Lifecycle Funds-Right on Target

Advantage 2005

John Sturiale CFP® AIF ®, Director Retirement Investment Services

The material contained herein is proprietary to Schwab and for informational purposes only. None of the information constitutes a recommendation by Schwab or a solicitation of an offer to buy or sell any securities. The information is not intended to provide tax, legal or investment advice. Schwab does not guarantee the suitability or potential value of any particular investment or information source. Certain information presented herein may be subject to change. Neither the presentation, nor any information or material contained in it may be copied, assigned, transferred, disclosed or utilized without the express written approval of Schwab.

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Our Mission

Why are we here today?

- To help participants get to and through retirement

- To educate on the latest industry trend, Target Retirement Funds

Retirement made easy - Target Retirement Funds

- One Simple, Informed Decision

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Target Retirement Funds

Lifecycle/Target Retirement

•Lifecycle, Age-Based

•Adjust with a specific Target Date in mind. Usually year-dated funds:

*2010 * 2020

*2030 *2040

•Become more conservative as retirement date approaches

•Participant takes a “hands-off” approach, portfolio automatically rebalanced by Professional Money Managers

Lifestyle

•Lifestyle, Risk-Based

•Tailored to a particular age and risk tolerance

Usually range in risk tolerance:

*Conservative

*Moderate

*Aggressive

•Over time the participant must monitor and change funds as retirement date grows closer

Balanced/Asset Allocation

•Balanced Fund

•Not managed to a certain date or risk tolerance

•Maintain “static” allocations among stocks and bonds (Typically 60% Stocks, 40% Bonds)

•Asset Allocation Managers are more flexible with allocation ranges than Balanced Managers

There are 3 Types of Funds:

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Industry Statistics

57.9 63.3 69.2 68.2

101.4

139.7

020

40

6080

100

120140

1999 2000 2001 2002 2003 2004

Billons of Dollars in Total LifeCycle Funds Source: Lipper Research Series - LifeCycle Funds: Fit for Life, March 2005

Usage and Growth in the Industry

15

25

43

0

10

20

30

40

50

2002 2003 2004

Billons of Dollars in Target Retirement Funds Source: Financial Research Corp.

LifeStyle and LifeCycle Funds (1999 – 2004)

Target Retirement Funds (2002 – 2004)

63% of U.S. plan sponsors now offer these types of vehicles [lifecycle funds], up from 25% in 20011

1 Mercer Investment Consulting Survey, April 2004

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Industry Statistics

Lifecycle Fund Investors’ Avg. Annual Return: + 3.06%1

Non-Lifecycle Fund Investors’ Avg. Annual Return: - 0.35%1

Returns for professionally managed pension funds beat self-directed 401(k) plans by 4.3% in 2000; 3.5% in 2001; and 3.8% in 20022

21% of respondents said they were much more likely to participate in an employer-provided plan, like a 401(k), if it provided a life-cycle fund3

23% of employees participating in their employer-sponsored plan said they were “very likely” to use a life-cycle fund3

63% of US plan sponsors now offer these types of vehicles [life-cycle funds], up from 25% in 20004

Lifecycle Fund Investors’ Avg. Annual Return: + 3.06%1

Non-Lifecycle Fund Investors’ Avg. Annual Return: - 0.35%1

Returns for professionally managed pension funds beat self-directed 401(k) plans by 4.3% in 2000; 3.5% in 2001; and 3.8% in 20022

21% of respondents said they were much more likely to participate in an employer-provided plan, like a 401(k), if it provided a life-cycle fund3

23% of employees participating in their employer-sponsored plan said they were “very likely” to use a life-cycle fund3

63% of US plan sponsors now offer these types of vehicles [life-cycle funds], up from 25% in 20004

Additional Industry Statistics

1Burgess & Associates, 1993-2003 Study of 90K DC Plan Participants2Watson Wyatt World Study, 20023Employee Benefits Research Institute (EBRI) and Matthew Greenwald & Associates4Mercer Investment Consulting Survey, April 2004 – 434 responses

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One, Simple Solution

Problem . . . ? Solution!Misguided Asset

Allocation- Approximately 50% of participants have equity allocations of either 0% or more than 90%1

Refined Asset Allocation-Better risk/return performance-Automatic allocation adjustment-Fully invested

Insufficient Diversification- More than 33% of portfolios were concentrated in just one or two asset classes2

Multi-Level Diversification-“Best-in-class” investment managers-Low overlap/correlation of holdings

Rebalance Inertia- 60% of participants never rebalance after making an initial enrollment3

Intelligent Rebalancing-Maximizes turnover efficiency -Controls Risks

1 Employee Benefit Research Institute Issue Brief 2722 Hewitt Associates 20033 Profit Sharing Council of America

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Evaluating Target Retirement Funds

What should you look for when evaluating Target Retirement Funds?

Active vs. Passive Management

Glide Path of Funds

Style of Investing

Underlying Management (Proprietary vs. Non-Proprietary)

Benchmark Analysis

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Target Retirement Funds

Participant will pick one fund depending on their desired target retirement

year: 2010, 2020, 2030, or 2040.

