401(k) Plan Fees …
How does your Plan
compare?
2008 Benefits New York
New York, NY
Monday, March 3, 2008
Session 9 – 2:30 PM to 3:20 PM
Michael Crowley and Wayne G. Bogosian
Workshop Objectives
 Current Events in Fee Disclosure
 Revenue Sharing – Good, Bad or Illegal?
 Case Study: Benchmarking 401(k) Plan Fees
 What is a “reasonable” fee?
 Getting ready for “full fee disclosure”?
401(k) Plan Fees … How Does Your Plan Compare? |
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Current Events in
Fee Disclosure
 2004 Department of Labor ERISA Advisory Council to Review 401(k) Plan Fees (12/9/2004)
– 15-member council appointed by the Secretary of Labor (union, employer, provider and "public" representatives)
– Result of Council/Congressional Action/Litigation is three-step initiative
(1) Revised Form 5500 Schedule C (confirm that all fees have been disclosed to sponsor;
(2) ERISA §408(b)(2) prohibited transaction exemption for fiduciaries who get written service agreements showing all
provider fees;
(3) Disclosing plan fees to participants, thereby confirming fees are reasonable
 401(k) Fee Lawsuits (9/2006)
– Claims by Plaintiffs: Fiduciaries were “unaware” of plan expenses
 2006 GAO Report Recommendations (11/2006)
– Findings: Few participants understand plan fees
– Recommendations: Report all fees paid from plan assets and paid by participants provide easy comparison
between funds
 401(k) Congress Holds Fee-Related Hearings (3/6/2007)
 DOL (EBSA) Requests Comment on 401(k) Fee Disclosures (4/20/2007)
– Question: What information do participants require to make investment decisions?
 Miller (D-CA) Introduces “401(k) Fair Disclosure for Retirement Security Act of 2007” (7/26/2007)
 DOL Issues Proposed Regulation on Fee Disclosure (12/12/2007)
– ERISA §408(b)(2) requires plan fees to be “reasonable”
– Plan sponsors require “full disclosure” of fees to make reasonableness assessment
– Requires ALL plan service providers to disclose all methods of compensation (direct and indirect), conflicts of
interest, etc.
– Plan fiduciaries receive prohibited transaction exemption if FULL disclosure is requested from all service providers
401(k) Plan Fees … How Does Your Plan Compare? |
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Current Events in
Fee Disclosure (continued)
 Court Decisions
– Exelon (2/21/2007): US District Court of Northern District of IL granted motion to
–
–
–
exclude investment losses from plaintiff’s suit. No connection was drawn between
participant investment losses and defendant’s failure to disclose administration
fees.
John Deere (6/29/2007): US District Court of Western District of WI dismissed
“excessive fee” fiduciary breach case.
United Technologies (8/9/2007): US District Court of CT granted motion to
dismiss claim of fiduciary breach for failure to disclose revenue share
arrangements but allowed it to proceed on a misrepresentation theory.
Phones Plus v. Hartford FSG (10/23/2007): US District Court denies motion to
dismiss “revenue sharing as plan assets” case. Plaintiff claimed: (1) Hartford was
plan fiduciary and therefore receipt of revenue sharing was a prohibited
transaction, and (2) Investment Adviser, as a fiduciary, had a duty to investigate,
discover and inform plaintiff of Hartford’s use of revenue sharing dollars.
401(k) Plan Fees … How Does Your Plan Compare? |
| 4
Current Events in
Fee Disclosure (continued)
 Court Decisions
– Tullis v. UMB Bank (1/28/2008): Appeals Court allows an individual to seek
–
–
recovery of plan assets without resorting to a class action.
Tussey v. UBB, Inc. (2/11/2008): US District Court of Western District of MO
rules that plan sponsor and Fidelity had no fiduciary duty to disclose revenue
sharing fees. However, the court denies motion to dismiss, declining to adopt the
Deere decision’s rationale. Rather, the court rules that the failure to disclose
revenue share arrangements is relevant to a 404(c) defense because that
