Massachusetts, Fidelity employs more than 39,700 individuals globally and operates over 180 Investor Centers nationwide. Fidelity remains a privately-owned entity that is wholly-owned by the Johnson family and the firm s employees. Of the firm s voting common stock, employees own 51%. Mr. Edward C. Johnson 3d is chairman of the board and chief executive officer of the company. Clients/Assets Fidelity Workplace Investing provided defined contribution services to 13,907 clients representing 16,830 plans and more than $1 trillion in assets under management as of December 31, In comparison, Fidelity provided services to 14,299 clients representing 17,123 plans and more than $906 billion in assets under management at the end of calendar year Overall, Fidelity managed assets of more than $3.8 trillion as of December 31, 2012, an increase from $3.5 trillion from the previous year end. Clients lost due to reasons other than merger and acquisition activity were the result of business reciprocity, advice, consolidation of vendors, other outside relations, fund investments, or total benefits outsourcing. Less than one percent of clients left Fidelity due to service issues. Fidelity Investments Tax-Exempt Services Company (FITSCo), organized in 1991, is responsible for the administration of SURS Self-Managed Plan. SURS Client Service Team SURS client service team remains unchanged from the prior year and is comprised of the following individuals:

3 Senior Managing Director Lou Gadoury Boston, Massachusetts Client Service Manager Dana Chapman Salt Lake City, Utah Senior Communications Consultant Melissa Cabrera Smithfield, Rhode Island SURS continues to receive excellent service from Fidelity s client relationship team. Mr. Gadoury has served as SURS relationship manager since January Ms. Chapman has been a member of the client service team for approximately eight years and Ms. Cabrera has been a member for two years. SURS staff performed an on-site due diligence visit at Fidelity s Boston, Massachusetts, offices in March 2013 with SURS client service team, an investment consultant, and equity and fixed income investment professionals. Cost SURS incurs no administrative fee for its members who invest in Fidelity funds. Each SMP participant is assessed a fee for every account in which the participant is invested. The fee, known as an expense ratio, is a combination of investment and administrative costs. Five investment options offered through Fidelity were transferred to lower-cost share classes in June of The mutual fund fees assessed by Fidelity fluctuated slightly in calendar year 2012 in all except six funds which had no change in fee. The funds available to SMP participants from Fidelity offer options at a cost below the industry average, as indicated in the table on the following page. The Fidelity expense ratios are compared to the median fees of the lowest fee institutional share class of Callan Associates mutual fund peer groups in the following table. The weighted average expense ratio of each fund category is based on the total asset allocation of SMP assets invested in Fidelity options. The 2012 weighted average median fee for Callan mutual funds was 0.65%, as compared to the 2011 weighted average median fee of 0.68% for Callan mutual funds. The 2012 weighted average expense ratio for SMP options offered by Fidelity was 0.52%, a decrease from 0.56% for As indicated by the table on the next page, Fidelity expense ratios are below the average in seven of the eight actively managed categories and in both of the passively managed categories. Only the world stock category exceeded the median expense ratio. When comparing fees, Fidelity provides SURS participants investment option choices at a lower cost than similar mutual funds. As a result, SURS SMP participants are afforded access to investment options at a competitive cost. As discussed in the Pricing section below, two investment options, the Managed Income Portfolio and the Ariel Fund, will transfer to lower-cost share classes in May 2013, providing savings to participants by lowering the expense ratio of each fund.

4 Investment Cost Comparison with 2012 Market Averages Mutual SURS Fee Type of Fund Fund (1) Fidelity Differences Annuity * Money Market 0.20 N/A N/A Active Bond Passive Bond TIPS 0.40 N/A N/A Balanced (Puritan, Four-in-One) Lifecycle U.S. Stock ** U.S. Stock Large Growth U.S. Stock Index U.S. Stock Growth Index 0.20 N/A N/A International Stock World Stock (Global) Real Estate Weighted Average Expense Ratio (1) Callan Associates expense data was used to calculate mutual fund median fees. Few retail share classes were included. * Annuity products do not have a stated expense ratio. ** Proprietary and non-proprietary funds combined. Annuity Provider Since December 2005, participants invested in SMP options have had the option to receive competitively-priced fixed monthly annuities from the Principal Financial Group (Principal). The annuity rates are in line with pricing available through TIAA-CREF, the other SMP annuity provider. Fidelity and Principal have no direct relationship; assets converted from SMP participant accounts to Principal for purposes of purchasing an annuity are considered individually directed distributions. SMP members and SURS staff have received excellent service from Principal. Initiatives/Issues/Concerns Investment Options Consideration SURS staff continually monitors the SMP investment offerings lineup to assure the menu of approved options complies with the SMP Investment Policy objectives. With assistance from professionals at Fidelity and TIAA-CREF, SURS staff researches potential funds based on performance, risk, cost, and asset class diversification. Fidelity routinely completes an investment options risk spectrum to categorize the current SMP investment options by level of inflation risk and investment risk as well as to identify asset classes not included in the SMP investment offerings lineup. The current spectrum identified no offerings through Fidelity in small cap blend equity, emerging markets equity, government fixed income and TIPS. The analysis is utilized when considering investment offering changes.

