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Stable Value FundsFundamentals and Current Issues

Purpose of Today's Discussion

Total Assets Under Management: $78 Billion Discuss what plan sponsors and fi duciaries should know about stable value funds

Understand stable value funds’ unique benefi t responsive features:Consistent, stable returns• Principal preservation, and• Immediate liquidity for participant transactions•

Explain how stable value’s benefi t responsiveness distinguishes stable value from other asset classes and why these distinctions make stable value an essential component for plans and plan participants

Explain how stable value’s benefi t responsiveness is achieved and how it is working in today’s market environment

Strong, Consistent Use of Stable Value

Stable value funds are a core asset in defi ned contribution plans$642 billion invested in stable value assets• 167,820 defi ned contribution employee benefi t plans• Offered in approximately half of all defi ned contribution plans• Range of average asset allocations from 17% to 37% over the life of the Hewitt • 401(k) Index™

Sources: SVIA 13th Annual Investment Policy Survey Covering Stable Value Assets as of yearend 2008. Hewitt 401(k) IndexTM Observations 1997 to March 2009. Hewitt 401(k) Index allocation to stable value ranges from 17% to 37% over time.

Why Stable Value Is a Key Part of Asset Allocation

Stable value is a fundamental component of defi ned contribution plans because it offers:

Principal protection• Steady, predictable returns consistent with a conservative principal protection vehicle• Benefi t-responsive liquidity•

Stable value is a low-risk, cost-effective investment option used by millions of participants to achieve their desired risk tolerance in asset allocation

Participants who invest in stable value funds are:• Retirees or individuals nearing retirement who will begin to access retirement funds • now or in the near futureConservative investors who seek a core portfolio that provides an attractive return • coupled with the opportunity for low volatility and preservation of capitalModerate or aggressive investors seeking diversifi cation to enhance their overall • portfolio risk-adjusted returnsIndividuals seeking an alternative to money market funds and short-term bond funds• Individuals who have been placed in a stable value fund by default because they have • not made an asset allocation decision.

Funds to the left have potentially more infl ation risk and less investment risk

Funds to the right have potentially less infl ation risk and more investment risk

Money Market Funds

Stable Value Funds

Bond Funds

Balanced Funds

Growth & Income Funds

Growth Funds

International/Global Equity Funds

Specialty Funds

Company Stock

Stable value funds are defi ned by the Financial Accounting Standards Board in “Reporting of Fully Benefi t-Responsive Investment Contracts Held by Certain Investment Companies Subject to the AICPA Investment Company Guide and Defi ned Contribution Health and Welfare and Pension Plans, FSP AAG INV-1 and SOP 94-4-1”

Stable Value Provides Capital Preservation and Consistant Steady Returns

Stable Value Offers Higher Return Potential than Money Market Funds

Why Stable Value Is a Key Part of Asset Allocation

Summary Statistics (January 1989 to December 2008)

