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T. Rowe Price Target Date Conversion Strategy A fresh start to more appropriate saving and investing behaviors T. Rowe Price Retirement | Insights Executive Summary Having pioneered and advocated for today’s automated solutions, including the use of target date investment options as qualified default investment alternatives (QDIAs), T. Rowe Price has emerged as a leader in the target date conversion process. Our experience managing these conversions since 2005 has led to a proven, results-driven process for sponsors looking to achieve a more optimal asset allocation. With nearly 80% of investors preferring to delegate or seek input on their investment decisions, plan sponsors are challenged to find ways to promote successful retirement outcomes. Research shows that, left to their own direction, some young participants invest very conservatively by allocating all, or almost all, of their assets to fixed income investments. Conversely, some participants nearing retirement invest very aggressively, allocating all, or almost all, of their assets to equity investments. To help decrease the occurrence of such extremes, many sponsors are adopting strategies that involve automated solutions coupled with the use of target date investment options as the QDIA. One such strategy—the target date conversion—has proven especially effective. It gives participants who choose to stay in the target date investment a “fresh start” using diversified, professionally managed portfolios that help them avoid such extreme asset allocations, while automatic rebalancing can help keep them on that track. The strategy also streamlines the conversion process, and the use of a QDIA may qualify sponsors for limited fiduciary protection. For many plan sponsors, conversion is an ideal time to rethink a plan from the ground up. It’s an opportunity to apply the latest behavioral insights and industry research to help participants save and invest wisely for their retirements. It’s a time to build a plan focused on better retirement outcomes for participants while being mindful of their fiduciary responsibility. By adopting automatic enrollment and defaulting participants into a target date investment, plan sponsors can help participants diversify their portfolios and provide a dynamic asset allocation product that will be rebalanced over the lifetime of the investment. Using its innovative target date conversion strategy, T. Rowe Price can work with sponsors to help them accomplish these goals and help delegators get on a path that has the potential to lead to greater retirement income. Helping participants INVEST FOR their retirement goals The strategy takes advantage of T. Rowe Price’s proprietary infrastructure of automation and applies best practice considerations to the conversion. By automating key aspects of the conversion, the strategy is able to channel employees into potentially advantageous investment options. A Strategy at the Forefront T. Rowe Price has conducted conversion and merger activities using target date default strategies since 2005. Our team is well informed on legislation related to automated solutions, and we continually provide our clients with regulatory updates. 1 Benefits of the TARGET DATE Conversion Strategy Increased diversification Participants who choose not to make an active election are defaulted into a diversified target date investment with the target date that is closest to the year in which they will turn age 65. While diversifying does not ensure a profit or protect against a loss in a declining market, it can be an important part of a participant’s investment strategy. The T. Rowe Price target date solutions invest in a mix of stocks, bonds, and short-term investments that gradually become more conservative as the target retirement date nears. But it doesn’t end there. Recognizing that people are living longer than ever, the T. Rowe Price target date solutions continue to adjust their asset allocation for 30 years after the target date. Even before the enactment of the Pension Protection Act, T. Rowe Price had long advocated for many of the act’s provisions, particularly automatic enrollment, automatic increase, and fiduciary protection for default investments that have the potential to result in a meaningful portion of a participant’s retirement income. Professional management All of our target date solutions are managed by the experienced investment professionals at T. Rowe Price and backed by our global research network. By investing in an age-appropriate T. Rowe Price target date solution, participant accounts could benefit from professional asset allocation and diversification. Research confirms effectiveness of automatic services Industry research shows that most investors are delegators, preferring to let others make investment decisions on their behalf or deferring important financial decisions altogether.1 Our experience is consistent with leading research on financial behavior and demonstrates that the majority of participants remain with the default selection and therefore could benefit from improved diversification, professional portfolio management, and rebalancing provided by target date investments. A fresh start Instituted at conversion, T. Rowe Price’s target date conversion strategy can help to overcome participant inertia. Instead of hindering an effective savings plan, inertia is turned into the participant’s benefit. Investing in a target date investment option could allow inexperienced investors or those with too little time to monitor their investments to make a fresh start with a professionally managed portfolio. Forrester Research, North American Technographics Benchmark Study 2009 (U.S., Canada). 