Quarterly. The New York State Deferred Compensation Plan

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1 In This Issue New International Investment Options Coming June Pension Protection Act: How it Affects You...2 Closing the Gap...2 Saver's Tax Credit Q & A...3 Investment Options Under Heightened Monitoring...3 Asset Allocation: Large-Cap Maximum Deferred Contribution Limits...5 Your New Journey Takes Planning...6 Plan Details: Distribution Changes...6 Quarterly January 2007 New International Investment Options Coming June 2007! The New York State Deferred Compensation Plan will introduce two new international investment options in June The international funds will be named the International Equity Fund Active Portfolio and the International Equity Fund Index Portfolio. These investment options are custom funds that are managed exclusively for the benefit of participants in the New York State Deferred Compensation Plan. This means that only Plan participants will be able to invest in the International Equity Funds. Therefore, investment performance cannot be affected by the trading activity of non-plan participants, which can be the case in a mutual fund. Other benefits of a custom fund include: Quality investment managers the historical performance of the selected managers equaled or exceeded the returns of the current international investment options offered in the Plan. Greater Board oversight the selected investment managers will be responsible to the Board. The investment managers at a mutual fund are responsible to many investors, of which the Plan is only a portion. Uniform trading policies currently each mutual fund establishes its own trading policies, which are not always consistent with one another. This may be confusing to Plan participants and difficult to administer. Lower investment expenses while past performance can never predict future results, controlling investment expenses is one method to improve investment performance. (Continued on page 4) To Our Plan Participants It has been said that the only constant is change will usher in a number of changes to the New York State Deferred Compensation Plan. Possibly the most significant change to the Plan will be the implementation of two new international investment options in June A benefit of participating in the Plan is that you are part of a large group of investors, and with size comes investment opportunities that are not always available to individuals. Investing in a custom fund, often referred to as a separate account, is one of those opportunities. The two new international investment options will be custom international funds that are designed exclusively for participants in the Plan and managed by highly qualified investment managers selected by the Board after an exhaustive search process. In addition, the custom international funds will allow the Plan to establish uniform trading policies and permit greater Board oversight. These new funds will have lower investment costs, meaning that more of your investment dollars will be working for you. Please read the article that begins on this cover page for more detailed information. The Pension Protection Act of 2006 became law in September. This law expands the eligibility for an unforeseeable emergency withdrawal, permits a tax free distribution to retired public safety officials up to $3,000 to pay for health insurance premiums or qualified long-term care premiums, and permits non-spousal beneficiaries to transfer assets directly to an inherited IRA. More details on these changes are on page 2 of this newsletter. Lastly, the Internal Revenue Service has announced the 2007 maximum deferral limits. In 2007, you may defer up to $15,500 in regular deferrals, up to an additional $5,000 if you are age 50 or older, and up to an additional $15,500 if you are enrolled in the Retirement Catch-Up program, depending on eligibility criteria. Remember, you can t make Age 50 and Over and Retirement Catch-Up deferrals in the same year. These are just some of the changes coming in As always, if you have questions about the Plan, please call the HELPLINE, meet with an Account Executive, or visit the Web site. The New York State Deferred Compensation Board Linda Angello Frederick J. Jacobs Mary Louise Mallick Maximum Deferral Amount for 2007 Regular Deferrals $15,500 Age 50 & Over Catch-Up $20,500 Retirement Catch-Up $31,000