defense requires that plan losses be caused by a plan participant exercising
control over investments. A jury could find that plan losses related to revenue
sharing fees were not caused by a plan participant who was ignorant of the
revenue sharing fees when choosing investments.
LaRue v. Dewolff (2/20/2008): Supreme Court ruling allows individuals to
recover (vs. entire plan) from fiduciaries.
401(k) Plan Fees … How Does Your Plan Compare? |
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Fiduciary and Participant
Responsibility
Fiduciary Responsibility
• Design/operate plan according to “rules”
• Select, negotiate and monitor service
providers and agreements
• Develop “Investment Structure”
• Select, monitor, hire/fire managers
• Communicate plan performance and
fees to participants
Participant Responsibility
• Understand benefits & costs of plan
participation
• Select investments
• Monitor account performance
• Make changes when appropriate
“What information do plan participants need to make confident decisions?”
401(k) Plan Fees … How Does Your Plan Compare? |
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Fiduciary and Participant
Responsibility (continued)
Required Statutory Disclosures
Desired Statutory Disclosures
(Enrollment Form, SPD, Form 5500, SAR)
(New Notice Requirements)
• Investment Fees (prospectus)
 Fund expense ratios
 Contingent redemption fees
• Administration Fees Paid from Plan
 Recordkeeping
 Loans, distributions, QDRO
 Transactions
 Compliance, Legal, Inv. Advisory, Audit
• Participant
 Investments – Name, objective, risks,
OER, CRF, performance
 Administration – All fees paid by
participants or plan
• Plan Sponsor
 Written service agreements w/all
service providers
 Disclose all provider revenue sources
 Disclose all conflicts of interest
 Document fees on Form 5500 Sch. C
“Will more information make participants better investors
or plan sponsors better fiduciaries?”
401(k) Plan Fees … How Does Your Plan Compare? |
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Your Personalized Expense Ratio
Investment
Category
Investment
Option
Current
Allocation
to Fund
Expense
Ratio
(bp)*
Weighted
Average
Expense
(bp)*
Industry
Average
Expense
(bp)*
Industry
Average
Weighted
Expense
(bp)*
Cash Equivalent
Schwab Stable Vale
5%
50
2.50
65
3.25
Fixed Income
PIMCO Total Return (Ins)
21%
43
9.00
102
21.42
Fixed Income
PIMCO Real Return
14%
45
6.30
99
13.86
Real Estate
Morgan Stanley Ins U.S. RE (A)
5%
89
4.50
154
7.70
Large Cap Value
MainStay ICAP (I)
14%
80
11.20
134
18.76
Large Cap Growth
Growth Fund of America (R5)
11%
36
3.96
142
15.62
Mid Cap Value
Janus Adviser Mid Cap Value (I)
7%
75
5.25
141
9.87
Mid Cap Growth
MainStay Mid Cap Growth (I)
5%
110
5.50
154
7.70
Small Cap Value
Third Avenue Small-Cap Value
4%
113
4.52
155
6.20
Small Cap Growth
Baron Small Cap
3%
133
3.99
166
4.98
International
AF EuroPacific Growth A
9%
80
7.20
153
13.77
Emerging Markets
Lazard Emerging Markets
2%
127
2.54
190
3.80
*A basis point (bp) is a
unit that is equal to 1/100th
of 1% (i.e., 0.01% = .0001
= 1 basis point or $0.01 on
$100 invested), and is used
to denote the change in a
financial instrument.
YOUR INVESTMENT EXPENSE 
66.44
126.93
YOUR ADMINISTRATION EXPENSE 
5.00
0.00
YOUR TOTAL EXPENSE 
71.44
126.93
WHAT IS MY TOTAL COST FOR PLAN
ADMINISTRATION AND INVESTMENT
MANAGEMENT? 
You pay
$0.71
out of every $100
you invest in your plan
The average investor would pay
$1.27
out of every $100 they invest
401(k) Plan Fees … How Does Your Plan Compare? |
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Sources of Provider
Revenues (“Economic Benefit”)
 Proprietary Product Placement
– Fully “bundled” using ALL/MOSTLY proprietary product is MOST profitable
– Internal “revenue crediting rates” (for proprietary funds) differ by fund company
– Default fund option (Life Cycle, Managed Accounts)
– Spreads (fixed income products)