2 T. R o w e P r i c e r e t i r e m e n t i n s i g h t s Helping sponsors manage the conversion process Alternative to like-fund mapping Other conversion strategies, such as like-fund mapping, may perpetuate a participant’s inappropriate investments or decisions that were made many years ago and may no longer be appropriate. A target date conversion strategy provides sponsors with an opportunity to help address these issues. Additionally, offering a QDIA such as a target date investment in combination with other associated requirements could help sponsors qualify for limited fiduciary protection. Streamlined mergers and acquisitions Investment options offered in the retirement plans of different companies can vary widely, making like-fund mapping a complex and time-consuming process. With an auto-investment strategy, plan sponsors have a more streamlined method to convert plans of newly acquired companies with diverse investment lineups. How our TARGET DATE Conversion Works This disciplined process spans all stages of the conversion, and it includes important safeguards for participants as well as sponsors: Preconversion—Participants are given the opportunity prior to conversion (two- to three-week window) to provide an election for how their existing plan assets will be invested in the new lineup. Conversion—Participants who do not provide an election during this period will have their existing balances defaulted into a QDIA—in this case, an age-appropriate investment based on the year they will turn age 65. Throughout the process, participants receive educational materials to help them understand their options. Post-conversion—Participants have the option to stay in the default target date investment or choose a new investment allocation at any time. They are not locked into these decisions/selections. 2 Key points: Participants have the freedom to select their own allocation before and after conversion by opting out of the default target date investment. They are not locked into these choices. � Target date investments used as a QDIA can provide limited fiduciary protection.2 � Target date Conversion and Sponsors’ Fiduciary Responsibilities Meeting the “prudent man” rule The passage of the Pension Protection Act in 2006 provided important protections for sponsors in their efforts to improve participant retirement outcomes. From a fiduciary standpoint, this legislation presents a choice between perpetuating poor investment decisions and acting as a “prudent man” to encourage participants to use diversified investments. ERISA Section 404(c)(5) extends fiduciary protections to default investments with certain conditions and requirements: 1.Participants are provided the opportunity to exercise control. 2.An annual notice is provided to participants. 3.Default investments are QDIAs. Solution for outdated lifestage decisions The T. Rowe Price target date conversion strategy provides unequivocal legal guidance with clear fiduciary support. This is not true with like-fund mapping, where existing fund choices are replaced with those having similar investment objectives and strategies. After all, there is no indication that the participant’s current investment allocation is an appropriate one. The individual might have chosen the investment many years earlier when it was appropriate for the participant’s lifestage, but now perhaps the investment is too risky or too conservative. With the target date conversion strategy, there is an opportunity to reset the participant’s investment allocation to be more consistent with his or her age and investment horizon. Plan sponsor must determine that target date solutions meet the requirements of a QDIA and follow the notification requirements. 3 c More than 80% remain with the ta r g e t d at e Q DIA Research among T. Rowe Price clients confirms that auto-investment can be a particularly effective way to take advantage of participant inertia, helping rather than hindering retirement savings plans. A closer look at the numbers Retention statistics for target date conversions through December 31, 2013:3 RetenTION CATEGORY Conversion 18 months later % of plan assets in target date solutions 79% % of participants invested in any target date solution 89% 87% % of participants with 100% in target date solutions 82% 75% 72% The principal value of the target date strategies is not guaranteed at any time, including at or after the target date, which is the approximate date when investors turn age 65. The target date strategies invest in a broad range of underlying portfolios that include stocks, bonds, and short-term investments and are subject to the risks of different areas of the market. The target date strategies emphasize potential capital appreciation during the early phases of retirement asset accumulation, balance the need for appreciation with the need for income as retirement approaches, and focus more on income and principal stability during retirement. The target date strategies maintain a substantial allocation to equities both prior to and after the target date, which can result in greater volatility. Call 1-800-638-7890 to request a prospectus, which includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. For more information on how our strategy can help sponsors and participants alike, please contact your T. Rowe Price representative. T. Rowe Price Retirement Plan Services, Inc. Since 2005, 41% of conversions completed by T. Rowe Price full-service clients used the target date conversion strategy.4 3 Includes new client conversion activity ranging from $1 million to $2.5 billion, from January 1, 2005, to December 31, 2013. 4 Includes client conversions and merger and acquisition activities from January 1, 2005, to December 31, 2013, on the T. Rowe Price Retirement Plan Services OMNI recordkeeping platform. Important Information This article has been prepared by T. Rowe Price Retirement Plan Services, Inc., for informational purposes only. T. Rowe Price (including T. Rowe Price Retirement Plan Services, Inc., its affiliates, and its associates) does not provide legal or tax advice. Any tax-related discussion contained in this article, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this article. 05515-2871 143450 E02-338 4/14