5 As new products are developed, the offerings are assessed for potential inclusion in the SMP to enhance the lineup of options or to replace a fund that performs at an unacceptable level over an extended period of time. At this time, no new funds are being recommended for the SMP. Pricing As new, lower-cost share classes of mutual funds become available, Fidelity reviews them to determine whether the SMP meets the eligibility criteria for the share class. As a result, specific SMP offerings provided by Fidelity have transferred to Class K, Institutional and Advantage share classes over the past three years. More lower-cost offerings are planned for implementation in May of 2013, as listed, below: From Current Expense Ratio To New Expense Ratio Managed Income Portfolio 69 basis points Managed Income Portfolio Class 2 50 basis points Ariel Fund Investor Class 104 basis points Ariel Fund Institutional Class 68 basis points Operational Process Issues Fidelity has responded timely to SURS requests to administrative and operational areas. Currently, there are no issues to be addressed. Consultant Comments Fidelity was founded in 1946 by Edward C. Johnson II and entered the defined contribution plan recordkeeping market in Fidelity is now the largest privately held financial services firm in the world with approximately $3.9 trillion in assets under administration, of which nearly half are assets under management. They are the largest administer of defined contribution (DC) plans as measured by recordkeeping assets, with approximately $950 billion in assets. They are also the largest administer of DC plans as measured by number of participants, having over 15 million participants. Fidelity provides DC administration to all market segments and has a significant market presence in the large and mega plan space. This can provide Fidelity with an edge in attracting plan sponsors seeking DC providers with broad experience. Fidelity makes substantial annual reinvestments into the business, making them a leader in DC technology and innovation. Areas of weakness for Fidelity are considered to be customization and flexibility as they can be limited in these areas due to the size and number of plans administered. Fidelity s organizational structure continues to evolve. In 2012, Fidelity merged the Fidelity Advisor 401(k) Program with their Workplace Investing business due to the growing number of advisors and consultants looking for similar products and services. Previously, in March 2011, Fidelity realigned their Personal and Workplace Investing (PWI) IT organization to better align their technology resources with their businesses and formed Workplace Participant Services. In July 2011, Fidelity realigned their advisor-sold and investment-only business within Workplace Investing and in September, Fidelity restructured their marketing organization and formed the Workplace Marketing, Solutions, & Experience group, led by Brian Murphy. In addition to organizational changes, Fidelity is currently involved in legal proceedings. In particular, in 2012, Fidelity was named in three separate class action suits alleging breach of fiduciary duty

6 regarding the allocation of interest earned on float, employer stock, and fees for processing 401(k) Qualified Domestic Relations Orders. With regard to the float income class action suit, on March 31, 2012, the court issued a ruling after trial that the Fidelity entities were liable for $1.7 million related to the allocation of interest earned on float. The Fidelity entities have appealed this ruling. For the latter two lawsuits, Fidelity intends to defend these cases vigorously. In February 2013, Fidelity was once again named in a class action lawsuit for alleged breaches of fiduciary duty relating to Fidelity's handling of 401(k) plan float income. The plaintiffs in the case are seeking for Fidelity to restore losses to the plans and to participants in the plans. Investment Options Review Fidelity has consistently maintained its bottom-up investment philosophy, the cornerstone of which is fundamental research. Eighty percent of fund manager decisions are based on proprietary research, which is made up of three elements: analysis, technology, and face-to-face contact. The fund manager is the center of a team of investment professionals with responsibility for a portfolio and has access to all of Fidelity Management Research Company s (FMR Co.) resources, including global proprietary research, company visits, and online information systems. The managers also receive specific recommendations from analysts and ideas from other fund managers in their investment discipline group. Fund management at Fidelity is driven by: The belief that active management adds value A commitment to proprietary research A bottom-up approach to stock selection Developing talent inside the Fidelity system Access to resources Reliance on decisions made by talented individuals within a disciplined team context Individual accountability for performance. Fidelity utilizes the Fidelity Risk Oversight Group, dedicated to providing assurance that Fidelity s risks are understood and are being managed. The Group continually reviews and updates the guidelines, as appropriate. Risks are identified and reviewed at least quarterly, assessing the potential impact of each risk against the probability of that risk occurring. The key risk controls Fidelity employs in the portfolio construction process are limitations on exposure to a single security (10 percent) and limitations on any individual country s weighting relative to the index (+/- 5 percent). Private placements and convertible issues are routinely avoided to minimize liquidity risk. The portfolio manager regularly monitors the relative weights of individual securities, sectors and countries and monitors the market capitalization and trading liquidity of each holding. As of December 31, 2012, the equity exposure of SMP assets invested in options available through Fidelity was 87.4%, significantly higher than the 71.3% average equity exposure of similarly sized taxexempt plans managed at Fidelity. In addition, of the SMP participants invested through Fidelity, 37%

7 were within 10% equity exposure of their age-appropriate target-dated Freedom Fund, 24% were invested 100% in equities, and 3% had no equity exposure. Recommendation SURS staff recommends that Fidelity Investments be retained as an investment service provider for the SURS Self-Managed Plan.