Non-Proprietary Product Revenues
– Revenue sharing arrangement & 12b-1 fees
– Sales commission
– Yield spread
– Wrap fees
– Sub Transfer Fees & Shareholder Service Fees
– Brokerage “shelf-space” Fees
– Preferred Provider or Placement Fees
– “Soft-dollar” Brokerage (proprietary & third-party research)
– Directed brokerage (for investment products other than mutual funds)
– Other: Allowances, Subsidies, Conferences, Reciprocal Referrals, Directed
Brokerage, Rollovers upon Termination
401(k) Plan Fees … How Does Your Plan Compare? |
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Is “Revenue Sharing” Good, Bad or
Illegal?
INVESTMENT
CATEGORY
INVESTMENT OPTION
EXPENSE RATIO
(Component Parts) (%)*
Inv. Mgt.
Distribution
(12b-1)
Other
EXP.
RATIO*
REVENUE
SHARE TO
SERVICE
PROVIDER
CATEGORY
AVG EXP.
RATIO
(%)*
Cash Equivalent
Proprietary Stable Value
6 bp
0 bp
44 bp
50 bp
44 bp
N/A
Fixed Income
PIMCO Total Return (Ins)
25 bp
0 bp
18 bp
43 bp
0 bp
102 bp
Allocation Strategy
Moderate Allocation Strategy
40 bp
0 bp
18 bp
58 bp
16 bp
108 bp
Balanced
Proprietary Balanced (Ins)
75bp
0 bp
11 bp
86 bp
75 bp
113 bp
Allocation Strategy
Aggressive Allocation Strategy
63 bp
1 bp
11 bp
75 bp
22 bp
113 bp
Real Estate
Morgan Stanley Ins U.S. RE (A)
76 bp
0 bp
13 bp
89 bp
10 bp
154 bp
Large Cap Value
Proprietary Equity (I)
80 bp
0 bp
0 bp
80 bp
50 bp
134 bp
Large Cap Index
BGI Equity Index (Q)
5 bp
0 bp
1 bp
6 bp
1 bp
115 bp
Large Cap Growth
Growth Fund of America (R5)
28 bp
0 bp
8 bp
36 bp
5 bp
142 bp
Mid Cap Value
Janus Adviser Mid Cap Value (I)
64 bp
0 bp
11 bp
75 bp
10 bp
141 bp
Mid Cap Index
Vanguard Mid-Cap Index Adm
11 bp
0 bp
2 bp
13 bp
0 bp
143 bp
Small Cap Value
Third Avenue Small-Cap Value
90 bp
0 bp
23 bp
113 bp
0 bp
155 bp
Small Cap Index
Vanguard Small-Cap Index Adm
10 bp
0 bp
3 bp
13 bp
0 bp
144 bp
Small Cap Growth
Baron Small Cap
100 bp
25 bp
8 bp
133 bp
35 bp
166 bp
International
Proprietary International (I)
80 bp
0 bp
0 bp
80 bp
50 bp
153 bp
Source: Morningstar 2007; Fund Prospectus
401(k) Plan Fees … How Does Your Plan Compare? |
| 10
About NFA
• Founded 1982
• Nationwide Self-Regulatory Org. for
US Futures Industry (not-for-profit)
• 280 Employees
• $58M 401(k)/Profit Sharing Plan
• 99% Participation
• 8.33% Avg. Deferral
• Auto-enrollment @ 6%
• QDIA – Balanced Fund
• 20 Plan Funds
 13 Active Managers
 5 Index Managers
 3 Risk-based Strategies
• Avg. participant uses 7 plan funds
• Formal Plan Oversight
401(k) Plan Fees … How Does Your Plan Compare? |
| 11
Fiduciary Committee – Plan
Oversight