Large Stocks Small Stocks

Long-Term Government

Bonds

Long-Term Corporate

BondsIntermediate Gov’t/Credit Stable Value Money Market

Net Monthly Returns

No. of Months 240 240 240 240 240 240 240

Mean 0.65% 0.94% 0.73% 0.62% 0.46% 0.51% 0.33%

STDEV 4.18% 5.69% 2.70% 2.44% 0.97% 0.12% 0.17%

Minimum -16.88% -20.71% -9.90% -8.89% -2.80% 0.29% -0.03%

Maximum 11.28% 23.58% 14.36% 15.53% 3.20% 0.80% 0.76%

Sharpe Ratio 0.075 0.107 0.148 0.118 0.138 1.477

Net Annual Returns

No. of Years 20 20 20 20 20 20 20

Mean 8.80% 12.15% 9.16% 7.60% 5.73% 6.26% 4.08%

STDEV 19.63% 22.90% 10.56% 7.94% 4.31% 1.57% 2.07%

Minimum -37.66% -36.72% -10.02% -8.05% -3.38% 4.29% -0.71%

Maximum 35.52% 60.70% 29.80% 25.41% 13.66% 9.60% 8.36%

Sharpe Ratio 0.248 0.348 0.481 0.447 0.426 1.643

Source: David Babbel, PhD. and Miguel Herce, PhD., March 2009 Analysis of Stable Value Funds from 1989 through 2008. Large stock returns are total returns on the S&P500 Index, Bloomberg. Small Stock, Long-Term Government and Corporate Bond returns are from Morningstar, SBBI 2008 Yearbook and 2009 update. Intermediate Government/Credit returns are from the Barclays Capital Intermediate U.S. Government/Credit Index, formerly the Lehman Intermediate U.S. Government/Credit Index. Stable value returns are asset-weighted average returns based on data provided by SVIA. Money Market returns are from the Merrill Lynch 3-Month T-Bill Index, Bloomberg.

Stable value can be an important asset allocation tool.

As you can see in the risk return analysis to the right, stable value’s high average annual return combined with stable value’s low risk (standard deviation) has created higher risk-adjusted performance versus certain asset classes.

Stable value has historically produced high risk-adjusted returns and has helped to diversify equity risk exposure.

Risk-Return Analysis10 Years Ending 6/30/09

1. Standard Deviation measures the degree to which individual observations in a probability distribution tend to vary from the mean (average, expected value) of the distribution. Approximately 2/3 of the observations in a series fall within one standard deviation of the mean. In terms of performance, it indicates the volatility of a portfolio's total return as measured against its average return.2. Sharpe Ratio is the risk-adjusted return calculated by dividing the return premium by the standard deviation. This indicates the historical reward for taking on the additional risk associated with an investment. The risk-free rate used in calculation of these Sharpe Ratios is the Merrill Lynch 90-Day U.S. Treasury Bill Index. Past performance is no indication of future results. Indices are unmanaged and not available for direct investment. See last page for defi nitions of indices.3. The MFR Money Market Index is the all-taxable money fund report average, a product of iMoneyNet, Inc., and is presented net of certain fees and expenses.

Stable value offers attractive risk/return characteristics

6

5

3

1

-1

-2

0

2

4

0-2 2 4 6 8 10 12 14 16 18R

ate

of R

etur

n (%

)

Stable Value

Money Markets

Stock Markets

Index ReturnStandard

Deviation/RiskSharpe

Ratio2

Stable Value (Ryan 5-Year GIC Index) 5.49% 0.24% 9.26%Money Markets (MFR Money Market Index3) 2.86% 0.54% -0.67%Stock Markets (S&P 500 Index) -2.22% 16.03% -0.33%

Risk (Standard Deviation in %)1

-3

Stable Value Versus Other Asset Classes

Benefi t Responsiveness Distinguishes Stable Value From Other Asset Classes

Benefi t-responsiveness means participants transact at book value (principal plus accrued interest)

Benefi t responsiveness helps the stable value fund achieve the following objectives:

Principal preservation with capital appreciation• Consistent, conservative returns • Returns similar to bond funds with the liquidity of money market funds•

Benefi t responsiveness is provided through one or more different types of investment contracts

Benefi t responsiveness criteria is established by the Financial Accounting Standards Board (FASB) and all fi ve requirements must be met

Stable value funds are defi ned by the Financial Accounting Standards Board in “Reporting of Fully Benefi t-Responsive Investment Contracts Held by Certain Investment Companies Subject to the AICPA Investment Company Guide and Defi ned Contribution Health and Welfare and Pension Plans, FSP AAG INV-1 and SOP 94-4-1”

FASB Requirements for Benefi t Responsiveness

FASB established criteria for benefi t responsiveness criteria in FSP AAG INV-a. All must be satisfi ed:

Investment contract is effected directly between the fund and issuer and prohibits the sale or 1. assignment of the contract or its proceeds to another party without the consent of the issuer

The repayment of principal and interest credited to participants in the fund is a fi nancial 2. obligation of the issuer of the investment contract, or prospective interest crediting rate adjustments are provided to participants in the fund on a designated pool of investments held by the fund or a contract issuer who is a fi nancially responsible third party and provides assurances that the adjustments to the interest crediting rate do not result in a future interest crediting rate that is less than zero

The terms of the investment contract require all permitted participant-initiated transactions 3. with the fund to occur at book value

An event (such as bankruptcy) that limits the ability of the fund to transact at book value with 4. the issuer and that also limits the ability of the fund to transact at book value with participants in the fund must not be probable of occurring

The fund itself must allow participants reasonable access to their funds5.

