PRUDENTIAL DAY ONE SM FUNDS Preparing for the first day of retirement, and all the days thereafter with target date funds Prudential Day One Funds are offered through Prudential Retirement Insurance and Annuity Company. For Plan Sponsor and Intermediary Use - Public Use Permitted.
Every day for the next 20 years, 10,000 Baby Boomers will reach age 65, many of whom are unprepared to retire.* Prudential is dedicated to helping people reach their Day One of retirement confident that they will have the income they need. Prudential s Day One SM Funds are an example of that commitment. And because the issues that surround retirement touch both the head and the heart, the Day One Funds were designed to help address the analytical and emotional decisions participants face in saving and investing. Our Day One Funds reflect the insights and experience that come with more than 85 years of working with thousands of retirement plans, millions of plan participants and leading investment managers and behavioral experts. Achieving a more secure retirement is a challenge A challenge that can be overcome. THE DAY ONE FUNDS CAN HELP. * Source: Baby Boomers Approach Age 65 Glumly, Pew Research Center Publications, Dec. 20, 2010.
PRUDENTIAL S Day One Funds Helping Americans Plan for Retirement Our goal is to help Americans successfully reach their Day One of retirement. Our challenge was to provide target date funds that could help prepare participants for 30+ years of retirement. Prudential is a leader in solving for retirement income needs, and we have approached the design and glidepath construction of our Day One Funds with this focus. Because of our more than 85 years of experience managing pension and defined contribution plans, we truly understand participant demographics, longevity and life expectancy. We also understand investment behaviors that can undermine the ability to properly prepare for retirement. Solving for America s Longevity Challenge The good news is that Americans are living longer. But increased life expectancy brings with it the challenge of funding retirements that can last 30 years or more. By 2050, the average American life expectancy is estimated to be 83 years.* Based on our proprietary research and our conservative view, and because participants need a reliable source of income that will last as long as they live, we have modeled our Day One Funds with the assumption that participants will live to age 95. 83.1 [2050] Average American Life Expectancy * 68.4 [1950] ** 73.5 [1978] age in years 65 70 75 80 85 * Centers for Disease Control and Prevention, Table 22. Life expectancy at birth, at age 65, and at age 75, by sex, race, and Hispanic origin: United States, selected years 1900-2010, http://www.cdc.gov/nchs/hus/contents2011.htm#022. Population Division, U.S. Census Bureau, Table 10. Projected Life Expectancy at Birth by Sex, Race, and Hispanic Origin for the United States: 2010 to 2050, www.census.gov/population/projections/files/summary/np2008-t10.xlscached. ** In 1978, Congress amended the Internal Revenue Code which made 401(k) plans possible. For illustrative purposes only, not to scale. 1
INCREASED LONGEVITY demands a different focus on risk Because protecting against longevity risk is so important, we believe most participants are best served over the long term by a through glidepath design. As a result, each Day One Fund continues to adjust its asset allocation for 10 years after its target date. To construct our glidepath, we applied asset liability modeling techniques historically done in the defined benefit market. To make the assumptions as realistic as possible, we analyzed multiple data sources, including more than 850,000 participants in plans serviced by Prudential. Asset Class Mix: GLIDEPATH Ten years prior to the target date, we incorporate The Retirement Red Zone concept into our glidepath. At this point, we begin to significantly shift from riskier assets to more conservative ones. Because addressing longevity risk is so important, the glidepath starts with a 97% allocation to domestic and foreign equities, as well as commodities and real estate (non-traditional investments) to help provide for potential growth. 97 % 80 60 40 20 EQUITY & NON-TRADITIONAL EXPOSURE (%) As the target date approaches, equity exposure decreases. -10 YEARS TARGET DATE Because the Day One Funds have a through retirement glidepath, the exposure to equities continues to decrease to provide additional protection against equity market declines. This allocation stabilizes 10 years after the target date at (26% equities, 9% commodities and real estate, and 65% fixed income. +10 YEARS 35 % 0 YEARS TO RETIREMENT -40 yrs -30 yrs -20 yrs -10 yrs +10 yrs TARGET DATE DAY ONE FUNDS 2060 2055 2050 2045 2040 2035 2030 2025 2020 2015 2010 Income As shown in the chart above, each target date fund s asset allocation follows a glidepath that becomes more conservative as the applicable target date approaches by reducing exposure to equity investments and increasing exposure to fixed-income investments. The glidepath continues to adjust allocations in this manner for approximately 10 years past the target date, at which point the asset allocation of each target date fund will be similar to that of the Day One Income Fund. 2 Each Day One Fund s underlying asset allocation is reviewed periodically to determine whether the glidepath (or, in the case of the Day One Income Fund, the prescribed asset allocation) and underlying funds in which such Fund invests remain suitable to meet the Fund s investment objective. As a result of this review, the glidepath and/or the allocation of the Fund s assets among the underlying funds may be modified. Allocations as of Sept. 30, 2013.