8 Manager Monitoring Summary The Manager Monitoring Summary below provides a summary for each investment option within the SMP that is available through Fidelity. The review of the investment options follows with data as of December 31, Fidelity Funds Last Meeting Fidelity Managed Income Portfolio March 2013 N/A Spartan U.S. Bond Index Institutional March 2013 N/A Issues/Concerns PIMCO Total Return Institutional March 2013 Consistent strong relative performance aided by portfolio manager s tenure since inception of the fund. Fidelity Four-in-One Index March 2013 N/A Fidelity Puritan Class K March 2013 Strong one-year performance with longer-term results closely tracking the custom benchmark. Ariel Fund March 2013 Strong relative performance and peer ranking in 2012 despite underperformance and low rankings in longer time periods in concentrated portfolio. American Beacon Large Cap Value Plan Ahead Institutional March 2013 Top decile relative performance and peer ranking for 2012 and ten-year period for portfolio. Buffalo Small Cap March 2013 Concentrated portfolio with low turnover had significant relative outperformance and strong peer ranking in 2012 and over ten-year period. Hartford Capital Appreciation Y March 2013 Favorable relative performance and peer ranking. Manager since inception plans to retire in Fidelity Contrafund Class K March 2013 Consistent relative performance and top quartile peer ranking over longer time periods. Fidelity Growth Company Class K March 2013 Strong performance and peer ranking over long term in portfolio with information technology overweight. Fidelity Low-Priced Stock Class K March 2013 Positive relative performance and high peer ranking for broadly diversified mid- and small-cap holdings. Spartan Extended Market Index Advantage March 2013 N/A Spartan Total Market Index Institutional March 2013 N/A Spartan 500 Index Institutional March 2013 N/A Fidelity Diversified International Class K March 2013 Spartan International Index Institutional March 2013 International equity exposure experienced strong performance in 2012 and over longer time periods. N/A Fidelity Worldwide March 2013 Relative outperformance has benefitted from investing in common stock globally in 2012 and over longer periods. Fidelity Real Estate Investment March 2013 Non-diversified real estate equity fund has had favorable performance over the one-, three- and five-year periods. Fidelity Freedom K Fund Series March 2013 All lifecycle funds in the series, with the exception of the 2055 Fund, outperformed the custom composite benchmarks for the one-year period.

9 Investment Option / Benchmark Fidelity Performance December 31, 2012, Returns Inception Date 1 Year 3 Year 5 Year 10 Year Fidelity Managed Income Portfolio Sep % 1.3% 1.9% 3.0% Custom / Citigroup 3 Month Treasury Bill 0.1% 1.3% 2.6% 3.3% Spartan U.S. Bond Index Fund - Institutional Class Mar % 6.1% 5.7% 5.0% Barclays Capital Aggregate Bond Index 4.2% 6.2% 5.9% 5.2% PIMCO Total Return Institutional Fund Sep % 7.7% 8.2% 6.6% Barclays Capital Aggregate Bond Index 4.2% 6.2% 5.9% 5.2% Fidelity Four-In-One Index Fund Jun % 8.9% 1.7% 7.4% Custom Benchmark % 8.9% 1.6% 7.5% Fidelity Puritan - Class K Apr % 9.4% 3.3% 7.2% 60% S&P 500 / 40% Barclays Capital Aggregate Bond Index 11.3% 9.3% 3.6% 7.1% Ariel Fund Nov % 10.4% 2.6% 6.9% Russell Midcap Value Index 18.5% 13.4% 3.8% 10.6% American Beacon Large Cap Value Plan Ahead Institutional Jul % 10.0% 0.5% 8.3% Russell 1000 Value Index 17.5% 10.9% 0.6% 7.4% Buffalo Small Cap Fund Apr % 10.1% 5.2% 11.4% Russell 2000 Growth Index 14.6% 12.8% 3.5% 9.8% Hartford Capital Appreciation Y Fund Jul % 5.2% -2.0% 9.0% Dow Jones U.S. Total Stock Market Index 16.4% 11.4% 2.2% 7.9% Fidelity Contrafund - Class K May % 10.8% 2.0% 9.7% Dow Jones U.S. Total Stock Market Index 16.4% 11.4% 2.2% 7.9% Fidelity Growth Company Fund - Class K Jan % 13.0% 3.8% 11.0% Russell 3000 Growth Index 15.2% 11.5% 3.2% 7.7% Fidelity Low-Priced Stock Fund - Class K Dec % 12.7% 4.9% 11.2% Russell 2000 Value Stock Index 18.1% 11.6% 3.5% 9.5% Spartan Extended Market Index Fund - Advantage Class Nov % 13.4% 4.2% 10.7% Dow Jones U.S. Completion Total Stock Market Index 17.9% 13.4% 4.1% 10.8% Spartan Total Market Index Fund - Institutional Class Nov % 11.3% 2.2% 7.8% Dow Jones U.S. Total Stock Market Index 16.4% 11.4% 2.2% 7.9% Spartan 500 Index Fund - Institutional Class Feb % 10.8% 1.6% 7.0% S&P 500 Index 16.0% 10.9% 1.7% 7.1% Fidelity Diversified International Fund - Class K Dec % 4.2% -3.9% 8.8% MSCI EAFE Index 17.3% 3.6% -3.7% 8.2% Spartan International Index Fund - Institutional Class Nov % 4.0% -3.3% 8.3% MSCI EAFE Index 17.3% 3.6% -3.7% 8.2% Fidelity Worldwide Fund May % 9.0% -0.1% 9.4% MSCI World Index 15.8% 6.9% -1.2% 7.5% Fidelity Real Estate Investment Portfolio Fund Nov % 18.4% 6.4% 11.4% Dow Jones U.S. Select Real Estate Securities Index 17.1% 17.9% 4.9% 11.6% Fidelity Freedom K 2005 Fund Nov % 6.5% 2.4% N/A Custom Composite 7.8% 6.4% 2.7% N/A Fidelity Freedom K 2010 Fund Oct % 7.2% 2.8% 6.0% Custom Composite 9.9% 7.5% 3.3% 6.4% Fidelity Freedom K 2015 Fund Nov % 7.3% 2.5% N/A Custom Composite 10.1% 7.6% 3.0% N/A Fidelity Freedom K 2020 Fund Oct % 7.7% 1.8% 6.9% Custom Composite 11.1% 8.2% 2.5% 7.4% Fidelity Freedom K 2025 Fund Nov % 8.0% 1.7% N/A Custom Composite 12.8% 8.8% 2.7% N/A Fidelity Freedom K 2030 Fund Oct % 8.0% 0.7% 7.0% Custom Composite 13.2% 8.9% 1.9% 7.7% Fidelity Freedom K 2035 Fund Nov % 7.9% 0.5% N/A Custom Composite 14.5% 9.1% 2.0% N/A Fidelity Freedom K 2040 Fund Sep % 7.9% 0.2% 7.2% Custom Composite 14.6% 9.2% 1.8% 8.1% Fidelity Freedom K 2045 Fund Jun % 7.9% 0.2% N/A Custom Composite 14.9% 9.2% 1.7% N/A Fidelity Freedom K 2050 Fund Jun % 7.8% -0.3% N/A Custom Composite 15.2% 9.2% 1.4% N/A Fidelity Freedom K 2055 Fund Jul % N/A N/A N/A Custom Composite 15.5% N/A N/A N/A Fidelity Freedom K Income Fund Oct % 5.4% 3.6% 4.4% Custom Composite 5.1% 4.7% 3.2% 4.5% 1 Custom / 48% S&P 500 Index / 12% Dow Jones U.S. Completion Total Stock Market Index / 25% MSCI EAFE Index / 15% Barclays Capital Aggregate Bond Index