How Benefi t Responsiveness is Achieved

Benefi t responsiveness is the ability of plan participants to transact at book value (principal plus accrued interest)

Benefi t responsiveness is delivered by a stable value investment contract from a fi nancially sound bank or insurance company that provides redemption at book value (principal plus accumulated interest), regardless of the level of market value

Stable value investment contracts are:Guaranteed Interest Contracts and/other General Account Contracts• Separate Account Contracts• Synthetic GICs•

Stable Value Funds may hold one contract type or some combination of these investment contracts

Stable value funds are defi ned by the Financial Accounting Standards Board in “Reporting of Fully Benefi t-Responsive Investment Contracts Held by Certain Investment Companies Subject to the AICPA Investment Company Guide and Defi ned Contribution Health and Welfare and Pension Plans, FSP AAG INV-1 and SOP 94-4-1”

How Benefi t Responsiveness Works

Ass

et v

alue

Time

Market Value of underlying

portfolio

Book Value Contract

Falling Interest Rates

Rising Interest Rates

Wrap Value: Book Value - Market Value

HIGH QUALITY WRAPPERS

STABLE VALUE

PORTFOLIO

Managed portfolio of high-quality,

fi xed income securities

The book value investment contract provides • preservation of principal and a stable crediting rateThe investment contract smoothes market • volatility by amortizing gains and losses over the duration of the portfolioThis smoothing is triggered through the rate reset • mechanism and insulates against day-to-day volatility

Benefi t Responsiveness:How Market Value and Book Value Converge

Fund

Bal

ance

($)

Market Value

Book Value

1 Year

Crediting Rate Formula Smoothes the Portfolio Yield and Keeps Market and Book Value Close Together

3 Years2 Years Duration

MV(1+ytm) = BV(1 + CR)

The equivalent formula, expressed in terms of CR is:

CR = [(MV/BV) x (1+ytm)] -1

Stable Value Investment Contracts

Types of Stable Value Contracts Description Rate of Return Assets

Guaranteed Interest Contracts (GICs) and

other General Account Contracts

Contracts with an insurance company that provide principal preservation, benefi t responsiveness, and a guaranteed fi xed or indexed rate of return backed by the assets of the insurer’s general account.

Guaranteed regardless of the performance of the underlying assets.

Owned by the insurance company and held within an insurer’s general account.

Separate Account Contracts

Contracts with an insurance company that provides principal preservation, benefi t responsiveness, and a guaranteed rate of return backed by assets held in a segregated account separate from the insurer’s general account.

May be fi xed, indexed, or reset periodically based on the actual performance of the segregated assets.

Owned by the insurance company but set aside in a separate account for the exclusive benefi t of the plan(s) participating in the separate account.

Synthetic GICs

Contracts with a bank or insurance company that provides principal preservation, benefi t responsiveness, and a guaranteed rate of return relative to a portfolio of assets held in an external trust.

Provides a rate of return based on the actual performance of the underlying assets, reset periodically.

Directly owned by the participating plan(s).

Stable Value Funds are Managed in Three Ways

Separately Managed AccountsSpecifi cally customized to meet the objectives of a single plan and do not include • the assets of other, unrelated plans

Commingled FundsDesigned to combine the assets of unrelated plans, enabling them to gain the • economies of scale within a single Stable Value strategy

GICs and Other General AccountsGenerally hold or invest in a single group annuity contract issued directly to the • plan, through which the plan sponsor receives a direct guarantee of principal and accrued interest from the issuer

All stable value funds are managed to meet FASB’s requirements for benefi t responsiveness

Characteristics of a Stable Value Portfolio

High credit quality, fi xed income securitiesPortfolios will have an investment grade strategy•

Broadly diversifi edIn general, the exposure to any single issuer of investment securities typically • does not exceed fi ve percent of fund assets

Balances duration with crediting-rate responsiveness

Maintains a source of ready liquidityPortfolios should be structured to provide suffi cient liquidity when needed for • plan benefi ts

