Northern Trust KEEPING YOUR FUNDS ON TARGET INSIDE The details explained What changed and why How investment decisions are made What this means for you BELOW Terms to know CHANGES IN BRIEF During the first quarter of, the following changes were made to better position the Focus s (s) for forecasted global economic and market conditions. To enhance diversification, the allocation to international stocks increased as a percentage of the overall allocation to stocks To increase efficiency, a single fund is now used to implement the allocation to US stocks, rather than three funds To further mitigate future inflation risk, exposure to US Treasury Inflation Protection Securities (TIPS) now focuses on TIPS with maturities between 1-10 years The TIPS allocation in s 2040 through 2055 was replaced with an increased allocation to commodities to capture long-term opportunities in the asset class for participants with a longer retirement time horizon To capture increased return potential, the allocation to cash was eliminated and redistributed to investment grade bonds represented in the allocation to the Aggregate Bond Index Northern Trust s forward looking, historically aware mindset is the foundation of our outlook expectations. Every year, Northern Trust investment professionals gather to develop five-year forward looking capital market assumptions (CMA). Knowing how capital markets behaved in the past being historically aware is important. Having an understanding of what might lie ahead being forward looking is even more essential. Based on historical risk and return, and relationships between and across asset classes, the CMA Working Group attempts to predict how and why these relationships may change in the years ahead. The changes made to the s in first quarter express the five-year forward-looking views of the Northern Trust Investment Policy Committee (IPC). The s management team uses these forecasts and evaluates how the assumptions may affect future returns in specific asset classes in which the s invest. TERMS TO KNOW Asset allocation is a process which determines how much of your money should be invested in different investment categories, such as stocks, bonds and cash. Benchmark is a market proxy against which portfolio performance can be measured. Capital markets are markets for buying and selling financial securities, such as stocks and bonds. Correlation is a statistical measure of how two securities returns move relative to each other. Diversification is a way to manage risk by mixing investments that are likely to perform differently in varying market environments. Glidepath is how the asset allocation shifts over time. More is allocated to stocks in early years and then gradually more is allocated to bonds in later years. Inflation hedge typically involves investing in assets that are expected to provide purchasing power protection by seeking to follow movements in inflation, typically measured by the Consumer Price Index, known as CPI. Investment grade bonds are government and corporate bonds rated as having a relatively low risk of default, for example, BBB and above. Yield is the income received on a security, such as a bond. Keeping Your s on Target 1 of 5
WHAT CHANGED AND WHY Q1. What happened with the s allocation to stocks? A1. While the overall allocation to stocks did not increase, there is now an equal weighting between US and international stocks within the overall allocation. The s stocks allocation moved to 50% US stocks and 50% international stocks from 60% US stocks and 40% international stocks. Q2. Why did the allocation to international stocks increase? A2. International stocks represent an ever-growing percentage of the global stock market. The increasing globalization of capital markets supports the case for a greater allocation to stocks in companies based outside the US. Table 1: Increased Allocation to International Stocks US stocks 37.00% 33.97% 30.19% 26.40% 22.61% 18.83% 15.04% 11.26% 10.50% Intl stocks 37.00% 33.97% 30.19% 26.40% 22.61% 18.83% 15.04% 11.26% 10.50% US stocks 44.00% 40.40% 35.90% 31.40% 26.90% 22.40% 17.90% 13.40% 12.50% Intl stocks 30.00% 27.54% 24.47% 21.40% 18.33% 15.26% 12.19% 9.11% 8.50% Q3. Why did a single US stock fund replace three US stock funds? A3. The three US stock funds S&P 500 Index, MidCap S&P 400 Index and Russell 2000 Index represent large, mid and small market capitalization US stocks. We now capture all three market capitalizations through a single fund, the MSCI US IMI Index (Investable Market Index) which is benchmarked to the MSCI USA IMI. With 2,457 constituents, this index captures approximately 99% of the free float-adjusted market capitalization in the US. By consolidating the US stock allocation to a single fund, we can decrease portfolio turnover and simplify the US stock allocation for the s. Table 2: Single for US Stocks Exposure US Stocks MSCI US IMI 37.00% 33.97% 30.19% 26.40% 22.61% 18.83% 15.04% 11.26% 10.50% US Stocks 44.00% 40.40% 35.90% 31.40% 26.90% 22.40% 17.90% 13.40% 12.50% S&P 500 34.50% 31.70% 28.20% 24.70% 21.20% 17.70% 14.20% 10.70% 10.00% S&P 400 5.50% 5.04% 4.47% 3.90% 3.33% 2.76% 2.19% 1.61% 1.50% Russell 2000 4.00% 3.66% 3.23% 2.80% 2.37% 1.94% 1.51% 1.09% 1.00% Keeping Your s on Target 2 of 5
