INVESTMENT GUIDE
INVESTMENT GUIDE Table of Contents Introduction About Savings Plus... 1 How to Invest for Your Retirement... 1 Section 1: Asset Allocation Two Key Elements of Asset Allocation... 3 How Important is Asset Allocation?... 3 Section 2: Investor Types Questionnaire... 5 Investor Profiles... 9 Section 3: Build Your Portfolio Select a pre-built portfolio from a single Asset Allocation fund... 10 Build a customized portfolio using our core investment fund options... 11 Build a customized portfolio using the Brokerage Account... 12 Savings Plus Fund Options... 13 Next Steps... 15 APPENDIX Asset Categories... 17 Know Your Asset Categories... 17 Management Style... 19 Index of Terms... 21
INTRODUCTION About Savings Plus Savings Plus, the State of California s 401(k) and 457 plans, is available to most State of California employees. These plans allow you to build a retirement savings account using automatic payroll deductions that are invested in options you select from the Savings Plus portfolio. You can set up your portfolio to position yourself to retire on your terms. Contributions to your account are considered deferred income, so you don t pay taxes on it until you withdraw the funds, generally during retirement. Even if you expect to get a pension from CalPERS, CalSTRS or Social Security, it may not be enough for your retirement. Savings Plus helps fill the gap. The additional income you receive from your Savings Plus account can be one of the keys to your future financial security. How to Invest for Your Retirement Participation in Savings Plus means you re both a saver and an investor. Every investor is different and so are the ways you can invest. It s important to consider your future and to understand what type of financial contributions you may make to support your retirement. This booklet provides information and a questionnaire to help you determine your Time Horizon, Risk Tolerance, and Investor Profile. When you consider your approach to retirement, it s equally important to consider both the risks and the potential investment return. There are several ways to manage investment risks, including asset allocation. This guide will help you understand asset categories and how you can use them to create an asset allocation strategy that s appropriate for you. The information in the Investment Guide helps you determine the investment mix that best fits your goals. Our website SPPforu.com also offers helpful investment information, including the most current performance data on our investment funds. Remember to read the fund fact sheet or prospectus for any investment you re considering before you invest. Investing involves market risk including possible loss of principal. 1
SECTION 1 What is asset allocation? Asset allocation is a strategy for managing risk. Simply put, it s the process of diversifying your investment dollars across different asset categories. It enables you to increase your return potential while reducing your risk of losing money. Your willingness to accept a degree of risk will help you determine how to diversify your investments. Two Key Elements of Asset Allocation 1. Your Time Horizon The number of years your money remains invested. A shorter Time Horizon generally calls for a more conservative portfolio strategy. 2. Your Risk Tolerance The amount of market fluctuations you re willing to endure. An aggressive portfolio may not be suitable for an investor with a low Risk Tolerance, even if he or she has a long-term Time Horizon. Your answers to these two questions can help you determine an appropriate asset allocation strategy. When will I need to use my retirement dollars? (Time Horizon) How comfortable am I with market risk? (Risk Tolerance) How important is asset allocation to your investment success? Picking specific investments and deciding when to buy and sell them can have some impact on your overall return. However, a well-diversified portfolio may be the critical factor in determining how well your portfolio performs in the long run. Industry research has shown asset allocation accounts for approximately 90% of the variability of returns. * This means the asset category, not the specific investment or timing of the investment, is actually what drives the variability. For example, how much a portfolio allocates to small company options vs. large company options has much more impact than the choice of large company investment option A vs. large company investment option B. The use of diversification does not guarantee returns or insulate from potential losses in a declining market. Portfolio Volatility Asset Allocation 90% Security selection < 8% Market timing < 2% * L. Randolph Hood, Determinants of Portfolio Performance, 20 Years Later Financial Analysts Journal, September/October 2005 3