10 Fidelity Managed Income Portfolio Fund Objective and Investment Approach The Managed Income Portfolio is a commingled pool managed by Fidelity Management Trust Company (FMTC) that seeks to preserve principal while earning a level of interest income consistent with principal preservation. The Portfolio strives to maintain a stable net asset value of $1 per share although there is no guarantee that it will be able to do so. The Portfolio s yield will fluctuate. The Portfolio is comprised of investment contracts issued by insurance companies and other financial institutions, fixed income securities, and money market funds. Under the terms of the contracts, the assets of the Portfolio are invested in fixed income securities which may include U.S. Treasury and agency bonds, corporate bonds, mortgage-backed securities, commercial mortgage-backed securities, asset-backed securities and shares of money market funds. The Portfolio may also invest in futures contracts, option contracts and swap agreements. The contracts purchased by the Portfolio allow the fixed income securities to be accounted for at book value (principal plus interest accrued to date). Through the use of book value accounting, there is no immediate recognition of investment gains and losses on the Portfolio s securities; instead, gains and losses are recognized over time by periodically adjusting the interest rate credited to the Portfolio under the contracts. At the time of purchase, all contracts and securities purchased for the Portfolio must satisfy the credit quality standards of FMTC. The contracts and securities purchased for the Portfolio are backed solely by the financial resources of the issuers of such contracts and securities. An investment in the fund is not insured or guaranteed by the manager(s), the plan sponsor, the trustee, the FDIC, or any other government agency. Performance Commentary In 2012, the Fidelity Managed Income Portfolio returned 1.28%, exceeding the Citigroup 3-Month Treasury Bill Index return of 0.07% by 121 basis points. Within the SMP, the Managed Income Portfolio will move to the lower-cost Class 2 share class in May Fund Characteristics Fidelity Managed Income Portfolio Total Fund Assets $6.8 billion Number of Holdings Day Yield 1.10% Duration 2.52 Years Quality U.S. Govt AAA AA A BBB and Below Cash/Other 63.3% Fees 0.69% Annually Portfolio Manager (tenure) Rob Chan since July 2012

11 Fidelity Managed Income Portfolio Historical Returns Fidelity Managed Income Portfolio Custom Benchmark* Return Return Return Difference % 4.1% Trailing 3-Year 1.3% 1.3% 0.0 Trailing 5-Year 1.9% Trailing 10-Year 3.0% * EnnisKnupp GIC Index to 1/1/11, Citigroup 3-Month Treasury Bill Index since then. Assessment The Fidelity Managed Income Portfolio outperformed the Citigroup 3-Month Treasury Bill Index in 2011 and 2012, following four years of relative underperformance that restrained longer-term returns. The Portfolio holds investment-grade securities and cash instruments. We recommend retention of this option.

