You do not have to sign in and out for InFRE credits InFRE tracking forms were included in conference registration materials.

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1 Continuing Education Credits Be sure to sign the Sign-In/Sign-Out sheet outside of the room when applying for Continuing Education Credits for the following certifications. (Check the appropriate certification) CFP CPE You do not have to sign in and out for InFRE credits InFRE tracking forms were included in conference registration materials. 1

2 Critical Questions for Fiduciaries about Guaranteed Income Products Moderator: David E. Fischer, Deputy Director NYS Deferred Compensation Speakers: Dagmar Nikles, Managing Director BlackRock Marc Pester, Senior Vice President, Prudential Retirement Roderick Crane, JD, TIAA-CREF 2

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4 Uncertain financial markets and low retirement confidence VIX and S&P 500 Indexes Plan Sponsors confidence level that workers are saving enough to get the monthly income they need in retirement (n=118) 11% 44% 40% 2% 55% not confident employees are saving enough 3% Source: 2012 BlackRock DC Survey. Source: CBOE and Bloomberg (1/2/90 8/31/10) Very confident Not very confident Not sure Somewhat confident Not at all confident 4

5 Retirement funding sources have fundamentally shifted % 26% 62% 15% 56% 29% 19% 63% 17% Access to traditional lifetime income has progressively declined DB only DC only Both Sources: 2010 Social Security Trustees Report. Poterba, Venti, and Wise. NBER, The Decline of Defined Benefit Retirement Plan and Asset Flows. 5

6 7 in 10 retirees state that more than 60% of their expenses are covered by traditional secure income defined benefits, social security and annuities Average spread of sources covering percent of monthly household expenses 1 (n = 1,035) Percent of monthly household expenses covered by traditional secure income 2 (n = 1,035) Employment, Annuity, 4% 5% Other, 9% 401K, 9% Defined benefit, 44% % range of expense covered by secure income 1 % of retirees % % % % % Social security, 29% 1. Source: 2012 BlackRock DC Survey. 2. Secure income is defined as Social Security, Defined Benefits and annuities. Traditional secure income 2 77% 6

7 Increased longevity and fear of outliving assets 58,800 17,657 14,000 4, and Older (000) 85 and Older (000) Source: 2010 EBRI Current population survey. 1. Reclaiming the future report from Alliaanz Life Insurance Co. Of North America Estimates Americans fear outliving their money more than they fear death. 1 7

8 Participant preferences When it comes to your workplace retirement savings plan, which of the following would you prefer? 24% 12% Your savings in a lump sum A steady stream of income throughout retirement 64% Part lump sum, part steady stream of income throughout retirement 86% of participants favor an income solution in their retirement plan Source: 2012 BlackRock DC Survey. 8

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10 Participant perspective Planning for future income better defined: Participant education challenges Simplify product features But, need to keep discussion simple Flexibility to adjust to unique needs is challenging 10

11 Comparing the Alternative Income Solutions #

12 No Income Guarantee Managed payout program Systematic withdrawals Benefits Maintain complete control over account value Challenges No guarantee against market and longevity risks Fixed Annuities Fixed payout annuity In-Plan/Out-of-Plan Protects against Incomplete access to market and longevity risk account value post In normal market annuitization conditions, more robust longevity protection Guaranteed Minimum Withdrawal Benefits (GMWB) Protects against market and longevity risks Maintain complete control over account value May provide lower annual withdrawal percentages than fixed annuities #

13 Additional Considerations for Income Solutions Benefit Design (eg, inflation protection) Investment Design (eg, target-date fund integration) Safeguards Portability Survivor Benefits Benchmarking the types and characteristics Fees Benchmark outcomes #

14 Plan Sponsor Due Diligence Know your legal and fiduciary environment and plan objectives Helps inform the in-plan or out-of-plan decision Product and provider factors Product features Investment performance Portability Insurer risk Fees and costs 14

15 Plan Level Legal Requirements Authorizing state and local laws Plan and trust documents Questions: Are guaranteed products permitted? How do any willing provider laws apply? Are statutory or plan amendments needed? 15

16 Legal and Regulatory Environment for Guaranteed Income Products State Insurance Laws and Regulations Federal Securities Regulation (SEC) FINRA Regulation State Guaranty Association Protections Federal and State Tax Laws Fiduciary Laws State laws (direct) and ERISA (indirect) 16

17 Fiduciary Standards Fiduciary obligations arise when the guaranteed retirement income solution is provided in the plan No fiduciary obligation for: Out of plan solutions: Rollouts to an IRA and participant chooses a retail product Annuity shopping services Not offering a solution unless required by law or the plan document 17

18 Fiduciary Standards For In Plan Solutions State Fiduciary Standards Vary from state to state Prudent man Prudent person Prudent expert Important to get legal advice ERISA is not applicable, but very useful for understanding what a prudent process might be 18

19 Department of Labor Regulation a-4 Safe Harbor If followed, fiduciaries will be considered to be protected for: Immediate annuities Selection of a product for distribution of benefits to a specific participant or beneficiary or Deferred annuities Selection of an annuity provider to provide annuity contracts at future dates to participants or beneficiaries. 19