Retained Responsibilities (Non-Delegated)
–
–
–
–
–
Fiduciary Oversight (“Benefit Plan Trustees”)
Committee Charter and Investment Policy
Fund Manager Performance
Fee Analysis (Total and Vendor-specific)
Service Provider Oversight
Delegated Committee Responsibilities
–
–
–
–
–
Trust (directed-trustee)
Plan Administration (day-to-day recordkeeping)
Investment Advisory
ERISA Counsel
Communications and Education
401(k) Plan Fees … How Does Your Plan Compare? |
| 12
“State-of-the-Plan” Report
to Board of Directors
 Purpose: Inform Board of the Actions of
their Appointed Fiduciaries
– Plan Amendments and Material Modifications
– Claims and Appeals
– Plan Administration
– Plan Demographics
– Plan Qualification
– Litigation
– Agents (ERISA Counsel, Inv. Advisor, Auditor)
– Plan Expenses
– Plan Funds
401(k) Plan Fees … How Does Your Plan Compare? |
| 13
Plan Fees Paid by Participants
ANNUAL PARTICIPANT PAID FEES
EXPENSE
(based upon Total Plan Assets
of $57,000,000 as of 12/31/2007)
Fees for Plan Administration
$125,000 or
$298/participant
22 basis points
Fees for Investment
Management, Shareholder,
Distribution
and Other Services
$251,000 or
$599/participant
44 basis points
Total Annual Fees
Paid by Participants
$376,000 or
$897/participant
66 basis points
NFA’s Average Account Balance is ~ $138,000
401(k) Plan Fees … How Does Your Plan Compare? |
| 14
How Does NFA Compare to All Plans?
Benchmark Comparison of Plan Fees to PFE 401(k) Database – ALL PLANS
DATABASE PROFILE
Mean
Median
NFA
Plan Assets
$995 Million
$451 Million
$58 Million
Participants
20,684
10,326
419
Avg. Account Size
$48,118
$43,709
$138,000
Inv. Expense (bp)
57 bp
54 bp
44 bp
Admin. Expense ($)
$161
$140
$298
PFE 401(k) DATABASE PROFILE – ALL PLANS
The PFE 401(k) Plan Expense Database contains information from 242
defined contribution plans, ranging in size from $442,000 to $16 billion
and from industries such as industrial, retail, professional services, financial
services, non-profit, technology, consumer products, and entertainment.
Total assets in the database are approximately $243 billion spread
among more than 5 million accounts.
Plans in PFE’s expense database have been submitted by fee-only
investment consultants and some service providers. It is highly likely these
plans are among the most competitively priced 401(k) plans in the United
States
401(k) Plan Fees … How Does Your Plan Compare? |
| 15
How Does NFA Compare to All Plans? (Continued)
*This table ranks ACTUAL
investment, administration
and total expenses for 242
plans in the PFE database.
Actual expenses are
influenced by average
account size and asset
allocation. Figures for Total
Cost, Investments and
Administration are
independent of each other
(mutually exclusive).
** 401k Source Averages
Book© 2007 8th edition Mid
plan is defined as assets of
$40 million and million