Managing Risk Throughout The Retirement Red Zone Long-term investing is one thing. But managing investment risk during the retirement planning period and beyond is quite another. At Prudential, we call this period The Retirement Red Zone a critical transition time in any investor s life. Why is this period so important? Poor investment performance during this time can have a lasting effect on a portfolio, often leaving precious little time to recover. The result can be a retirement that runs out of money. Since developing the Red Zone concept in 2005, Prudential has conducted multiple research studies to examine both the effects of the markets on Retirement Red Zone investors, as well as investor behavior. The proprietary research continues to confirm that losses in this time period can have a significant impact on an investor s ability to retire when planned and live comfortably throughout his/her retirement. Over one-third (35%) of adults 62 and older say they have delayed retirement because of the recession. Source: How the Great Recession Has Changed Life in America, PEW Research Center June 2010. 3
DIVERSIFICATION with a purpose The Day One Funds are managed to specific target dates and are offered in five-year intervals through the year 2060. Participants typically select the fund with the target date that most closely matches when they plan to retire and may begin withdrawing their money. For those who are already retired or seek current income, there is the Day One Income Fund, which has the highest fixed-income exposure and is the most conservative of the Day One Funds. The Day One Funds are regularly reviewed to make sure the portfolios are aligned with their target dates and investment benchmarks. The goal is to minimize asset class drift and help ensure that the funds stay true to their intended glidepaths. Also, the fund allocations are adjusted each year in accordance with the glidepath. Despite these features, there are several factors and risks to consider in selecting a target date fund. In addition to anticipated retirement date, relevant factors for fund selection may include age, risk tolerance, other investments owned by the participant, and planned withdrawals. As with any investment, participants should carefully consider the investment objectives, risks, charges, and expenses of the Funds before investing. It is possible to lose money in a Fund including near or following retirement and there is no guarantee that the Funds will provide adequate retirement income. Our Day One Funds diversified portfolios include a passive index core complemented by risk and fundamental actively managed investments. The broad array of domestic and foreign equities, fixed-income and non-traditional strategies was intentionally selected in an effort to provide competitive returns and diversification to help manage market, economic and other risks. The Day One Funds are fund of funds that offer: Equity exposure across market capitalizations and geography, to offer access to a broad opportunity set Passive and active equity strategies, to provide a diversity of investment approaches Fixed-income asset classes, to help lower volatility relative to other asset classes, which is particularly important as the target date approaches Non-traditional asset classes, to offer the potential for increased returns with low correlation to stocks and bonds, as well as the potential to hedge inflation 4
Additionally, our modeling found that including non-traditional assets, specifically real estate and commodities, as well as Treasury Inflation-Protected Securities (TIPS), increases the portfolio s potential to moderate risk. Real Estate: We found that the inclusion of real estate improved the risk and return characteristics because of lower correlation to stocks and bonds. Private real estate investments also help to mitigate the volatility often associated with both equity strategies and real estate investment trusts (REITS). The combination of the growth potential of public real estate and the relative stability of private real estate may result in stronger risk-adjusted returns and less volatility. Commodities: Having generally a low or negative correlation to traditional asset classes, commodities benefits the efficient frontier by improving the risk and return characteristics. TIPS: Inflation-protected bonds are important to investors who are especially vulnerable to rising costs. Including TIPS in the Day One Funds helps mitigate this risk and further helps reduce overall volatility, as it has been one of the least volatile asset classes. Overseeing the asset allocation and glidepath Quantitative Management Associates, LLC (QMA) is an analytically driven asset manager with nearly four decades of experience applying adaptive techniques to an array of investment and asset allocation strategies. QMA is part of Prudential s institutional asset management team. QMA serves two important roles in the Day One Funds: 1. QMA manages two passive and three risk-controlled active equity strategies, and 2. QMA handles glidepath and asset allocation responsibilities. In that role, QMA: Reviews glidepath allocations and recommends adjustments when needed. Conducts ongoing review of glidepath inputs, including: Projected assets and liabilities Capital market assumptions Portfolio managers insights. Monitors rebalancing activity to help ensure allocations adhere to Fund parameters. Annually adjusts each Fund s asset allocation in accordance with the glidepath. Quantitative Management Associates, LLC (QMA) is a wholly owned subsidiary of Prudential Investment Management. QMA and PIM are registered investment advisors and Prudential Financial companies. QMA has been retained as the investment sub-advisor to the Day One Funds to manage and monitor the funds glidepath allocations. 5