2 InvestorNews Pension Protection Act: How It Affects You The Pension Protection Act of 2006, which became law in September 2006, contains a number of changes that will be valuable to Plan participants. There are three significant changes now available to participants. Unforeseeable Emergencies Prior to the Pension Protection Act, a participant could withdraw a portion of his or her Plan assets for an unforeseeable emergency experienced by the participant, the participant s spouse, or a dependent of the participant. A participant may now withdraw a portion of his or her Plan account for an unforeseeable emergency experienced by a designated beneficiary. Distributions to Non-Spousal Beneficiaries The Pension Protection Act permits a beneficiary, who is not a spouse, to roll their assets directly to an inherited IRA. Public Safety Officers Distributions The Pension Protection Act permits police officers, firefighters, parole officers, correction officers, probation officers, and members of a rescue squad or ambulance crew who have retired because they were eligible for a service or disability retirement benefit from the State or a participating employer to request a distribution of up to $3,000 annually to pay for health insurance or qualified long-term care premiums for themselves, their spouse, or dependents. The distribution must be paid directly to the insurance provider and will be exempt from federal income taxes. The Plan will continue to keep you informed about important changes. And, if you want to know more, please feel free to call the HELPLINE. Closing the Gap Income you need in retirement minus the income from your pension, Social Security, and personal savings equals your retirement gap. Your Plan account can help you move towards your goal of a more secure retirement and help you close your retirement gap. The Plan is called a supplemental retirement plan because your pension and Social Security may not be enough to help you meet expenses in retirement. Once your retirement gap is determined, the next step is to close the gap. Here are a few options to help you: Increase your contribution to your Plan account. In 2007, you can defer as much as $15,500 of your salary taxdeferred (your withdrawals are taxed as ordinary income). Participants who are at least 50, or will become 50 years old in 2007, or are within four years of the Plan s normal retirement age, can invest even more through one of the Plan s two Catch-Up opportunities. Use asset allocation to your advantage. The asset allocation model you choose is based on how comfortable you are with risk and the length of time until you need to use your investment dollars (and even how long you need your dollars to last throughout retirement). It s important to know how your dollars are spread among stocks, bonds, and cash equivalents. Talk with an Account Executive today for additional information on asset allocation and diversification. Work longer. You can extend your working years by taking a part-time job or beginning a new full-time job. Because people are living longer, healthier lives, more employees are comfortable working longer. If this option is necessary or acceptable to you, the additional income could help you close your gap. It can even give you a new opportunity in life for a second career or the chance to try something you ve always wanted to do. Call the HELPLINE to discuss your individual situation and find out how you can begin closing the gap to your retirement. What is the Equity Wash Restriction? The equity wash restriction prohibits direct exchanges from the Stable Income Fund into the Vanguard GNMA Fund or the Vanguard Prime Money Market Fund-Institutional Shares. This trading restriction is not imposed by the Plan but is required by Guaranteed Income Contract carriers who manage part of the Stable Income Fund. By agreement with the Guaranteed Income Contract managers, exchanges out of the Stable Income Fund are permitted only to non-competing mutual funds. Upon an exchange from the Stable Income Fund to a non-competing mutual fund, no exchanges into the Vanguard GNMA Fund or the Vanguard Prime Money Market Fund-Institutional Shares are permitted for 90 days. 2

3 InvestorNews Saver s Tax Credit Q&A Q: What is the Saver s Tax Credit? A: The Saver s Tax Credit is a non-refundable federal income tax credit that is based on how much of your income you contribute to your Plan account, up to $2,000, and your income. You can use this credit in addition to any deduction or exclusion allowed for your contributions. In other words, it s another good incentive to invest in your future! Q: Who qualifies? A: Public employees with low to moderate incomes (up to $50,000) qualify. Depending on your income, you may qualify for a federal income tax credit that is equal to half of the first $2,000 you contribute to your Plan account. Not everyone qualifies and of those who do, not all qualify at the 50% level but it s worth finding out if you do. Q: How do you know if you qualify for Saver s Tax Credit? A: To find out if you qualify, consult an income tax professional. Although the Plan nor any of its representatives may offer legal or tax advice, we may be able to help you find ways to invest more for retirement. Q: How does it work? A: Let s say you file as a single tax payer and your income is $24,000. If you contribute $20 per week (which is $1,040 per year), you may be eligible for a $104 federal income