12 Spartan U.S. Bond Index Fund Fund Objective and Investment Approach The Spartan U.S. Bond Index Fund is a mutual fund that pursues investment results corresponding to the aggregate price and interest performance of the debt securities in the Barclays Capital U.S. Aggregate Bond Index. The Fund usually invests at least 80% of its assets in bonds included in the Barclays Capital U.S. Aggregate Bond Index. The Fund utilizes statistical sampling techniques based on duration, maturity, interest rate sensitivity, security structure, and credit quality to attempt to replicate the returns of the Index while using a smaller number of securities than are in the Index. To adjust the Fund s risk exposure, the Fund can invest in securities that may have a leveraging effect, including investments in derivatives such as swaps and futures contracts and forward-settling securities. Performance Commentary The Spartan U.S. Bond Index Fund returned 4.21% in calendar year 2012, matching the Barclays Capital U.S. Aggregate Bond Index return of 4.21%. Fund Characteristics Spartan U.S. Bond Index Fund Institutional Class Total Fund Assets $3.2 billion Average Maturity 6.1 years Duration 4.8 years 30 Day Yield 1.64% Quality U.S. Govt AAA AA A BBB Below BBB Not Rated/Cash 68.6% Number of Holdings 1,138 Turnover 100% Fees 0.07% Annually Portfolio Manager (tenure) Curtis Hollingsworth since February 2009 and Alan Bembenek since March 2012

13 Spartan U.S. Bond Index Fund Spartan U.S. Bond Index Fund - Institutional Class Quartile Ranking Bar for Periods Ended December 31, 2012 Group: Lipper: Intmt Inv Grd Debt Funds (5.0) Last 10 Years B (41) B (53) B (75) A (51) A (64) A (78) Last 5 Years Last 3 Years Last Year B (86) A (86) 1st Percentile th Percentile Median th Percentile th Percentile 0.41 (2.78) Member Count Spartan U.S. Bond Index Fund - Institutional Class A Barclays Aggregate Index B Historical Returns Spartan U.S. Bond Index Fund Aggregate Bond Index Return Return Rank * Return Rank * Difference % % Trailing 3-Year 6.1% % Trailing 5-Year Trailing 10-Year * Rank of 1 is best and 100 is worst. Assessment The Spartan U.S. Bond Index Fund, in accordance with the Fund s objective, performed in line with the Barclays Capital U.S. Aggregate Bond Index for 2012 and in all longer time periods presented. The Fund is a low-cost, passively-managed investment option. We recommend retention of this option.

14 PIMCO Total Return Fund Fund Objective and Investment Approach The PIMCO Total Return Fund is a mutual fund that seeks maximum total return, consistent with preservation of capital and prudent investment management. The Fund typically invests at least 65% of its total assets in a diversified portfolio of fixed income instruments of varying maturities, which may include forwards or derivatives such as options, futures contracts, or swap agreements. The Fund primarily is comprised of investment-grade debt securities, and may invest up to 10% of its total assets in high yield securities rated B or higher by Moody s, or equivalently rated by S&P or Fitch, or, if unrated, determined by PIMCO to be of comparable quality. Performance Commentary In calendar year 2012, the PIMCO Total Return Fund returned 10.36%, outpacing the 4.21% Barclays Capital U.S. Aggregate Bond Index return by 615 basis points. Fund Characteristics PIMCO Total Return Fund Institutional Class Total Fund Assets $175.1 billion Average Maturity 5.93 years Duration 4.02 years 30 Day Yield 2.37% Composition Agency mortgage-backed Cash & equivalents Government Corporate bond Municipal tax-exempt Non-agency residential mortgagebacked Government related Commercial mortgage-backed Asset-backed Number of Holdings 20,824 Turnover 584% Fees 0.46% Annually Portfolio Manager (tenure) Bill Gross since inception September 8, %

15 PIMCO Total Return Fund PIMCO Total Return Fund - Institutional Class Quartile Ranking Bar for Periods Ended December 31, 2012 Group: Lipper: Intmt Inv Grd Debt Funds (5.0) A (6) A (5) A (22) A (5) B (41) B (53) B (75) B (86) Last 10 Last 5 Years Last 3 Years Last Year Years 1st Percentile th Percentile Median th Percentile th Percentile 0.41 (2.78) Member Count PIMCO Total Return Fund - Institutional Class A Barclays Aggregate Index B Historical Returns PIMCO Total Aggregate Bond Return Index Return Return Rank * Return Rank * Difference % % Trailing 3-Year 7.7% % Trailing 5-Year Trailing 10-Year * Rank of 1 is best and 100 is worst. Assessment The PIMCO Total Return Fund has experienced excellent relative performance versus the benchmark and among a universe of peers in 2012 as well as over all longer time periods presented. The Fund holds a well diversified portfolio of fixed income securities that may include derivative instruments. The Fund has been managed by Mr. Bill Gross for the entire life of the Fund. We recommend retention of this option.

