Defined Contribution Trends

Presentation to the Stable Value Investment AssociationOctober 11, 2016

For institutional investor use only

1

DC approaching 50% of global pension assets…

program structures differ by country

As of 31 December 2015

Source: Allianz International Pensions Country Factsheets, 2016

Mandatory DC

Mandatory DB/hybrid

Auto enrollment DC

Voluntary DC/DB

2

U.S. defined contribution investment structures continue

to evolve

SOURCE: PIMCO

Refer to Appendix for additional outlook and risk information.

INVESTMENT TIER CURRENT FUTURE

Investment defaults

Packaged target dates

Limited diversifying assets……………………………

Open architecture

Increased diversifying assets, including alternatives

Core line-ups Equity risk dominate

Few real asset and global offerings

Increased balance in offerings

More real assets, diversifying bonds and global offerings

Retirement income

Low retiree asset retention

Few retiree-appropriate investments/services……………………………..

Increased retiree asset retention

More risk-appropriate investment solutions

3

PIMCO’s 10th Annual Defined Contribution Consulting Support

and Trends Survey

66 DC consultants and

advisors from 23 states

PIMCO’s DC Practice has prepared the 10th annual Defined Contribution Consulting Support and Trends

Survey to help plan sponsors understand the breadth of views and consulting services available within the

DC marketplace. Our 2016 survey captures data, trends and opinions from 66 consulting firms across the

U.S., which serve over 11,000 clients with aggregate DC assets in excess of $4.2 trillion.

1

2–3

4–5

15

# of

consultants

SURVEY PARTICIPANTS

As of 1 January 2016

11K+ DC plan sponsor

clients represented

$4.2T+ In client

DC assets

4

Defined contribution business…meeting retirement goals and managing litigation risk drive decision making

Q: As plan sponsors consider their DC plan, which of the following factors drive decisions the most? (n=65)

8%

8%

9%

18%

20%

34%

8%

8%

8%

11%

23%

22%

17%

5%

5%

5%

11%

11%

18%

25%

8%

18%

5%

6%

23%

9%

20%

6%

9%

22%

13%

14%

17%

13%

6%

8%

20%

9%

Keep pace with competition

Meet workforce management objectives

Keeping administration simple/easy as possible

Manage organizational costs

Performance of an investment

Cost of an investment

Manage litigation risk

Meet participant retirement goals

RANK ORDER OF PLAN SPONSOR DECISION MAKING

#2 #3 #4#1 #5

2%

2%

5DC_standard_tab_03

DC Investment

Design Future

1. Investment defaults

2. Core investment line ups

3. Retirement income

6

Pension Protection Act (PPA) 2006 support of automatic improves DC

plan participation

DC plans using auto-enrollment realized an average participation rate of 86% versus 63% for those without auto

enrollment – a 37% increase!

Source: Aon Hewtt’s 2016 Universe Benchmarks - Employee Savings and Investing Behavior in Defined Contribution Plans

86%

63%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

2009 2010 2011 2012 2013 2014 2015

Participation Rates

Auto Enrollment No Auto Enrollment

7

Auto enrollment feeds increased assets into the DC plan default

and draws assets away from stable value and other core options…

As of 31 May 2016

SOURCE: Hewitt 401(k) Index

Over 25% of existing DC assets now allocated

to target date fund strategies; forecast is for

50% of assets to be in target date strategies in

less than ten years.

Over 40% of new contributions are allocated

to target date strategies

New contributions flowing to target dates

Target date fund AUM growing

0%

10%

20%

30%

40%

50%

Jan

'05

Jan

'06

Jan

'07

Jan

'08

Jan

'09

Jan

'10

Jan

'11

Jan

'12

Jan

'13

Jan

'14

Jan

'15

Jan

'16

Bond

Co. Stock

Target Date/Risk

Equities

GIC/SV

0%

10%

20%

30%

40%

50%

Jan

'05

Jan

'06

Jan

'07

Jan

'08

Jan

'09

Jan

'10

Jan

'11

Jan

'12

Jan

'13

Jan

'14

Jan

'15

Jan

'16

Bond

Co. Stock

Target Date/Risk

Equities

GIC/SV

8

Type of target-date strategy varies from full custom to single

manager packaged…consultants suggest approach by plan size

Target-Date Fund Structure LIKELY TO BE CHOSEN

89%of consultants recommend

target-date funds be

used as the qualified

default investment

alternative (QDIA)

n = 64

#1 Ranked Target-Date

Objective: Maximizing

asset returns while

minimizing volatility

relative to the

retirement liability

9DC_standard_tab_03

DC Investment

Design Future

1. Investment defaults

2. Core investment line ups

3. Retirement income

10

6

2

1 1

0 0

CAPITAL

PRESERVATION

FIXED

INCOMEEQUITY

INFLATION-

PROTECTIONALTERNATIVES BALANCED

98% 100% 100% 84% 27% 44%

Active only 80% 37% 2% 37% 44%

Passive only 2% 0% 2% 10% 0%

Active/passive blend 19% 25% 41% 42% 5%

Multiple active & passive 0% 19% 34% 3% 2%

Mirrored active & passive 0% 17% 20% 0% 2%

Core investments: consultants suggest 10 investment strategies

across four primary risk pillars…primarily actively managed

Optimal #

of options

% recommending

at least one

Most

recommended

strategies

(in order)