THE Day One Funds DAY ONE 2060 DAY ONE 2055 DAY ONE 2050 69% DOMESTIC EQUITY Broad Market 21% Large Cap 41% Mid Cap 5% 19% INTERNATIONAL EQUITY Developed Markets 15% Emerging Markets 4% 3% FIXED INCOME Core Bond 2% TIPS 1% 69% DOMESTIC EQUITY Broad Market 21% Large Cap 41% Mid Cap 5% 19% INTERNATIONAL EQUITY Developed Markets 15% Emerging Markets 4% 3% FIXED INCOME Core Bond 2% TIPS 1% 67% DOMESTIC EQUITY Broad Market 20% Large Cap 40% Mid Cap 5% 18% INTERNATIONAL EQUITY Developed Markets 15% Emerging Markets 3% 6% FIXED INCOME Core Bond 3% TIPS 3% DAY ONE 2030 DAY ONE 2025 DAY ONE 2020 55% DOMESTIC EQUITY Broad Market 17% Large Cap 32% Mid Cap 4% 15% INTERNATIONAL EQUITY Developed Markets 13% Emerging Markets 2% 21% FIXED INCOME Core Bond 11% Short Term 1% TIPS 9% 46% DOMESTIC EQUITY Broad Market 14% Large Cap 27% Mid Cap 3% 13% INTERNATIONAL EQUITY Developed Markets 11% Emerging Markets 2% 32% FIXED INCOME Core Bond 16% Short Term 1% TIPS 15% 34% DOMESTIC EQUITY Broad Market 11% Large Cap 20% Mid Cap 2% Small Cap 1% 9% INTERNATIONAL EQUITY Developed Markets 8% Emerging Markets 1% 48% FIXED INCOME Core Bond 23% Short Term 4% TIPS 21% 6
DAY ONE 2045 DAY ONE 2040 DAY ONE 2035 66% DOMESTIC EQUITY Broad Market 20% Large Cap 39% Mid Cap 5% 18% INTERNATIONAL EQUITY Developed Markets 15% Emerging Markets 3% 7% FIXED INCOME Core Bond 4% TIPS 3% 64% DOMESTIC EQUITY Broad Market 20% Large Cap 38% Mid Cap 4% 18% INTERNATIONAL EQUITY Developed Markets 15% Emerging Markets 3% 9% FIXED INCOME Core Bond 5% TIPS 4% 60% DOMESTIC EQUITY Broad Market 18% Large Cap 36% Mid Cap 4% 16% INTERNATIONAL EQUITY Developed Markets 14% Emerging Markets 2% 15% FIXED INCOME Core Bond 9% TIPS 6% DAY ONE 2015 DAY ONE 2010 DAY ONE INCOME 29% DOMESTIC EQUITY Broad Market 9% Large Cap 17% Mid Cap 2% Small Cap 1% 8% INTERNATIONAL EQUITY Developed Markets 7% Emerging Markets 1% 54% FIXED INCOME Core Bond 25% Short Term 6% TIPS 23% 26% DOMESTIC EQUITY Broad Market 8% Large Cap 15% Mid Cap 2% Small Cap 1% 7% INTERNATIONAL EQUITY Developed Markets 6% Emerging Markets 1% 58% FIXED INCOME Core Bond 28% Short Term 7% TIPS 23% 20% DOMESTIC EQUITY Broad Market 6% Large Cap 12% Mid Cap 1% Small Cap 1% 6% INTERNATIONAL EQUITY Developed Markets 6% 65% FIXED INCOME Core Bond 31% Short Term 8% TIPS 26% For additional information regarding the Day One Funds, including fees and information about the underlying investments, please refer to the Fund Fact sheet. Allocations are as of Sept. 30, 2013. 7
DESIGNING a cost-effective fund series The Day One Funds are constructed with passive index funds that are complemented by risk-controlled and fundamental actively managed strategies that combined provide an economical solution for both plan sponsors and participants. Risk-Controlled Active Equity Large Cap Mid Cap Emerging Markets Fundamental Active Equity Small Cap Passive Core S&P 1500 Index Russell Developed Ex-North America Large Cap Index Non-Traditional Real Estate Commodities Fixed Income Core Bond TIPS Short-Term Bond FOCUSED on today s retirement challenges The Prudential Day One Funds were developed with an understanding of the key challenges facing retirees today. Many of the funds design features were based on our proprietary research with a focus on helping Americans reach their Day One of retirement and all of the days that follow. The Retirement Need A married couple may need income for 30 years of retirement*. Exposure to equities early in an investor s career is key. Significant losses late in workers careers can seriously jeopardize their ability to retire. Controlling investment expenses is critical. Exposure to non-traditional and non-correlating asset classes can potentially boost returns and reduce volatility. The Day One Funds Response The Funds use a through glidepath and model life expectancy to age 95. The Funds allocation to equity and non-traditional strategies early in the glidepath is among the highest in the industry. Steeper glidepath slope switching from equity to fixed income to help lower overall portfolio volatility during the Retirement Red Zone. Core of passive index funds complemented by a satellite of actively managed strategies offers a cost-effective approach. Exposure to commodities and private real estate, as well as TIPS, can offer significant risk/return benefits. * Source: Society of Actuaries Committee. The Impact of Running Out of Money in Retirement, November 2012. 8