Q4. What happened with the s inflation hedge securities? A4. The s use global real estate, commodities and TIPS as a hedge against inflation. Beginning first quarter, the s transitioned to a shorter duration TIPS portfolio with maturities from 1 to 10 years. Previously, the fund invested in a TIPS portfolio with maturities of up to 30 years. TIPS were removed from s 2040 through 2055 and the allocation to commodities in these s increased by the percentage previously allocated to TIPS. Q5. Why are shorter duration TIPS being used going forward? A5. Shorter duration TIPS more closely track the rate of inflation as measured by the Consumer Price Index (CPI). This stronger correlation to inflation may help mitigate loss of purchasing power for participants closer to retirement. For participants with a longer investment horizon, TIPS exposure was replaced by commodities which also serve as a hedge against inflation. Q6. Why did commodities replace the allocation to TIPS in s 2040 through 2055? A6. The increased allocation to commodities in these s is expected to capture long term opportunities for participants with a longer term retirement time horizon. Table 3: Movement in Inflation-hedge Securities Inflation 11.00% 11.69% 12.54% 13.40% 14.26% 15.11% 15.97% 16.83% 17.00% hedge Global real 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% estate Commodities 6.00% 5.31% 4.46% 3.60% 2.74% 1.89% 1.03% 0.17% 0.00% US TIPS 1-10 year 0.00% 1.37% 3.09% 4.80% 6.51% 8.23% 9.94% 11.66% 12.00% Inflation 11.00% 11.69% 12.54% 13.40% 14.26% 15.11% 15.97% 16.83% 17.00% hedge Global real 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% estate Commodities 4.00% 3.54% 2.97% 2.40% 1.83% 1.26% 0.69% 0.11% 0.00% US TIPS 1-30 year 2.00% 3.14% 4.57% 6.00% 7.43% 8.86% 10.29% 11.71% 12.00% Q7. Why was cash eliminated from the glidepath? A7. Cash was eliminated due to its low yield potential. Northern Trust IPC expects cash to stay anchored around a 0% yield for the majority of the five-year forward-looking horizon. By replacing cash with investment grade bonds through our allocation to the Northern Trust Aggregate Bond Index, the s seek to capture increased return opportunity. Table 4: Elimination of Cash Bonds 15.00% 20.37% 27.09% 33.80% 40.51% 47.23% 53.94% 60.66% 62.00% Bonds 15.00% 19.80% 25.80% 31.80% 37.80% 43.80% 49.80% 55.80% 57.00% Cash 0.00% 0.57% 1.29% 2.00% 2.71% 3.43% 4.14% 4.86% 5.00% Keeping Your s on Target 3 of 5
Q8. What does the current glidepath look like? A8. The glidepath from first quarter is: Allocation % 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 Participant Age US Stocks International Stocks Inflation Hedge Bonds Table 5: Targeted Asset Allocation US stocks 37.00% 33.97% 30.19% 26.40% 22.61% 18.83% 15.04% 11.26% 10.50% Intl stocks 37.00% 33.97% 30.19% 26.40% 22.61% 18.83% 15.04% 11.26% 10.50% Inflation Hedge 11.00% 11.69% 12.54% 13.40% 14.26% 15.11% 15.97% 16.83% 17.00% Bonds 15.00% 20.37% 27.09% 33.80% 40.51% 47.23% 53.94% 60.66% 62.00% HOW INVESTMENT DECISIONS ARE MADE Q9. How does the investment review process work? A9. The s management team, appointed by Northern Trust Asset Management, meets regularly to review and monitor how target asset allocations underlying the glidepath support the s investment goals. Annually, the management team meets to review the five-year, forward-looking CMAs and may adjust the allocations strategically to potentially benefit from expected market dynamics. Q10. When could the s investments change? A10. Strategic asset allocations are based on a long-term investment strategy. Asset allocations may be modified from time to time to account for changes in market conditions as well as Northern Trust s longer-term investment outlook. Other asset classes may also be considered from time to time. Future recommendations to add or omit certain asset classes may be made to help the s continue to meet their objectives, depending on longer-term economic and market expectations. Keeping Your s on Target 4 of 5
WHAT THIS MEANS FOR YOU Q11. Does my have the same goal as before? A11. Yes. Each has a year which indicates the timeframe in which you are assumed to retire or start withdrawing money from your account. The goal of each remains the same to provide an asset allocation that balances risk with the number of years until retirement. Q12. Has the s investment strategy changed? A12. No. The investment changes reflect how the s manager continues to manage investments to best meet the goals of the s long-term investment strategy. Q13. Have the s investment management fees remained the same? A13. Yes. The updates did not result in any change to investment management fees paid by plan participants. Q14. Have the strategic allocation changes increased the s investment risk? A14. The allocation changes are not expected to have a material impact on any of the s overall investment risk. Each s five-year risk/return forecasts continue to fall within expected risk parameters established by the investment manager. This is not a solicitation. No information provided herein shall constitute an offer to sell or a solicitation of an offer to acquire any security, investment product or service, nor shall any such security, product or service be offered or sold in any jurisdiction where such offer or solicitation is prohibited by law or regulation. This material is provided for informational purposes only and does not constitute a recommendation of any investment strategy or product described here. Northern Trust Asset Management comprises Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K., The Northern Trust Company of Connecticut, NT Global Advisors, Inc. and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE Keeping Your s on Target 5 of 5