Q: What is the optimal number of core menu options for each of these asset categories? (n=62)

11

While nearly all consultants recommend stable value for the core, only half do so for blended strategies

Q: Which capital preservation strategies do you recommend? (n=66; n=36)

CAPITAL PRESERVATION RECOMMENDATIONS

Capital

preservation

Fixed

income Equity

Inflation-

protection

# of stand-alone options 1 2 6 1

Capital preservation strategies Stand-alone* Blended**

Stable value 97% 50%

Money market 68% 42%

Low duration 33% 64%

Ultra-short bond 26% 50%

*Used as a stand-alone option on the core investment menu

**Used in a multi-manager/white label core option or in a sleeve in a custom target-date/risk portfolio

12

3%

7%

44%

65%

9%

13%

10%

18%

20%

16%

13%

18%

22%

25%

22%

15%

78%

68%

65%

51%

14%

5%

15% 11% 26%

Consultants recommend switch to stable value

Given the 2014 SEC money market reforms,

almost two-thirds of consultants (63%) are

likely or very likely to recommend a capital

preservation alternative for clients invested in

a non-government money market fund.

For plan sponsors seeking alternatives to

MMFs, over three-quarters of consultants

(81%) are likely or very likely to recommend a

switch to stable value.

Q: If a plan sponsor is seeking alternatives to its MMF, how likely

are you to recommend a switch to the following? (n=62)

*To be fully implemented in October 2016

Q: Given the SEC money market reforms,* how likely are you to recommend a capital preservation

alternative for clients invested in a non-government money market fund (MMF)? (n=62)

Stable value

Government money market

An “ultra-short” fixed income option or one tailored for DC

A short-term fixed income option

A low-duration fixed income option

No change – keep the prime money market option

48%

Very

likely LikelySomewhat

likelyNot

likely

CORE INVESTMENTS

13

Many stable valuation evaluation factors rated very important

Q: How important are the following factors when evaluating stable value funds/managers? (n=63)

Other: Wrap capacity access

5%

8%

10%

32%

35%

60%

60%

61%

62%

63%

63%

23%

23%

61%

34%

50%

40%

40%

35%

37%

29%

32%

25%

57%

29%

29%

15%

3%

2%

8%

5%

47%

12%

5%

Fees

Diversified wrap providers

Depth of investment resources

Clearly understands book value risk

Fixed income management expertise

Wrap provider credit quality

Current crediting rate

Diversified fixed income sub-advisors

Past performance

Less constrained guidelines

Boutique stable value provider

Very

important ImportantSomewhat

important

Not

important

14

Plan sponsors likely to add more diversifying assets to balance

investment menu skew toward equity risk

Capital preservation

Global fixed income

Diversifying

fixed income

Inflation hedging

Global balanced

“1/n”

Capital preservation

Global fixed income

Diversifying

fixed income

Inflation hedging

Global balanced

DIVERSIFYING RISK EQUITY RISK

U.S. small

cap blend

U.S. mid

cap blend

U.S. large

cap blend

Developed

non-U.S.

Emerging Markets

U.S. small

cap blend

Developed

non-U.S.

Emerging Markets

15

Active management important in most asset classes

Non-U.S. bonds

U.S. equity (large cap)

TIPS

U.S. equity (small cap)

REITS

Commodities

U.S. bonds

Emerging market equity

Global asset-allocation strategy

Non-U.S. equity (developed markets)

As of 31 December 2015

SOURCE: 2016 PIMCO DefinedContribution Consulting Support and Trends Survey (n=63)

More than 90% of consultants believe that active management is important for non-U.S. bonds,

emerging market equity strategies and U.S. bonds.

Very

important ImportantSomewhat

important

Not

important

8%

10%

21%

26%

26%

29%

33%

40%

57%

67%

74%

13%

24%

35%

31%

44%

51%

28%

48%

35%

29%

24%

42%

37%

34%

36%

23%

17%

31%

11%

8%

5%

2%

37%

30%

10%

7%

7%

3%

8%

2%

0% 25% 50% 75% 100%

U.S. equity (large cap)

TIPS

REITs

Balanced strategies

Commodities

U.S. equity (small cap)

Target-date strategies

Non-U.S. equity

U.S. bonds

Emerging market equity

Non-U.S. bonds

16DC_standard_tab_03

DC Investment

Design Future

1. Investment defaults

2. Core investment line ups

3. Retirement income

17

Q: Approximately what percent of

your plan sponsor clients take the

below view on retaining retired

participants’ assets in their plan?