20 DOL a-4 Safe Harbor Requirements Conduct an objective, thorough and analytical search when selecting providers from which to purchase annuities. If necessary, the plan fiduciaries should consult with appropriate experts. Consider information sufficient to assess the ability of the insurer to make all future payments under the product. Consider the cost (including fees and commissions) of the product in relation to the benefits and administrative services to be provided. Conclude that, at the time of the selection, the insurer is financially able to make all future payments under the contract and its cost is reasonable in relation to the benefits and services to be provided under the contract. 20

21 Fiduciary Issues for Guar. Products Product fit to plan retirement income objectives Maximizing retirement income Portability Fees/Costs Transparency Flexibility to participant Inflation protection features Survivor benefits 21

22 Assessing Insurer Financial Strength The insurer s experience and expertise in providing the desired product s features The insurer s capitalization, surplus and reserve status The insurer s credit ratings by insurance rating services The flexibility of the contract terms The scope of additional protection through state guaranty associations 22

23 Measuring Financial Strength Examine the company s current and history of financial strength: Credit Ratings Fitch, Moody s, Standard & Poors, Best s Risk Based Capital (RBC) Position 100% RBC is usually the minimum Highest credit ratings require 300% RBC or higher Publicly available financial and actuarial reports Capital position and contingency reserves 23

24 Investment Performance and Costs Fixed products crediting rates Variable products investment performance Fees Commissions, surrender fees, loads Mortality and Expense fees (M&E) Interest rate spreads Annuity purchase rates - $xxx/month per $10,000 of premium Transparency of fees is a consideration 24

25 Summary Know your legal and fiduciary environment Stay informed. This is a relatively new area. Get help from experts. As always, a well documented process is vital. Q & A 25

26 Appendix 26

27 ERISA Prudent Person Rule A fiduciary is required to discharge his duties with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the context of an enterprise of a like character and with like aims 27

28 ERISA Prudent Person Rule Prudence is determined at the time the decision is made and not in hindsight Test: At the time of the decision did the fiduciaries use appropriate methods to reach a prudent decision on the selection of a product and provider? Just like any investment product, there is a continuing obligation to monitor the performance of in plan solutions 28

29 State Regulation of Guaranteed Retirement Income Products State Insurance Laws and Regulations Annuities and GMWBs are insurance products issued by life insurance companies. The individual states have regulatory authority over life insurance companies domiciled within their borders. For an annuity or GMWB to be distributed, it must meet the requirements imposed by the states, which include suitability guidelines with which distributors must adhere in their sales practices. In some states, there is an extra layer of consumer protection guidelines, e.g., those that apply to the sale of such products to senior citizens. The states also regulate the life insurance companies by setting reserve and other financial requirements and standards. 29

30 State Regulation of Guaranteed Retirement Income Products State Guaranty Association Protections All 50 states, the District of Columbia and Puerto Rico have guaranty associations that protect policyholders, up to specified limits in the event that an insurance company becomes insolvent. State guaranty associations are created and governed under state law and thus there is some variation among states in the operation of their respective guaranty associations; most guaranty associations cover up to at least $100,000 in present value for annuity benefits. Generally, where the policyholder lives at the time of the insurance company s insolvency determines which state guaranty association is applicable. If a member insurer becomes insolvent, funds to continue coverage and/or pay claims are raised through assessments of the state guaranty association s other member insurers 30

31 Federal Regulation of Guaranteed Retirement Income Products Federal Securities Regulation (SEC) Variable and indexed annuity products, and GMWB products, are considered to be securities subject to federal securities laws because the underlying assets are invested in the equity markets. SEC regulations may require such products comply with product registration and disclosure rules, and be issued with a prospectus that details expenses, charges and risk 31

32 Federal Regulation of Guaranteed Retirement Income Products FINRA Regulation The Financial Industry Regulatory Authority (FINRA) is a selfregulatory body that regulates business practices and sales conduct of all licensed representatives. The rules of conduct established by FINRA must be followed when marketing and selling variable and indexed annuities. Strict requirements for suitability must be met when a variable or indexed annuity is sold. 32

33 BlackRock Disclosures The opinions expressed are as of August 15th 2012 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock and/or its subsidiaries (together, "BlackRock") to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is no guarantee of future results. The strategies referred to herein are among various investment strategies that are managed by BlackRock, Inc. and its subsidiaries (together, "BlackRock") as part of its investment management and fiduciary services. Strategies may include collective investment funds maintained by BlackRock Institutional Trust Company, N.A., which are available only to certain qualified employee benefit plans and governmental plans and not offered to the general public. Accordingly, prospectuses are not required and prices are not available in local publications. To obtain pricing information, please contact a defined contribution strategist. Strategies maintained by BlackRock are not insured by the Federal Deposit Insurance Corporation and are not guaranteed by BlackRock or its affiliates. This information is for illustrative purposes only and is not intended to provide investment advice. BlackRock dose not guarantee the suitability or potential value of any particular investment. Investing involves risk, including possible loss of principal. CTF BlackRock, Inc., All Rights Reserved. 33