SECTION 2 What Type of Investor Are You? Now that you ve learned the basics, it s time to determine your Investor Profile (what type of investor you are). Your Investor Profile is a combination of two factors: your Time Horizon (the length of time you plan to stay invested) and Risk Tolerance (your willingness to tolerate possible investment losses). You can determine your Investor Profile by answering the following questionnaire. * Circle the number next to your answers and add up the point values at the end of each section. Time Horizon 1) Time until Withdrawals When do you expect to begin using this money? 0 Two years or less from now 3 Three to five years from now 7 Six to eight years from now 2) Time for Withdrawals Once you begin using this money, how long will it need to last? 0 I m going to need it all at once 2 Between one to five years 4 Between six to 10 years Total Your Time Horizon Score: Question 1 point value + Question 2 point value Your Time Horizon Score = 10 Nine to 11 years from now 11 12 years or more from now 7 Between 11 to 19 years 10 For 20 years or more 5 * Questionnaire provided by Ibbotson Associates, a leading authority on asset allocation within the financial services industry If your Time Horizon score equals 0, this questionnaire should not be used for portfolio selection
POSSIBLE one year gains and losses $140,000 +$38,000 +$45,000 $130,000 +$29,000 $120,000 +$21,000 $110,000 $100,000 +$15,000 Portfolio A Portfolio B Portfolio C Portfolio D Portfolio E -$8,000 $90,000 $80,000 -$13,000 -$18,000 -$24,000 -$28,000 Possible One Year Gain Possible One Year Loss Risk Tolerance 1) Range of Returns/Potential Losses At the beginning of the year, you have $100,000 invested. The graph above shows the possible losses and potential best gains of various portfolios in any given year of different hypothetical portfolios over the long term. Select the portfolio below that you feel most comfortable with. 0 Portfolio A 4 Portfolio B 8 Portfolio C 12 Portfolio D 17 Portfolio E 2) Inflation In 1970, a candy bar cost around 15 cents. 40 years later, a candy bar costs around 90 cents due to inflation. To offset the impact of inflation, I will accept: 17 The highest level of risk, whereby returns may significantly exceed inflation 11 High risk. Returns moderately exceed inflation 5 Moderate risk. Returns slightly exceed inflation 0 Lowest risk. Returns only keep pace with inflation 3) Risk/Return Trade Off I understand that to meet my future income needs, I may need to take on additional risks in order to achieve potentially higher returns. 16 I m comfortable with a greater than average amount of risk. 8 I m comfortable having a mix of both risky and less-risky investments. 0 I m more comfortable with lower risk investments. 6
4) Ability to Stay the Course All investment markets experience declines from time to time. If you have $100,000 in an account at what point of a decline in account value would you move your investments into more conservative options? 0 After losing 5% or $5,000 5 After losing 10% or $10,000 10 After losing 15% or $15,000 16 I would not sell any of my investments. If my account declines in value, that by itself is not a good reason to sell. 5) Loss Aversion I m comfortable with investments that may frequently experience large declines in value if there s a long-term potential for high returns. 0 Strongly disagree 5 Disagree 9 Somewhat agree 12 Agree 17 Strongly agree 6) Volatility Typically, accounts with lower returns also experience lower volatility or fluctuations in account value. Meanwhile, accounts with higher returns tend to have higher fluctuations or volatility in account value. Please consider four hypothetical accounts invested for 10 years. Given your attitude towards volatility, in which hypothetical account would you be most comfortable investing? Score Potential Number of Years of Losses or Negative Returns Potential Worst Performing Year Potential Average Return 0 2-7% 5% 5 3-12% 6% 9 3-18% 7% 12 3-23% 8% 17 4-28% 9% Total Your Risk Tolerance Score: Question 1 point value Question 2 point value Question 3 point value Question 4 point value Question 5 point value + Question 6 point value Your Risk Tolerance Score = 7