(n=52)

VIEW ON RETIREES

38%33%

32%

30%

14%

21%

17% 16%

0%

25%

50%

75%

100%

Perc

en

t o

f cli

en

ts

2015 2016

Actively seek to

retain these

assets

Prefer retaining

these assets, but

do not actively

encourage

Indifferent

Prefer retirees

move assets out

51%46%

Retirement income…interest in asset retention increasing

Sources: PIMCO DC Consulting and Trends Survey 2015 and 2016

18

Retiree assets also building in target-date strategies

SOURCE: EBRI/ICI Participant-Directed Retirement Plan Data Collection Project: 1998-2014

DC ASSET ALLOCATION FOR 60+ YEAR OLD PARTICIPANTS

Stable Value

Target Dates +

Balanced

Target Dates

Balanced

Perc

en

t

Equity/Other

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

19

Q: What is your firm’s position on the use of the following investment and insurance retirement

income strategies? (n=57)

5%

5%

9%

11%

11%

12%

13%

14%

19%

29%

30%

39%

49%

51%

36%

42%

49%

52%

66%

46%

36%

53%

41%

30%

26%

41%

33%

33%

29%

14%

24%

21%

9%

14%

16%

14%

13%

14%

5%

7%

5%

11%

14%

9%

Managed payout funds

In-plan immediate annuity

In-plan deferred income annuity

Equity income

Asset allocation with lifetime income guarantee

Income-focused funds

Out-of-plan annuity

Managed accounts

Multi-sector fixed income

Cash management

At-retirement target date

SUPPORT FOR RETIREMENT INCOME STRATEGIES

DiscourageNeutralSupport client interestActively promote

Retirement income…capital market solutions preferred

Source: PIMCO DC Consulting and Trends Survey 2016

20

Retirement income…many concerns with in-plan insurance solutions

Q: What are the primary concerns that may stop your clients from offering

in-plan insurance products (e.g., annuities)? (n=63)

Portability 67% Operational complexity 35%

Cost 63% Communication complexity 27%

Insufficient government support (e.g., safe harbor) 62% Monitoring/benchmarking 25%

Perception of added liability 40% Low interest rate environment 16%

Insurance company default risk 37% Transparency 14%

Lack of liquidity and control 37% Selection criteria unclear 10%

Lack of participant demand 35% Lack of insurance company commitment 3%

Primary concerns with in-plan insurance products

IN-PLAN INSURANCE PRODUCT CONCERNS

21

DC plan design will evolve to build and seek to preserve

retirement assets

Importance and growth of DC assets may drive increase in:

Institutional, professionally managed and open architecture defaults

Broadly diversified and balanced core line ups

Retiree asset retention and more income-focused solutions

22

Biography

Stacy Schaus

CFP®, DC Practice Leader, PIMCO

Ms. Schaus is an executive vice president in the Newport Beach office and leads PIMCO's Defined

Contribution Practice working primarily with plan sponsors and consultants. She has written

extensively on defined contribution issues, including the regular publication PIMCO DC

Dialogue™ and her 2010 book, Designing Successful Target-Date Strategies for Defined

Contribution Plans. Prior to joining PIMCO in 2006, she was a founder and president of Hewitt

Financial Services, which includes DC investment consulting and research as well as brokerage

and personal finance.

She is the founding chair for the Defined Contribution Institutional Investment Association, serves

on the executive committee of the Employee Benefit Research Institute and served as a Financial

Planning Association board member. She has 32 years of investment experience and holds an

MBA from the Stern School of Business at New York University and an undergraduate degree

from the University of California, Santa Barbara.

23

About the PIMCO DC Practice

The PIMCO DC Practice is based in Newport Beach and is dedicated to promoting effective DC plan design and innovative retirement solutions. Our team is pleased to support

our clients and broader community by sharing ideas and developments in DC plans in the hopes of fostering a more secure financial future for employees of corporations, not-

for-profits, governments and other organizations.

If you have a topic you’d like to discuss, please contact your PIMCO representative or email us at pimcodcpractice@pimco.com. We’re interested in your ideas and

feedback!

Past performance is not a guarantee or a reliable indicator of future results. This report is provided for informational purposes and should not be construed as a

solicitation or offer to buy or sell any securities or related financial instruments in any jurisdiction.

A Word About Risk: PIMCO does not offer insurance guaranteed products or products that offer investments containing both securities and insurance features. Investing in the

bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by

changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as

interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market

liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign denominated and/or domiciled

securities may involve heightened risk due to currency fluctuations and to economic and political risks, which may be enhanced in emerging markets. Certain U.S. Government

securities are backed by the full faith of the government. Obligations of U.S. Government agencies and authorities are supported by varying degrees but are generally not

backed by the full faith of the U.S. Government; portfolios that invest in such securities are not guaranteed and will fluctuate in value. Inflation-linked bonds (ILBs) issued by a

government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise.

Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. Government. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax

laws or failure to qualify for tax-free pass-through of income. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not

be suitable for all investors. Stable value wrap contracts are subject to credit and management risk. Derivatives may involve certain costs and risks such as liquidity, interest rate,

market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested.

The survey results contain the opinions of the respondents and not necessarily those of PIMCO. Information contained herein has been obtained from sources believed to be

reliable, but is not guaranteed. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of

any particular security, strategy or investment product. No part of this material may be reproduced in any form, or referred to in any other publication, without express written

permission.

Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800.387.4626.

PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management

Company LLC, respectively, in the United States and throughout the world. ©2014, PIMCO.