16 Fidelity Four-in-One Index Fund Fund Objective and Investment Approach The Fidelity Four-in-One Index Fund is a mutual fund that pursues high total return. The Fund strategy is to invest in a combination of four proprietary equity and fixed income funds utilizing an asset allocation constructed to provide a broadly diversified, index-based investment. The underlying funds utilized in the strategy include the Spartan 500 Index Fund, the Spartan Extended Market Index Fund, the Spartan International Index Fund, and the Spartan U.S. Bond Index Fund. The ability of the Fund to meet its investment objective is directly related to its target asset allocation among the underlying Fidelity funds and the ability of those funds to meet their investment objectives. Performance Commentary In 2012, the Fidelity Four-in-One Index Fund return of 15.10% exceeded by 19 basis points the custom benchmark return of 14.91%. Fund Characteristics Total Fund Assets Composition Fidelity Four-in-One Index Fund $2.4 billion U.S. stocks 59.7% Non-U.S. stocks 25.6 Bonds 14.7 Turnover 10% Fees 0.23% Annually Portfolio Manager (tenure) Andrew Dierdorf since January 2009 and Christopher Sharpe since June 2009 The fund statistics reflect those of the underlying funds. There is no universe comparison graph for the Fidelity Four-in-One Index Fund because there is not a broad universe of competing funds.

17 Fidelity Four-in-One Index Fund Historical Returns Fidelity Four-in-One Index Fund Custom Benchmark* Return Return Return Difference % 28.4% Trailing 3-Year 8.9% 8.9% 0.0 Trailing 5-Year Since Inception (7/1/99) * 48% S&P 500, 12% Dow Jones 4500 Completion, 25% MSCI EAFE, 15% Agg Bond Index, effective November 1, Assessment The Fidelity Four-in-One Index Fund is a broadly diversified portfolio comprised of passively-managed Fidelity funds in domestic equity, international equity and fixed income. The Fund has closely tracked the custom benchmark over all calendar year and longer time periods presented. Underperformance is less than the level of fees. We recommend retention of this option.

18 Fidelity Puritan Fund Fund Objective and Investment Approach The Fidelity Puritan Fund is a mutual fund that seeks to attain income and capital growth consistent with reasonable risk. The Fund invests approximately 60% of its assets in stocks and other equity securities and the remainder in bonds and other debt securities, including lower-quality debt securities, when Fidelity s market outlook is neutral. The Fund may vary from this target if Fidelity views either stocks or bonds as offering more favorable opportunities. At all times at least 25% of assets are invested in fixed income senior securities, including debt securities and preferred stock. The Fund invests in both domestic and foreign issuers and uses transactions that have a leveraging effect on the portfolio. Performance Commentary In calendar year 2012, the Fidelity Puritan Fund returned 13.90%, outpacing by 259 basis points the 11.31% custom benchmark return. The Fund has closely tracked the custom benchmark in the longer time periods. Within the SMP, the Puritan Fund was transferred to the lower-cost Class K share class in June Fund Characteristics Total Fund Assets Style Characteristics Capitalization Focus Target Allocations Actual Allocations Fidelity Puritan Fund Class K $4.5 billion Growth Large Stocks 60% Bonds 40% Stocks 63.5% Bonds 33.0% Cash & Other 3.5% Number of Holdings Total 1,904 Turnover 141% Fees 0.48% Annually Portfolio Manager (tenure) Ramin Arani since February 2007 and Pramod Atluri since March 2012 There is no universe comparison graph for the Fidelity Puritan Fund because there is not a broad universe of competing funds.

19 Fidelity Puritan Fund Historical Returns Fidelity Puritan Custom Benchmark* Return Return Return Difference % 19.9% Trailing 3-Year 9.4% 9.3% 0.0 Trailing 5-Year Trailing 10-Year * 60% Russell 3000 Value to 7/1/08, S&P 500 since then / 40% Agg Bond Index. Assessment The Fidelity Puritan Fund is a broadly diversified portfolio of domestic equities, international equities and bonds. Despite the volatility of the actively-managed Fund shown in the calendar year results, longer time periods indicate performance has closely tracked the custom benchmark. We recommend retention of this option.

20 Ariel Fund Fund Objective and Investment Approach The Ariel Fund is a mutual fund that pursues long-term capital appreciation. The Fund invests primarily in common stocks of undervalued U.S. companies that show strong potential for growth. The Fund does not hold securities that fall within the top two quintiles of the Russell U.S. equity indexes and if such stock falls within the top two quintiles, it will be sold by the end of the following quarter. The Fund seeks companies with attributes that are expected to contribute to capital appreciation, including high barriers to entry, sustainable competitive advantages, predictable fundamentals that allow for double-digit earnings growth, skilled management teams and solid financials. The Fund does not invest in securities of corporations whose primary source of revenue is derived from the production or sale of tobacco products or the manufacture of handguns. The Fund generally has a weighted average market capitalization between $1 billion and $7.5 billion and seeks to hold investments for approximately five years in a portfolio typically comprised of 30 to 50 securities. Performance Commentary The Ariel Fund returned 20.32% for the year ended December 31, 2012, outpacing by 181 basis points the Russell Midcap Value Index return of 18.51%. The volatility of the concentrated strategy is reflected in the relative underperformance for the three-, five- and ten-year periods, of 304, 120 and 377 basis points, respectively. Within the SMP, the Ariel Fund will transfer to the lower-cost Institutional share class in May Fund Characteristics Ariel Fund Total Fund Assets $1.5 billion Style Characteristics Value Capitalization Focus Mid Level of Diversification Concentrated Number of Holdings 42 Turnover 30% Fees 1.04% Annually Portfolio Manager (tenure) John Rogers, Jr. since November 1986 inception, John Miller since November 2006 and Kenneth Kuhrt since December 2011