PRUDENTIAL S ASSET MANAGEMENT experience Backing the Day One Funds is the extensive expertise and experience of Prudential Investment Management and Prudential Retirement: Asset management heritage dating back more than 135 years One of the top 10 asset managers in the world 1 5th-largest Defined Contribution asset manager 2 7th-largest Defined Benefit asset manager 2 More than $1 trillion in assets under management (AUM) 3 We manage assets for 24 of the 25 largest plans in the U.S. 4 PRUDENTIAL S ASSET ALLOCATION expertise Prudential also has significant size, scale and experience in creating asset allocation and glidepath solutions: Asset Allocation: Nearly four decades in the asset allocation business and $62 billion in AUM in asset allocation portfolios. 5 Target Date Funds: Prudential has been a leading provider of target date funds and glidepath solutions for nearly 20 years, with more than $2 billion in AUM across 661 plans, covering 128,000 participants. 6 Our Day One Funds feature Prudential s affiliated and third-party asset managers, who have built their reputations over decades in the demanding institutional markets. These managers make research a foundation of their investment process, each with a distinct approach according to their expertise and focus. 1 Pensions & Investments Top Money Managers list, May 2013. Based on Prudential Financial total worldwide institutional assets under management as of Dec. 31, 2012. 2 P&I Money Manager Rankings, May 2013. Based on Prudential Financial worldwide assets under management as of Dec. 31, 2012. 3 As of Dec. 31, 2012. Based on Prudential Financial worldwide assets under management. Includes Institutional Retail and General Account assets. 4 Based on U.S. Plan Sponsor rankings in Pensions & Investments as of Sept. 30, 2012, Prudential Investment Management clients. 5 Source: Quantitative Management Associates, as of Sept. 30, 2013. 6 Prudential Financial Internal Data as of June 30, 2013. 9
For more information about the Prudential Day One Funds, please contact your Prudential representative or go to www.prudential.com/dayonefunds S&P Composite 1500 Index: Combining the S&P 500, S&P MidCap 400 and S&P SmallCap 600 indices is an efficient way to create a broad market portfolio representing about 85% of U.S. equities. This combination addresses the needs of investors wanting broader exposure beyond the S&P 500. The Russell Developed ex-north America Large Cap Index measures the performance of the investable securities in developed countries globally, excluding companies assigned to the U.S. and Canada. It is not possible to invest directly in an index. Indexes are unmanaged and index results to not reflect deductions for fees and other costs. All investing involves risk and there is no guarantee the Fund s objective will be achieved. An investment in a Day One Fund is subject to the risks of the investments of each underlying fund, which include: With respect to investment in equities, stock prices are more volatile than bond prices over the long term, and the value of such investment will fluctuate with changes in market conditions. Small- and mid-cap investments may be more volatile than large-cap investments, and investments in non-u.s. markets may be more volatile than domestic investments due to currency fluctuation and political uncertainty. Investments in emerging markets are subject to greater volatility and price declines. Fixed-income investments may fluctuate based on interest rate changes and are subject to the risk that the company may not be able to make timely payments of principal and interest. Further, TIPS may experience greater losses than other fixed- income securities with similar durations. Unique risks associated with real estate and commodities may cause these investments to react differently to market conditions than traditional investments. Commodities may be speculative and more volatile than investments in more traditional equity and debt securities. Asset allocation does not assure a gain or prevent a loss in declining markets. Investors should carefully consider a fund s investment objectives, risks, charges and expenses before investing. A participant or beneficiary may lose money by investing in the funds, including losses near and following retirement, and there is no guarantee that the funds will provide adequate retirement income. A target date fund should not be selected based solely on age or retirement date, is not a guaranteed investment and the stated asset allocation may be subject to change. Investments in the Funds are not deposits or obligations of any bank and are not insured or guaranteed by any governmental agency or instrumentality. Prudential Day One Funds are insurance company separate accounts available under group annuity contracts issued by Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT, a Prudential Financial company. PRIAC is solely responsible for its own contractual obligations and financial condition. 2013 Prudential Financial, Inc. and its related entities. Prudential, the Prudential logo, the Rock symbol and Bring Your Challenges are service marks of Prudential Financial, Inc., and its related entities, registered in many jurisdictions worldwide. 0246647-00004-00 RSBR855 For Plan Sponsor and Intermediary Use - Public Use Permitted.