tax credit. Another example you are married, filing jointly, and your combined income equals $48,000 per year. If together, you and your spouse contribute a total of $30 per week (which is $1,560 per year), you may be eligible for a $156 federal income tax credit. To see the qualifying income levels and applicable tax credits, review the chart below. If the Saver s Tax Credit applies to you, be sure to complete the appropriate forms when filing your 2006 Federal Income Tax return. Federal Income 2006 Federal Income Tax Credit Per Annual Income Level Tax Filing Status 50% Tax Credit* 20% Tax Credit* 10% Tax Credit* Joint $0 to $30,000 $30,001 to $32,500 $32,501 to $50,000 Head of Household $0 to $22,500 $22,501 to $24,375 $24,376 to $37,500 Single/Others $0 to $15,000 $15,001 to $16,250 $16,251 to $25,000 * Credit is applied only to the first $2,000 deferred. Investment Options Under Heightened Monitoring Investment Monitoring Process The Board and its independent investment consultant continue to monitor the Plan s core investment options in accordance with the Board s Investment Policy, which identifies conditions that warrant increased or heightened monitoring of an investment option. The chart below lists the Plan investment options under heightened monitoring as of September 8, 2006 along with corresponding investment policy criteria. In addition to placing certain funds under heightened monitoring, the Board monitors material developments that relate to all Plan investment options. Recent developments include portfolio management changes affecting the Vanguard Wellington and Vanguard GNMA funds, and firm-wide regulatory developments related to Fidelity s trading operations. Investment Option Alger MidCap Growth Fund (1) American Century Int'l Growth Fund (1), (3) Fidelity Magellan Fund (1), (3) George Putnam Fund of Boston (7) ICAP Equity Portfolio (1), (8) Janus Fund (3), (8) T. Rowe Price International Stock Fund (1) Policy Criteria Heightened monitoring does not result in the immediate closure of an investment option. The Board will continue its active evaluation to determine whether closure, elimination, or a return to a regular monitoring status is appropriate. The Board's Investment Policy may be accessed on the Plan s Web site and identifies the following criteria to be considered: (1) performance issues (2) a change in investment style (3) departure of key personnel (4) operational issues (5) changes to the fund (6) issues related to fees (7) general regulatory issues and (8) changes in organizational structure of the fund. 3

4 PlanNews Asset Allocation: A Closer Look at Large-Cap You read and hear about asset allocation a lot. It s on purpose because asset allocation is one of the most important investing strategies you can have when you invest your money. Simply stated, asset allocation is a fancy way of talking about your account s diversification. The use of diversification and asset allocation as part of an overall investment strategy does not assure a profit or protect against a loss in a declining market. This article focuses on large-cap stock funds. But if you want to learn more about any of the asset classes, you can visit nysdcp.com or call the HELPLINE. Large-cap stock funds generally invest in well-known companies that have a market value of more than $8 billion. These companies are typically well established, with solid histories of growth and dividend payments (the company s earnings that are distributed to shareholders). Historically speaking, large-cap stock funds have been less volatile than the mid-cap or small-cap stock funds. The Plan offers large-cap funds and other U.S. stock funds from three different styles: Growth Funds generally hold stocks of companies with above average prospects for growth. Value Funds generally hold stocks of companies that appear to be undervalued by the market. Blend Funds generally hold stocks of a mix of companies with both growth and value characteristics. See the table below to learn what large-cap options you have through the Plan. Before investing in any fund, be sure to read its prospectus, the document that shows the fund s investment objectives, risks, charges, and expenses, as well as other important information. Read it carefully before investing. You can obtain a copy of fund prospectuses by calling or through the Plan Web site. Large-Cap Options Offered Through the Plan Large-Cap Stock Fund Fund Style Davis New York Venture Fund A Blend Dreyfus Appreciation Fund, Inc. Blend Fidelity Magellan Fund Blend Vanguard Inst'l Index Fund Plus Shares Blend Vanguard PRIMECAP Fund Admiral Shares Blend Fidelity OTC Portfolio Growth Harbor Capital Appreciation Fund Growth Janus Fund Growth Mainstay ICAP Equity I Value Morgan Stanley IF Value Portfolio Inv Class Value T. Rowe Price Equity Fund Value New International Investment Options (Continued from page 1) International Equity Fund Active Portfolio