21 Ariel Fund Ariel Fund - Investor Class Quartile Ranking Bar for Periods Ended December 31, 2012 Group: Lipper: Mid-Cap Value Funds (10.0) B (14) A (95) B (39) A (69) A (12) B (10) B (27) A (75) (30.0) Last 10 Years Last 5 Years Last 3 Years Last Year 1st Percentile th Percentile Median th Percentile th Percentile 3.19 (8.08) (9.47) (19.93) Member Count Ariel:Fund;Investor A Russell:Midcap Value B Historical Returns Ariel Fund Russell Midcap Value Return Return Rank * Return Rank * Difference % % Trailing 3-Year 10.4% % Trailing 5-Year Trailing 10-Year * Rank of 1 is best and 100 is worst. Assessment The Ariel Fund is a concentrated equity strategy that provides a socially responsible investing option. Relative underperformance over the longer time periods exceeds the level of fees. At this time, we recommend retention of this option.

22 American Beacon Large Cap Value Plan Ahead Institutional Fund Fund Objective and Investment Approach The American Beacon Large Cap Value Plan Ahead Institutional Fund is a mutual fund with the objective to attain long-term capital appreciation and current income. The Fund normally invests at least 80% of net assets in equity securities of U.S. companies with large market capitalizations that are within the market capitalization range of those found in the Russell 1000 Index at the time of investment. The Fund s investments may include common stocks, preferred stocks, securities convertible into U.S. common stocks, real estate investment trusts (REITs), American Depositary Receipts (ADRs) and U.S. dollar-denominated foreign stocks trading on U.S. exchanges. The Fund s manager allocates the assets among different sub-advisors who select stocks of undervalued companies based on above-average earnings growth potential, below-average price to earnings ratio, below-average price to book value ratio, and above-average dividend yields. Performance Commentary In 2012, the American Beacon Large Cap Value Plan Ahead Institutional Fund return of 19.06% outperformed the 17.51% return of the Russell 1000 Value Index by 155 basis points. The Fund s performance trailed the benchmark in the three- and five-year periods and exceeded the benchmark in the ten-year period. Fund Characteristics American Beacon Large Cap Value Plan Ahead Institutional Fund Total Fund Assets $4.0 billion Style Characteristics Value Capitalization Focus Large Number of Holdings 186 Turnover 30% Fees 0.59% Annually Portfolio Manager (tenure) James Barrow since July 1987 inception, George Davis, Jr. since December 1988, Sheldon Lieberman since December 1994, Patricia McKenna since December 1995 and Paul Lesutis since December 1996

23 American Beacon Large Cap Value Plan Ahead Institutional Fund American Beacon Large Cap Value Plan Ahead Fd - Institutional Class Quartile Ranking Bar for Periods Ended December 31, 2012 Group: Lipper: Large-Cap Value Funds (5.0) (15.0) Last 10 Years A (6) B (23) B (32) A (38) Last 5 Years Last 3 Years A (8) B (7) B (24) A (19) Last Year 1st Percentile th Percentile Median 6.46 (0.15) th Percentile 5.60 (1.15) th Percentile 2.45 (5.20) Member Count American Beacon Large Cap Value Plan Ahead Fd Inst A Russell:1000 Value B Historical Returns American Beacon Lg Cap Plan Ahead Russell 1000 Value Return Return Rank * Return Rank * Difference % % Trailing 3-Year 10.0% % Trailing 5-Year Trailing 10-Year * Rank of 1 is best and 100 is worst. Assessment The American Beacon Large Cap Value Plan Ahead Institutional Fund provides exposure to undervalued large capitalization U.S. companies. In 2012 and in the ten-year period, the Fund had strong performance versus its benchmark and ranked in the top decile of a universe of peers. We recommend retention of this option.

24 Buffalo Small Cap Fund Fund Objective and Investment Approach The Buffalo Small Cap Fund is a mutual fund seeking long-term growth of capital. The Fund normally invests a minimum of 80% of its net assets in equity securities, including domestic common stocks, preferred stocks, convertible preferred stocks, warrants and rights of small capitalization companies with a market capitalization of $2.5 billion or less at the time of purchase. The Fund seeks to identify a broad mix of small cap companies expected to benefit from long-term industry, technological or other trends with the potential for revenue growth in excess of GDP. The Fund may invest a maximum of 20% of its net assets in sponsored or unsponsored American Depositary Receipts (ADRs) and securities of foreign companies that are traded on U.S. stock exchanges. Performance Commentary The Buffalo Small Cap Fund returned 19.93% in 2012, significantly outperforming the 14.59% return of the Russell 2000 Growth Index by 534 basis points. The volatility of the concentrated strategy is shown in the calendar year results from 2003 through Five- and ten-year relative performance and peer rankings are favorable. Fund Characteristics Buffalo Small Cap Fund Total Fund Assets $2.9 billion Style Characteristics Growth Capitalization Focus Small Number of Holdings 56 Turnover 24% Fees 1.00% Annually Portfolio Manager (tenure) Kent Gasaway and Robert Male since inception April 1998, Grant Sarris since November 2003 and John Bichelmeyer since September 2011