Each characteristic should be viewed and evaluated as a component of the total, overall strategy employed

Source: SVIA’s Key Investment Management Principles for Stable Value Funds

Stable Value Investment Portfolios

Cash, 7.18%

Treasuries, 9.88%

Agencies, 3.71%

GICs, 3.42%

Asset-Backeds,

7.04%

Mortgage-Backeds, 25.71%

Commercial Mortgage-Backeds,

9.20%

Publically Traded Bonds,

19.49%

Private Placements,

4.58%

Commercial Mortgages,

5.10%Other, 4.68%

Well diversifi ed, high quality fi xed income securities

Typically AA- to A- minimum average • qualityTypically A- to BBB- minimum issue • qualityTreasuries, agencies, corporates, • RMBS, ABS, CMBSConcentration guidelines by asset • type, by issuer, by issue

Typically managed to a constant duration of about 3 years

Subject to ERISA “prudent expert” rules

Source: SVIA 13th Annual Stable Value Investment and Policy Survey

How Stable Value Funds Are Performing

Recent Market Turmoil

Market Value to Book Value Ratios

Crediting Rates

Exceptions to Book Value

Capacity

Fees and Disclosure

Recent Market Turmoil

The fi nancial markets experienced unprecedented dislocation in 2008

The mortgage meltdown and ripple effect drove down asset valuations of MBS, ABS, and CMBS as well as other fi xed income assets, due to both credit concerns and overall market illiquidity

Many actively managed fi xed portfolios performed poorly, although better than most actively managed equity portfolios

Although well diversifi ed, stable value funds are not immune to these events and experienced declines in market value

0

1

2

3

4

5

30 Yr10 Yr5 Yr2 Yr3 Mth

Source: Bloomberg

12/31/07 12/31/08 02/13/09

3 Month 3.24% 0.08% 0.13%2 Year 3.05% 0.76% 0.97%5 Year 3.44% 1.55% 2.39%10 Year 4.02% 2.21% 3.40%30 Year 4.45% 2.68% 4.18%

12/31/07 12/31/08 8/31/09

U.S. Treasury Yield Curves

Source: Barclays Capital Indices, POINT. ©2009 Barclays Capital Inc. Used with permission. POINT is a registered trademark of Barclays Capital Inc.

CMBS

55050

250

450

650

850

1050

1250

1450

12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10

Credit

20170

170

270

370

470

570

12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10

ABS

16150

150

250

350

450

550

650

750

850

950

1050

1150

12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10

MBS

2520

35

50

65

80

95

110

125

140

155

170

185

200

12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10

CMBS ABS

MBSCorporates

Barclays Capital Index Daily Option Adjusted SpreadsMajor Fixed Income Market Sectors

Historical Spread Levels as of 9/16/09

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Q408 2008

YTD through 8/31/09

Barclays Capital Aggregate -0.80% 0.80% -1.31% 0.54% 0.29% 1.55% 1.03% -0.31% 0.85% -2.06% -2.96% -7.10% 5.94%

Agencies -0.49% 0.41% -0.13% 0.73% 0.96% 0.27% 0.78% 0.13% 0.75% -0.56% 0.05% -1.52% 2.29%

MBS -0.90% 1.13% -0.77% -0.75% 1.73% 0.11% 1.42% -0.37% 1.22% -1.77% -1.95% -2.32% 3.75%

ABS -0.88% 1.37% 0.43% 1.39% -0.16% 1.81% 1.45% 0.32% 0.87% -6.34% -11.73% -22.23% 21.15%

CMBS N/A 0.87% -0.41% 1.31% 2.10% 2.01% 1.18% 0.15% 1.37% -4.35% -20.43% -32.74% 23.06%

Credit -2.38% 1.70% -4.63% 2.77% -1.87% 5.27% 1.59% -0.85% 1.19% -4.64% -5.43% -17.86% 16.08%

High Yield* -8.43% 4.76% -18.97% -2.85% -13.29% 26.42% 8.00% 0.47% 8.43% -7.77% -24.90% -38.32% 42.24%