The International Equity Fund Active Portfolio will invest in many international companies and be managed by the following five highly respected international investment firms: AllianceBernstein Julius Baer Investment Management Martin Currie Investment Management Northern Trust Global Investments NWQ Tradewinds Global Investors All assets invested in the Plan s current established markets international investment options will be transferred to the International Equity Fund Active Portfolio when the Fund is implemented. The current international investment options will be eliminated from the Plan when the International Equity Fund Active Portfolio is implemented. In addition, all salary deferrals that are allocated to one of the three existing international mutual funds will be allocated to the International Equity Fund Active Portfolio unless you change your deferral allocations. The Plan s current international investment options are: Fidelity Diversified International Fund T.R. Price International Stock Fund American Century International Growth Fund The Morgan Stanley Emerging Markets Portfolio will remain as an investment option to Plan participants and assets held in that investment option will not be transferred to the International Equity Fund Active Portfolio. International Equity Fund Index Portfolio International Equity Fund Index Portfolio will be managed by Northern Trust Global Investments in a manner that reflects the MSCI EAFE Index. The MSCI EAFE Index represents investments in over 1,100 international companies in Europe, Australia, Asia, and the Far East. No assets will be transferred to this portfolio. (Continued on page 5) 4

5 PlanNews The 2007 Maximum Deferred Contribution Limits In 2007, you can defer as much as $15,500 of your salary to your Plan account, tax-deferred. That means the salary that you defer to your Plan account, and any earnings, work harder for you now and you only pay federal taxes when you withdraw your assets from your Plan account. Catch-Up Some Plan participants are eligible to defer even more to their Plan account through the Plan s two Catch-Up options. Those options are: 1 Age 50 and Over Catch-Up that is available to participants who are at least or will become 50 years old in 2007 or 2 Retirement Catch-Up that is available to participants who are within four years of the Plan s normal retirement age You can only use one of these catch-up provisions at a time, but both of these can help eligible participants to invest even more for retirement. The table below shows the maximum amount of money you can invest in the Plan in Maximum Deferral Amount for 2007 Regular Deferrals $15,500 Age 50 & Over Catch-Up $20,500 Retirement Catch-Up $31,000 Challenge Yourself to Max Out This Coming Year! When was the last time you increased what you contribute to your retirement? It makes sense to pay yourself more and benefit from the Plan s unique tax advantages. Even increasing your contribution a little bit now may make a big difference over time. The table below illustrates the minimum amount you will have to defer each pay period to reach the maximum deferral amount allowed. Contact an Account Executive or call the HELPLINE. Tell them you d like to increase your contribution to your Plan account or that you want to contribute the maximum in If you are making Regular Deferrals Age 50 & Over Catch-Up Deferrals Retirement Catch-Up Deferrals and you are paid Maximum Per Pay Is Weekly (52 pays) $ $ $ Biweekly (26 pays) $ $ $1, Monthly (12 pays) $1, $1, $2, Semi-monthly (24 pays) $ $ $1, However, you may direct future salary deferrals or transfer existing assets in your Plan account to the International Equity Fund Index Portfolio. Board s Decision Making Process The Board s decision to implement these new investment options was made after many months of intensive study. The Board contracted with an investment consultant to evaluate the investment options in the Plan, provide an in depth analysis of the alternative investment approaches that could be offered to Plan participants, and make recommendations on potential investment options. The investment consultant recommended that the Board initiate a custom fund because of the previously mentioned advantages. The Board issued a request for proposal (RFP) for international investment management firms based on the recommendation of the investment consultant to determine the feasibility of offering a custom international fund. The RFP responses revealed that the selected international investment managers had historical investment returns that equaled or exceeded the historical performance of the Plan s current international investment options and that the overall expenses would be significantly lower. A special page has been added to the Plan s Web site, which will contain more detailed information relating to the International Equity Funds including numerous questions and answers concerning the Funds, a Fact Sheet on the Funds, the Funds' Investment Guidelines, and other relevant information. In addition, direct mailings will be sent to Plan participants as the Plan makes progress on the transition from the current international investment options to the new International Equity Funds. Please be aware that funds that invest internationally involve risks not associated with investing solely in the U.S., such as currency fluctuation, political risk, differences in accounting and the limited availability of information. 5