25 Buffalo Small Cap Fund Buffalo Small Cap Fund Quartile Ranking Bar for Periods Ended December 31, 2012 Group: Lipper: Small-Cap Growth Funds A (6) B (33) A (17) B (39) B (47) A (81) A (5) B (38) (40.0) (80.0) (120.0) Last 10 Years Last 5 Years Last 3 Years Last Year 1st Percentile th Percentile Median th Percentile th Percentile (2.05) (19.24) (19.17) (81.30) Member Count Buffalo:Small Cap A Russell:2000 Growth B Historical Returns Buffalo Small Cap Russell 2000 Growth Return Return Rank * Return Rank * Difference % % Trailing 3-Year 10.1% % Trailing 5-Year Trailing 10-Year * Rank of 1 is best and 100 is worst. Assessment In 2012 and for the ten-year period, the Buffalo Small Cap Fund had strong performance relative to the Russell 2000 Growth Index and ranked in the top decile of a universe of peers. Since inception in 1998, the Fund has been managed by the same investment managers. We recommend retention of this option.

26 Hartford Capital Appreciation Y Fund Fund Objective and Investment Approach The Hartford Capital Appreciation Y Fund is a mutual fund striving to attain growth of capital. The Fund seeks to achieve its goal by investing primarily in stocks selected on the basis of potential for capital appreciation by utilizing a fundamental, bottom-up approach to investing. The Fund typically invests a minimum of 65% of its total assets in common stocks of medium and large companies. The Fund may invest a maximum of 35% of its total assets in securities of foreign issuers and non-dollar securities, including companies whose principal business activities are conducted in emerging markets or whose securities are traded principally on exchanges in emerging markets. Performance Commentary In 2012, the 20.71% Hartford Capital Appreciation Y Fund return exceeded the 16.38% Dow Jones U.S. Total Stock Market Index return by 433 basis points. The Fund had favorable relative performance for 2012 and the ten-year period, following disappointing results versus the benchmark and a universe of peers in 2010 and Although the Fund is benchmarked against a domestic equity index, the Fund s portfolio had an allocation of 23.5% in international stock as of December 31, Fund Characteristics Hartford Capital Appreciation Y Fund Total Fund Assets $1.3 billion Style Characteristics Blend Capitalization Focus Large Number of Holdings 98 Turnover 74% Fees 0.70% Annually Portfolio Manager (tenure) Wellington Management Company sub-advisers: Saul Pannell since inception July 1996 and Frank Catrickes since December 1998

27 Hartford Capital Appreciation Y Fund Hartford Capital Appreciation Y Fund Quartile Ranking Bar for Periods Ended December 31, 2012 Group: Lipper: Large-Cap Core Funds (10.0) A (5) B (13) B (17) A (92) A (3) B (8) B (29) A (97) (30.0) Last 10 Years Last 5 Years Last 3 Years Last Year 1st Percentile th Percentile Median th Percentile 5.74 (0.32) th Percentile 2.18 (6.17) Member Count Hartfd:Cap Appr;Y A 9.03 (1.98) DJ:US Total Mkt Ix B Historical Returns Hartford Cap Appr Y DJ US Total Stk Mkt Return Return Rank * Return Rank * Difference % % Trailing 3-Year 5.2% % Trailing 5-Year Trailing 10-Year * Rank of 1 is best and 100 is worst. Assessment The Hartford Capital Appreciation Y Fund had significant relative outperformance and ranked in the top decile of a universe of peers in 2012 and for the ten-year period. The Fund s domestic equity strategy holds a sizable allocation in international equity. The Fund has implemented succession planning in anticipation of the 2014 retirement of Mr. Saul Pannell who has managed the portfolio since inception. At this time, we recommend retention of this option.

28 Fidelity Contrafund Fund Objective and Investment Approach The Fidelity Contrafund is a mutual fund that seeks to attain capital appreciation. The Fund normally invests primarily in common stocks of companies whose value the portfolio manager believes is not fully recognized by the public. The Fund s portfolio holds growth stocks, value stocks and securities of domestic and foreign issuers. The asset allocation of the portfolio is approximately 86% in domestic equities and approximately 13% in international developed and emerging market equities. The Fund continues to maintain significant overweight positions in the information technology and consumer discretionary sectors. Performance Commentary The Fidelity Contrafund returned 16.32% in calendar year 2012, trailing by 6 basis points the 16.38% Dow Jones U.S. Total Stock Market Index return. The Fund has consistently performed in line with the benchmark and ranked well versus a universe of peers in 2012 and for the longer time periods presented. Within the SMP, the Contrafund was transferred to the lower-cost Class K share class in June Fund Characteristics Total Fund Assets Style Characteristics Capitalization Focus Composition Fidelity Contrafund Class K $25.7 billion Growth Large U.S. stocks 86.1% Non-U.S. stocks 12.6 Cash 1.3 Number of Holdings 369 Turnover 53% Fees 0.69% Annually Portfolio Manager (tenure) Will Danoff since September 1990