EMD** -20.46% 24.17% 1.48% -5.41% 0.23% 24.65% 8.23% 9.59% 7.02% -4.57% -17.82% -28.42% 28.43%

Source: Barclays Capital Indices.* Barclays Capital U.S. Corporate High Yield Index** Barclays Capital Emerging Markets Index (USD)

Worst PeriodSecond Worst PeriodThird Worst Period

Duration-Adjusted Excess Returns by Sector

Market Value to Book Value Ratios

Measure of the market value of the stable value fund portfolio as a percentage of book value

Market Value (MV)/Book Value (BV) ratio is fl uid

Higher MV/BV ratio means less reliance on the contract issuer to support the crediting rate

Underlying gains and/or losses of the portfolio are amortized over the duration of the portfolio, which smoothes fl uctuations in the crediting rate

Gradual amortization in the underlying portfolio helps achieve stability of returns

MV/BV ratios have improved signifi cantly in 2009 for the majority of stable value funds

Crediting Rates

Crediting rate formula smoothes underlying gains and/or losses of the portfolio over the duration of the portfolio

Gradual amortization of the gains and/or losses in the underlying portfolio helps promote stability of returns

In 2009 crediting rates have been reduced for stable value funds with low MV/BV ratios

Stable value funds continue to offer capital preservation and competitive relative returns

-37%

5.24%

1.80%

4.75%3.16% 1.90%

0.14%

2.14%

S&P Index Barclays Capital

Aggregate Bond Index

S&P Citigroup 3 Month

Treasury Index

Stable Value

2008 Annual Returns and 2009 Returns through 6/30/2009

2008 Annual Returns

2009 Returns Through 6/30/2009

Exceptions to Book Value

Employer-initiated events that cause en masse withdrawals are generally not covered

Most contracts have book value corridors for employer-initiated events such as • early retirement programs, layoffs or bankruptcyBecause these events are known in advance, plan sponsors may be able to • negotiate coverage of these events so that all participants continue to transact at book value

Employer-initiated events are treated as exceptions since withdrawals can impact investors and plans that choose to remain in the fund

Capacity

Events in the capital markets along with reassessment of risks have reduced the availability of some stable value investment contracts

Some issuers are not accepting new deposits• Some issuers are exiting the market• Others are considering entering the market•

Stable value funds are addressing capacity constraints byIncreasing cash reserves• Adopting more conservative investment guidelines• Implementing shorter durations• Increasing the premiums for investment contracts in recognition of the • increased volatility of the fi xed income market

Stable Value Fees and Disclosure

Stable value fund fees are treated similarly to other 401(k) assets

Disclosures to plan sponsors and fi duciaries include:Crediting rate • Benchmark for stable value fund• Fund fees, which typically comprise management fees, sub-advisory fees and • investment contract premiumsAverage credit quality of assets in the underlying portfolio• Average duration of the stable value fund• List of stable value contracts, which includes their individual credit quality and • the stable value fund’s overall exposure to each stable value contract

Disclosures for general account products are consistent with insurance company reporting requirements.

Information Plan Sponsors and Fiduciaries Have to Evaluate Stable Value Funds

Investment guidelinesGovern the stable value fund investments and includes such criteria as the • type of permissible securities allowed in the portfolio, the average credit quality of the underlying investments in the portfolio, minimum and maximum portfolio duration, the fund’s benchmark, exposure limits to investment contract issuers

Investment contracts Provide the stable value fund’s benefi t responsiveness• Terms include the exceptions or circumstances that may prevent a participant • from transacting at book value, and how the crediting rate is calculated

Crediting rate

MV/BV ratio

Expenses and fees

Information provided by general account products is consistent with insurance company reporting requirements.

Stable Value Funds Continue to be a Valued Investment

Stable value funds:Have consistently delivered stability of return and preservation of principal to • millions of plan participants for over 35 yearsAre a core investment option in defi ned contribution employee benefi t plans• Are defi ned by FASB’s benefi t responsive requirements that establishes book • valueHave a contractual obligation that all transactions occur at book value for • participant-initiated transactionsAre in demand by plan participants as evidenced by a 12% growth in stable • value assets in 2008

Source: SVIA 13th Annual Stable Value Fund Investment and Policy Survey. The 12% growth from 2007 to 2008 is derived from participants who provided data for both years.