As the target date As the target date approaches, the fund approaches, the fund

automatically becomes automatically becomes increasingly more increasingly more

conservative to help conservative to help reduce portfolio riskreduce portfolio risk.

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Glide Path

•Allocation at retirement is 75% Bonds/Stable Value & Cash and 25% Stocks.

•This remains static through retirement in the Retirement Income Fund

Automatic Asset Allocation Adjustment

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Asset Allocation

Diversification Across Asset Classes

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Underlying Investment Management

Multi-Manager ApproachProprietary Manager Approach

Large Cap Value Best in Class Value Mgr Proprietary Manager A

Large Cap Growth Best in Class Growth Mgr Proprietary Manager B

Domestic Small Best in Class Small Cap Mgr

Proprietary Manager C

International Core

Best in Class International Mgr

Proprietary Manager D

International Small

Best in Class International Mgr

Proprietary Manager E

Core Bond Best in Class Bond Mgr Proprietary Manager F

Stable Value Best in Class Stable Value Mgr

Proprietary Manager G

Management Approach: Multi Manager vs. Proprietary Manager

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Underlying Investment Management

Schwab Managed Retirement Schwab Managed Retirement Trust FundsTrust Funds

Mutual Fund AMutual Fund A Mutual Fund BMutual Fund B

Management Approach: Multi Manager vs. Proprietary Manager

According to Overlap®, a percentage of 20% or more

indicates significant overlap of equity holdings. (Shown in red)

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Benchmark Analysis

Example: Target Retirement 2020 Fund 1 Year Return

2020 Fund 12.00%2020 Benchmark* 11.00%

Benchmarks are a composition of the underlying category indices:

Sample Asset Allocation Sample Benchmark Composition:

Domestic Equity 54.00% Russell 3000 54.00%Int’l Equity 13.00% MSCI EAFE

13.00%Fixed Income 31.00% LB US Agg. Bond 31.00%Cash 2.00% 3 Month T-Bill 2.00%

Example: Target Retirement 2020 Fund 1 Year Return

2020 Fund 12.00%2020 Benchmark* 11.00%

Benchmarks are a composition of the underlying category indices:

Sample Asset Allocation Sample Benchmark Composition:

Domestic Equity 54.00% Russell 3000 54.00%Int’l Equity 13.00% MSCI EAFE

13.00%Fixed Income 31.00% LB US Agg. Bond 31.00%Cash 2.00% 3 Month T-Bill 2.00%

These values are for illustrative purposes only and do not reflect the performance of any particular investment security.

Benchmarks created should measure the performance of each manager and the portfolio as a whole.

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Comparison

Fund Structure Active vs. Passive Management Proprietary vs. Non-Proprietary Management Mutual Funds vs. Collective Trust Funds 10-Year Increments vs. 5-Year Increments

Oversight Some products have a 3rd Party Oversight

Product vs. Process Best-in-Class vs. Proprietary Managed Products

Asset Allocation Some Products are More Aggressive

(i.e. 2010 Funds: Manager A has 67% Equity, while Manager B has 45% Equity)

Some manage to a Target Date, Others Manage Past Target Dates

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Ideal Structure

Summary of Main Characteristics to Consider When Choosing a Target Retirement Fund:

Investment Diversification within the Portfolio

Investment Manager Due Diligence & Oversight

Investment Management- Non-Proprietary vs Proprietary

Competitive Performance and Reasonable Fees

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The Future

What can you expect to see in years to come?

More Variations

More Multi-Manager Approaches

Further Popularity within the Industry

Further Default Options by Age

Reduction in Balanced Fund Options in Plans

Reduction in Number of Total Options in Plans

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Q&A

Thank You

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Disclosure

Schwab Corporate Services (SCS) provides services to retirement plan sponsors and participants through Schwab Retirement Plan Services, Inc, The Charles Schwab Trust Company, and Charles Schwab & Co., Inc. SCS also provides equity compensation plan services and other financial and retirement services to corporations and executives. Schwab Retirement Plan Services, Inc. provides recordkeeping and related services with respect to retirement plans. CSTC, a California state-chartered trust company, provides trust and custody services to retirement plan sponsors. Charles Schwab & Co., Inc. (Member SIPC) is a registered broker/dealer, offering the Schwab Personal Choice Retirement Account® (PCRA), as well as other brokerage and custody services to its customers. These entities are affiliates of each other and are wholly owned subsidiaries of The Charles Schwab Corporation.

The Schwab Managed Retirement Trust Funds are collective trust funds.  They are not mutual funds and their units are not registered with the SEC or regulatory authorities in any state or other jurisdiction.  The funds are not guaranteed by The Charles Schwab Trust Company, any of its affiliates, the FDIC or any other person.  The unit value of the funds will fluctuate and investors may lose money. Various asset classes of the underlying funds, such as small-cap and international may carry additional risks.