w/approximately 1,000
participants
$900
$800
$700
$600
$500
$400
$300
$200
$100
PERCENTILE
5
25
50
75
95
NFA Forecast
$0
INVESTMENTS*
$59
$134
$200
$289
$563
$538 (41 bp)
ADMINISTRATION*
$53
$101
$157
$233
$491
$384 (29 bp)
TOTAL COST*
$139
$246
$351
$417
$582
$922 (70 bp)
NFA Actual
$599 (44 bp)
$298 (22 bp)
$897 (66 bp)
401k Source Mid Plan Avg.**
$584 (119 bp)
$15 (2 bp)
$599 (122 bp)
401(k) Plan Fees … How Does Your Plan Compare? |
| 16
NFA vs. Comparable Plans by Plan Assets
Investment Expense Only
# of
Accounts
Avg. Account
Size*
Total Inv
Expense**
Inv
Expense
(bp)**
Average Cost
Per
Account**
Total Plan
Assets
Company
Stock
Industrial
$81,044,815
$7,292,497
1,686
$48,081
$99,620
14
$59
Professional Svcs
$35,681,201
$0
498
$71,649
$56,739
16
$114
Industrial
$54,260,731
$0
581
$93,392
$91,317
17
$157
Professional Svcs
$70,294,370
$0
1,280
$54,917
$205,864
29
$161
Professional Svcs
$81,139,048
$0
1,056
$76,836
$238,960
30
$226
Health Care
$32,079,183
$0
419
$76,561
$109,971
34
$262
Financial
$27,140,254
$0
574
$47,283
$100,540
38
$175
Industrial
$23,015,306
$0
725
$31,745
$87,029
40
$120
Professional Svcs
$61,280,897
$0
736
$83,262
$265,982
43
$361
Professional Svcs
$35,118,675
$0
470
$74,721
$149,669
43
$318
Professional Svcs
$79,919,515
$0
652
$122,576
$351,100
44
$538
Industrial
$51,347,282
$0
378
$135,839
$223,498
44
$591
NFA
$57,659,094
$0
419
$137,611
$251,486
44
$599
Entertainment
$30,632,811
$0
550
$55,696
$153,401
50
$279
Non-Profit
$47,447,000
$0
1,802
$26,330
$269,142
57
$149
Industrial
$28,861,702
$0
1,580
$18,267
$166,074
59
$105
Health Care
$53,041,345
$0
1,103
$48,081
$325,858
61
$295
Industrial
$56,438,692
$0
1,058
$53,345
$311,375
63
$294
Consumer/Misc Prods
$63,565,086
$0
2,000
$31,783
$478,315
75
$239
Industrial
$67,600,000
$0
3,700
$18,270
$521,282
77
$141
Health Care/Med Svcs
$75,907,292
$0
13,000
$5,839
$610,531
80
$47
Industry
* Includes Company Stock. ** Includes all funds-Life Cycle, Life Style and Company Stock funds
401(k) Plan Fees … How Does Your Plan Compare? |
| 17
Benchmarking Fees …
Easier Said Than Done
 No Benchmarking Survey Can Capture all Plan Expenses
– Loan, Distribution, and Ad Hoc Fees can be substantial
– Managed Account fees are often not counted
– Expenses paid by plan sponsors are often not reported (as a result overall fee looks low for
these sponsors when compared to all-in expensing)
 Not all Plans are created equal
– What provider services do you use?
– How complex is your plan design?
– How “demanding” are you?
 What services are of value to “your” plan and participants, but incur
additional cost?
–
–
–
–
Independent Investment Advisor
ERISA Counsel
Demographic-specific communications
Financial education and one-on-one counseling
 Index and ETF Plans vs. Active Manager Plans
– Active Manager Plans tend to look expensive when compared to all-Index or ETF plans