Determine your investor profile Your Investor Profile is used for guidance on how to spread your investments across different asset categories in a manner that matches your Time Horizon and Risk Tolerance. Use the Investor Profile Code chart below to locate where your Time Horizon and Risk Tolerance score intersect, then circle your Investor Profile Code. 1. Look across the top row to find your Time Horizon score. 2. Look down the left column to locate your Risk Tolerance score. 3. Match the two to find the code that represents your Investor Profile. Risk Tolerance score Time Horizon score 10+ 8 9 6 7 3 5 0 2 86 100 A MA M MC C 66 85 MA MA M MC C 39 65 M M M MC C 15 38 MC MC MC MC C 1 14 C C C C C Example: If your Time Horizon score is 8 and your Risk Tolerance score is 57 your Investor Profile Code would be M. Your Investor Profile would be Moderate. Investor profile Key A Aggressive MA Moderately Aggressive M Moderate MC Moderately Conservative C Conservative Now that you ve identified your Investor Profile, you re ready to design your asset allocation strategy. Ibbotson Associates uses a broad approach to diversify holdings across asset categories, which include combinations of different types of stock investments, diversified real return, bonds, and short-term investments. You can implement your asset allocation strategy by selecting a portfolio that matches your Investor Profile. See Investor Profiles on the next page. The use of asset allocation does not guarantee profits or insulate you from potential losses in a declining market. 8
Investor Profiles Put a check mark next to your Investor Profile Aggressive 9% Small Cap STOCK 29% International STOCKS 14% Mid Cap STOCKS 38% Large Cap STOCKS 5% Diversified Real Return 5% Bonds 0% Short-Term Investments Moderately Aggressive 5% Small Cap STOCK 23% International STOCKS 13% Mid Cap STOCKS 33% Large Cap STOCKS 8% Diversified Real Return 14% Bonds 4% Short-Term Investments Moderate 4% Small Cap STOCKS 14% International STOCKS 9% Mid Cap STOCKS 27% Large Cap STOCKS 10% Diversified Real Return 22% Bonds 14% Short-Term Investments Moderately Conservative 0% Small Cap STOCKS 9% International STOCKS 7% Mid Cap STOCKS 19% Large Cap STOCKS 8% Diversified Real Return 34% Bonds 23% Short-Term Investments Conservative 0% Small Cap STOCKS 4% International STOCKS 3% Mid Cap STOCKS 9% Large Cap STOCKS 5% Diversified Real Return 39% Bonds 40% Short-Term Investments 9
SECTION 3 How Do You Want To Build Your Portfolio? Now that you ve evaluated your Time Horizon and Risk Tolerance and determined your Investor Profile, it s time to build your Savings Plus portfolio. There are three ways to build your portfolio: 1 Select A PRE-BUILT PORTFOLIO FROM A Single Asset Allocation Fund Use Method 1 if... You prefer to let the pros handle your investment lineup. Pre-built portfolios automatically rebalance your investments for you. How it works Asset allocation funds are designed to provide you with one convenient investment option. Each asset allocation fund invests specific percentages in the different asset categories. Each asset allocation fund carries different risk and reward potential tied to the mission of the fund. How it s done (existing portfolio, future deferrals, or both) 1. Determine which Asset Allocation option from the Savings Plus line-up on page 13 corresponds to your Investor Profile 2. Log in to your secure online account at SPPforu.com Over a long-term period, conservative funds generally experience lower risk and lower potential returns, whereas aggressive funds generally experience higher risk and higher potential returns. Remember to reassess your Investor Profile if you experience a major life change, change your retirement plans, and as your remaining Time Horizon decreases. 3. Existing Portfolio Select Transactions, then End Result Exchange to reallocate your existing portfolio to your selected fund 4. Future Deferrals Select Transactions, then Allocation Change to direct your future deferrals Note: Asset allocation funds are designed for you to designate 100% of your existing portfolio and future deferrals to the fund that matches your Investor Profile. Asset Allocation Funds can be selected based on your personal objectives and risk tolerance and are designed to provide asset allocation across several types of investments and asset categories, primarily by investing in underlying funds. Included in the Asset Allocation fund total operating expenses (found in the fund fact sheet) are a proportional share of the underlying fund expenses. Please see fund fact sheets for further fee and expense details. 10