6 RetireeNews Your New Journey Takes Planning If you re getting ready to retire, this is an exciting time for you! And it s also time for important planning. Making a confident decision about how to receive your income isn t difficult especially with help from your local Account Executive and the HELPLINE. Planning your retirement income takes three simple steps. Determine how much income you need in retirement Compare your monthly income with your monthly expenses. Look at what you need versus what you have. You have options whether you experience a shortfall (if you need additional income) or a surplus (if you have more than enough money to meet your expenses). Stretch your income so it lasts throughout retirement Because people are living longer, plan to make the income and assets that you have stretch through your retirement years. Your income and assets face risks like inflation and health care expenses, so it s important to plan for them. Choose the payout option that s right for you When deciding how you want to receive your account dollars from the Plan, you may be surprised at how many choices there are. It s a good thing to have so many choices because you have a better chance of finding one that fits you. And your Plan is flexible. If you want to change your payout option or amount at a later date, you can! Plan Details: Distribution Changes Pay attention to RMD. The IRS requires that you begin receiving a required minimum distribution (RMD) no later than April 1st in the year after you reach the age 70½. If you don t take the distribution or you don t take enough to meet the minimum, the IRS can assess a hefty 50% of the shortfall. That s in addition to federal income taxes you should have paid. Call your local Account Executive or the HELPLINE when you re ready to take these steps. They will provide the education and resources to help you determine how much income you need, the best way to receive it, and how to start the process. The Plan has implemented a new minimum benefit payment policy applicable to distribution requests initiated after January 1, Participants who initiate a benefit distribution after this date are now required to receive a minimum of $100 in each benefit payment. The minimum fixed dollar benefit payment that a participant may select is now $100. Participants who select a payment schedule to be paid over a fixed period of time will receive the calculated amount or $100, whichever is greater. Participants who are currently receiving a benefit payment will not be affected by the new policy. If these changes are relevant to your Plan account, the Plan can provide you with more in-depth information and individual attention to discuss your situation. Please call your local Account Executive or the HELPLINE. This newsletter gives information that is intended to help participants understand what investment alternatives are available to them under the Plan. If you need tax or legal advice, please ask your certified public accountant or lawyer. While we are pleased to help keep you up-to-date on your retirement savings, nothing in this newsletter can change the terms of the Plan or any investment contract. Participants in the New York State Deferred Compensation Plan will be charged administrative fees for the Plan year beginning April 1, 2006 and ending March 31, Each participant is charged a $14 annual fee, assessed in two $7 semi-annual charges in September and March. This fixed fee will appear on your account statement as a deduction. The Plan s administrative expenses are partially offset by reimbursements the Board has negotiated with most of the Plan s mutual fund providers. In addition, each of the mutual funds offered by the Plan has fund expenses that are netted directly from the mutual fund s daily price. These will vary based upon the investment fund selected. Information provided by Account Executives is for educational purposes only and is not intended as investment advice. Neither the Administrative Service Agency nor any of its representatives offer legal or tax advice. For such guidance, you should consult your own legal or tax adviser. Securities offered through Nationwide Investment Services Corporation, Member NASD. New York State Deferred Compensation Plan Room 124 Empire State Plaza P.O. Box 2103 Albany, NY All rights reserved. Printed in the U.S.A. Q , NRM-2830NY.6 6