– Expenses alone do not tell the entire story; return and risk must also be included
401(k) Plan Fees … How Does Your Plan Compare? |
| 18
Comparing Active Management vs. Index
Management (Risk and Return)
COMPOSITION
Asset Class/Style Class
Fund
Moderate Allocation
Aggressive Allocation
Naïve*
Index
Fund
Naïve*
Index
Fund
Cash & Equivalent
Schwab Stable Value
10%
10%
10%
------
------
------
Investment Grade Bonds
PIMCO Total Return D
50%
30%
30%
20%
12%
12%
Inflation-Adjusted Bonds
PIMCO Real Return Instl
------
20%
20%
------
8%
8%
Large Cap Value
WHG Large Cap Value Inst
------
11%
11%
------
17%
17%
Large Cap Blend
S&P 500 IndexSel
40%
------
------
80%
------
------
Large Cap Growth
Growth Fund of America R4
------
9%
9%
------
13%
13%
Midcap Value
JP Morgan Midcap Value Inst
------
5%
5%
------
8%
8%
Midcap Growth
Alger Midcap Growth Instl
------
4%
4%
------
5%
5%
Small Cap Value
Royce Low-Priced Stock
------
3%
3%
------
6%
6%
Small Cap Growth
Schroeder US Opportunities
------
2%
2%
------
4%
4%
Real Estate
Third Avenue Real Estate Val
------
3%
3%
------
8%
8%
International Equity
Amer Funds EuroPac A
------
3%
3%
------
14%
14%
Emerging Markets Equity
Oppenheimer Dev Markets A
------
------
------
------
5%
5%
SEVEN YEAR PERFORMANCE** (ending 12/31/2007)
This table shows the
seven-year risk and return
characteristics for two
optimally-constructed
portfolios using plan
funds. Naïve vs. Index
shows the efficiencies of
diversification. Index vs.
Fund shows the added
value (if any) of active
management.
Annualized Return
4.82%
6.65%
7.85%
4.00%
8.42%
10.33%
Alpha vs. Naïve
0.00
1.91
3.40
0.00
4.43
6.49
Beta vs. Naïve
1.00
0.97
0.89
1.00
0.94
0.86
R-Squared vs. Naïve
1.00
0.89
0.83
1.00
0.89
0.84
Standard Deviation
5.04
5.15
4.93
10.43
10.41
9.82
Sharpe Ratio
0.36
0.71
0.99
0.10
0.52
0.75
Tracking Error vs. Naïve
0.00
1.68
2.13
0.00
3.44
4.13
Information Ratio
N/A
1.14
1.60
N/A
1.29
1.57
*See “Interpreting Modern Portfolio Theory Statistics” at the end of this publication
401(k) Plan Fees … How Does Your Plan Compare? |
| 19
The Future for Plan Fees
 Notice Requirements – add 2 new “Notices” to your
current list (AE, AI, QDIA, Safe Harbor):
– Annual Fee Notice and Fund Change Notice
 Comprehensive Fee Analysis and Benchmarking – by
independent third party
 Fee Restructuring – pro rata allocation of administration
expense; per capita allocation of investment expense
 More Competition – 2008 Form 5500 (Schedule C) will
disclose all expenses paid by plan (w/o any context, of
course)
401(k) Plan Fees … How Does Your Plan Compare? |
| 20
Are You Ready for Full Fee
Disclosure?
Relate these questions to your retirement plan?
Yes
No
Don’t
Know
1.
We have identified those services which are considered necessary to
the effective and efficient operation of the plan?