2 Build A Customized Portfolio USING Our Core Investment Fund Options Use Method 2 if... You re a Hands On investor. How it works Hands on investors can build and maintain their own portfolio from the menu of investment options available within Savings Plus. The investment fund managers are chosen through the State s competitive bid process. Remember to reassess your Investor Profile if you experience a major life change, change your retirement plans, and as your remaining Time Horizon decreases. How it s done (existing portfolio, future deferrals, or both) 1. Use the Investor Profile models on page 9 to determine the appropriate percentages to allocate to each of the seven asset categories 2. Select investment funds from Savings Plus core line-up featured on page 13 3. Log in to your secure online account at SPPforu.com 4. Existing Portfolio Select Transactions, then End Result Exchange, and type the percentages based on the Investor Profile model you selected on page 9 5. Future Deferrals Select Transactions, then Allocation Change to direct your future deferrals Before investing, carefully consider the funds investment objectives, risks, and charges and expenses. The fact sheets/prospectuses contain this and other important information. Fund fact sheets/prospectuses can be obtained on the Savings Plus website (SPPforu.com) or by calling (866) 566-4777 (press *0). Read the fact sheets/prospectuses carefully before investing. Past performance does not guarantee future results. 11
3 Build A Customized Portfolio USING The Brokerage Account Use Method 3 if... You re an experienced investor seeking a wider variety of investment options. How it works Experienced investors may want to direct investments to a wider variety of options than are available in Savings Plus core line-up featured on page 13. This can be accomplished by selecting the self-directed brokerage option. The brokerage account is called the Personal Choice Retirement Account (PCRA), offered through Charles Schwab & Co., Inc. (Member SIPC). How it s done (existing portfolio, future deferrals, or both) 1. Go online to SPPforu.com 2. Complete the steps on page 11 to implement the Build a Customized Portfolio Using Our Core Investment Fund Options In combination with the Build a Customized Portfolio Using Our Core Investment Fund Options, a PCRA allows you to further customize your portfolio. This option allows you to invest in most publicly traded mutual funds, individual stocks, individual governmental or corporate bonds, real estate investment trusts, and a variety of other investments. 3. Obtain the Schwab Personal Choice Retirement Account paperwork under forms and publications 4. Follow the instructions to open a brokerage account Note: You must retain $2,500 or 50% of your total account balance, whichever is less, in your Savings Plus core account. Savings Plus maintains the right to adjust this minimum account balance requirement at any time. 12
Fund Options Put a check mark next to how you would like to build your portfolio Asset Allocation Funds Method 1 Asset Allocation Index Fund Aggressive Asset Allocation Index Fund Moderately Aggressive Asset Allocation Index Fund Moderate Asset Allocation Index Fund Moderately Conservative Asset Allocation Index Fund Conservative Core Investment Fund Options Managed Funds (Active Management) Small Cap Fund Stocks Index Funds (Passive Management) Small Cap Index Fund International Fund Mid Cap Fund International Index Fund Mid Cap Index Fund OPTION 2 Method 2 Large Cap Fund Large Cap Index Fund Socially Responsible Fund * Diversified Real Return Diversified Real Return Fund Bonds Bond Fund Bond Index Fund Short-Term Investments Short Term Investment Fund Short Term Investment Fund-CASH Method 3 Brokerage Account Personal Choice Retirement Account (PCRA) (offered through Charles Schwab, Inc.) * The Socially Responsible Fund is Savings Plus descriptor for the Neuberger Berman Socially Responsive Fund, a variable annuity sub-account which invests in the assets of an underlying large cap investment option. 13
Next Steps maintaining your savings plus account Now that you ve enrolled, identified your Investor Profile, and implemented your investment strategy, follow this 5-step checklist: 1 Be patient invest consistently and let time work to your advantage 2 Review your investment strategy annually to ensure it still fits with your goals 3 Increase your contribution with each salary increase 4 Combine your previous employer s retirement plan assets into your Savings Plus account (rollover-in) 5 Commit to your future Savings Plus will be with you every step of the way! 15
APPENDIX Asset Categories Savings Plus offers different types of investment fund options with various levels of risk and reward. When planning your retirement, Savings Plus provides many investment options to help you design a portfolio based upon your risk comfort levels. Risk and reward go hand in hand; where there is greater risk, there is a greater potential for performance to be rewarded. Funds ranking high on a risk-adjusted return scale demonstrate a favorable trade off between risk and reward. Range of Relation Between Risk and Return Diversified Small-Cap International Mid-Cap Large-Cap Real Return Bonds Short-Term Investments HIGH POTENTIAL RISK/REWARD LOW The chart above displays the range of relation between risk and return potential of the seven asset categories available through Savings Plus. Asset Allocation funds don t appear because those funds diversify investments across several categories. Know Your Asset Categories The investment choices offered by Savings Plus fall into seven asset categories: Small-Cap, International, Mid-Cap, Large-Cap, Diversified Real Return, Bonds, and Short-Term Investments. Diversifying your investment selections across asset categories can increase your return potential according to the level of risk you re willing to accept. Small-Cap Stocks typically refers to companies with market value less than $2 billion. Small companies can grow much faster than big companies, but tend to be more volatile, and their stocks tend to be more risky than the stocks of mid-cap and large-cap companies. 17
International Stocks, also known as foreign funds, are invested in companies located outside of the United States. Because of currency fluctuations, possible political instability, differences in accounting standards, and foreign regulations, international funds carry risks not found with domestic stock funds. Both risk and return potential are higher than the large-cap and mid-cap stock categories. Mid-Cap Stocks typically refers to companies with market values between $2 billion and $10 billion. These funds can be somewhat more volatile than large-cap funds, but are generally less risky than funds devoted exclusively to smaller companies. Large-Cap Stocks are instruments that signify part ownership in corporations. Usually, they encounter higher market risk than do short-term investments and bonds but offer the potential for higher long-term returns. Large-cap typically refers to companies with market values exceeding $10 billion. Large-cap funds tend to be less volatile and offer lower risk than do funds with smaller capitalizations. Diversified Real Return includes three investment types: Treasury Inflation-Protected Securities (TIPS), Real Estate Investment Trusts (REITs), and commodities. Historically, these investment types have had low correlation with one another. Bonds are loans or debt instruments issued by governments or corporations that need to raise money. When investors buy bonds, they re lending money to those governments or corporations. Bonds are issued for a set period, during which interest payments are made to the bondholder. Bonds are more stable than stocks and provide a more steady flow of income than stocks. However, over a long time period, they often provide a lower rate of return than stocks. Short Term Investments include two basic underlying asset types: (1) cash, which refers to short term securities, such as bank certificates of deposit (CDs) and money market funds and (2) fixed income, which includes securities issued by the U.S. Government, U.S. Agencies, corporate bonds, residential and commercial mortgage-backed securities, and other asset-backed securities. Typically, short term investments encounter less market risk than do stocks, diversified real return, and bonds because of their short duration. Therefore, they usually provide a lower rate of return than investments in those categories. Management Style Managed funds use an active management strategy in which the fund managers attempt to beat the returns of a market index using their own informed, independent judgment to make investment decisions. These managers use research and analysis of the underlying companies or bonds within an index to help them make decisions. Since active management takes more research, managed funds tend to charge higher management fees, which affect the net performance of the fund. However, if the fund manager consistently exceeds the index benchmark over a long time period (3, 5, or 10 years), the fund s investors will reap the benefit of higher returns relative to the index. Index funds use the opposite approach, known as passive management. These funds seek to match the performance of the overall market (or some part of it) by mirroring its composition. For the U.S. market, an index could be composed of small, medium, or large companies; an international index could be composed of international companies; a bond index could be composed of a group of bonds, domestic or international. Managers using passive management don t try to outperform the market; therefore, the passively managed index funds have lower expenses. 19
Index of Terms The Index of Terms provides definitions for terms found in this Investment Guide. They should not be considered as legal or formal definitions. Account (page 1) The record of all transactions affecting a participant s investments. A participant may have both a 401(k) Plan account and a 457 Plan account. Asset Allocation (page 3) The strategy of spreading investment fund options across asset categories. The allocation should be based on a participant s goals, Time Horizon, and Risk Tolerance. Cap (pages 9, 13) An abbreviation of the term capitalization. When used with small-, mid-, or large-, it refers to how much stock the companies in the fund have issued and has available in the market. Capitalization is computed by multiplying the number of shares outstanding by the current share price and often refers to the size of a company. Diversification (page 3) A portfolio strategy designed to spread risk by allocating assets among a variety of investments, such as stocks, diversified real return, bonds, and short-term investments. Exchange (pages 10, 11) The movement of assets from one investment fund option to another within Savings Plus. Fact Sheets (pages 1, 11) A document providing the investment objectives, strategy, fees and expenses, and past performance of the fund options offered by Savings Plus. Fact sheets are provided in lieu of a fund prospectus for separate accounts, collective trust funds, and fund-of-fund options. 21
Index (page 19) A statistical indicator providing a representation of the value of the securities that constitute a specific market sector. Indexes often serve as barometers for a given market or industry and benchmarks against which financial or economic performance is measured. Note: You cannot invest directly into an index. Index performances are presented for comparison only and don t take into account fees or charges associated with purchasing securities. Index Fund (pages 13, 19) Index Funds seek to match the overall performance of a market or some segment of a market by investing in many or all securities (stocks or bonds) that comprise that index. For example, the Large Cap Index Fund offered by Savings Plus seeks to match the returns of the S&P 500 Index. Mutual Fund (page 12) An investment with a company that pools money from shareholders and invests in a variety of securities, including stocks, bonds, and money market instruments. As openend investments, most mutual funds continuously offer new shares to investors. PCRA (pages 12, 13) Personal Choice Retirement Account. This is a self-directed brokerage account provided by Charles Schwab & Co., Inc., and offered through Savings Plus. Participants choosing to enroll in a PCRA manage investments in their 401(k) Plan and/or 457 Plan. Portfolio (pages 1, 3, 6, 8, 10, 11, 12, 13, 17) A collection of investments owned by a participant. Prospectus (pages 1, 11) A legal document used to describe material information about a mutual fund, such as the securities held in the mutual fund. Federal and state securities regulators require the prospectus to include the fund s investment objectives, policies and restrictions, fees and expenses, and the process for buying and selling shares. It should be read carefully before investing. Rate of Return (page 19) The percentage of change in an investment, including appreciation or depreciation and dividends or interest, over a given time period. It may be expressed on an annual basis or as a return per year. Variable Annuity (page 13) The value of the Socially Responsible Fund reflects the performance of the underlying investments minus the contract expenses, when applicable, and is subject to market risk, including the potential loss of the principal invested. There are no mortality, expense risk and administration charges, deferred contingent sales charges, or annual maintenance fee applicable under Hartford s offered group annuity contract. 23
State of California Department of Personnel Administration Savings Plus Program 1800 15th Street Sacramento, CA 95811-6614 SPPforu.com Voice Response System (866) 566-4777 TTY (800) 848-0833 Lobby Hours 8:00 a.m. 4:30 p.m. FAX (916) 327-1885 Phone Hours 8:30 a.m. 4:00 p.m. The third-party administrator for Savings Plus is Nationwide Retirement Solutions. Retirement Specialists are Registered Representatives of Nationwide Investment Services Corporation, Member FINRA. All information is current as of the date this handbook was printed. The plan administrator reserves the right to amend any of the procedures or plan provisions as outlined in this handbook or the official plan document to conform with governing laws or Internal Revenue Code regulations issued subsequent to the publication of this handbook. Such changes may be enacted without prior announcement or the expressed consent or agreement of plan participants. If there is any contradiction between the terms of the official plan document and this Investment Guide, the official plan document will govern. 2011 Nationwide Retirement Solutions. All rights reserved. NRM-3226CA-CA.10 (04/11)