2.
We have identified all fees charged for necessary services and
confirmed (a) who is currently paying the fee (participant or sponsor)
and (b) how the fee is being assessed (pro-rata or per capita)?



3.
We have identified all Plan Administration services (and fees) which
are currently paid through plan investments?



4.
We offer less expensive share classes today (if possible) than we did
three years ago?



5.
We have re-negotiated our plan fees (or moved our business) within
the past three years?



6.
We have benchmarked our plan services and fees to similar plans in
the past three years?



7.
Total plan expenses are reported to plan fiduciaries at least once each
year?



8.
An independent investment advisor, who is a fiduciary of the plan,
regularly reviews our plan’s services, investments and fees?



ERISA § 406(a)/408(b)…
“Prohibited transaction occurs if plan assets are used to pay service providers
more than reasonable compensation for their services”
401(k) Plan Fees … How Does Your Plan Compare? |
| 21
A Fiduciary’s “Fee-Related” To Do List …
 Service provider revenue/service assessment
 Comparing plan investments and plan costs to
correct benchmarks
 Share class selection and monitoring
 Service provider revenue capitation ($ or bp)
 Default fund selection (Who recommended?
What were revenue implications?)
 Pension plan vs. 401(k) due diligence
 Reporting fiduciary actions to Board of Directors
If you don’t know what you are doing …
ERISA requires you to find someone who does.
401(k) Plan Fees … How Does Your Plan Compare? |
| 22
Thanks for coming!
Wayne G. Bogosian
Michael Crowley
President & Managing Director
Associate General Counsel
The PFE Group
National Futures Association
144 Turnpike Road, Suite 360
Southborough, MA 01772
(508) 683-1400, ext. 205
wayne_bogosian@pfegroup.com
300 South Riverside Plaza
Suite 1800
Chicago, IL 60606
(312) 781-1388
mcrowley@nfa.futures.org
401(k) Plan Fees … How Does Your Plan Compare? |
| 23
Disclaimers and Attributions
General Notes

The information contained in this document is as of December 31, 2007 and is believed to be accurate. Data was gathered from a variety of sources believed to be reliable, including
Morningstar, eVestmentAlliance, Standard & Poor’s and other third-party administrators. Every attempt has been made to verify data; however, no guarantees or endorsements of
accuracy are to be made. Any discrepancies between the numbers contained herein and other sources are unintentional.

Total returns include changes in share values and reinvestment of dividends and capital gains distributions, if any. Gross returns will be reduced by management fees and other
expenses in an amount proportional to performance. For example, a fund with a gross return of 10% and an expense ratio of 1% will experience a reduction of 1.1%. Individual client
performance numbers may differ from reported numbers for a fund due to contributions or withdrawals made during the performance measurement period. Past performance is no
guarantee of future results.

All references to Company Plans reflect information that was available at the time of publication. Actual benefits will be based upon information and formulas contained in the
appropriate Plan Document(s). The inclusion of non-plan funds in certain exhibits is for comparative purposes only, and does not imply an endorsement of those funds by PFE
Advisors, Inc.

The information on specific investments contained in this document is not an offer to sell, nor a solicitation of an offer to buy, these securities. Plan sponsors should review fund
prospectuses and other relevant information before making any investment decisions.

This presentation is for the exclusive use of PFE Advisors, Inc. and its respective clients, and is not authorized for public distribution.
Index Definitions

The S&P 500 is an unmanaged index of 500 large-cap domestic stocks that is commonly used as a proxy for the large-cap stock market. Historically, the index has targeted a
composition of 400 industrial companies, 40 financial companies, 40 utility companies, and 20 transportation companies. The index does not contain real estate investment trusts.
Changes in the index composition may be made at any time. Performance numbers for the index are a size-weighted average of the performance numbers for each index constituent.

The Russell 2000 is an unmanaged index consisting of the smallest 2000 stocks in the Russell 3000 universe, which in itself consists of the largest 3000 publicly-traded domestic
companies. This index is commonly used as a proxy for the liquid small-cap stock market. The index is reconstructed on July 1 of each year. Performance numbers for the index are
a size-weighted average of the performance numbers for each index constituent.

The MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance,
excluding the US & Canada. The index consists of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong
Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

The NAREIT index is an unmanaged index of securities that meet the definition of Real Estate Investment Trust (REIT) and are traded on the NYSE, AMEX, or NASDAQ. REITs are
investments in rental properties, and are required to pay out 95% of their earnings each year as dividends. Performance numbers for the index are a size-weighted average of the
performance numbers for each index constituent.
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The Lehman Aggregate Bond Index is an unmanaged index made up of the following fixed-income securities: all debt securities issues to the public by the US Government or its
agencies, as well as quasi-federal corporations or corporate debt guaranteed by the US Government; all public obligations of the US Treasury except flower bonds and foreigntargeted issues; all 15-year and 30-year fixed-rate securities backed by mortgage pools of GNMA, FHLMC, and FNMA, with the exception of graduated payment mortgages,
manufactured home mortgages, and graduated equity mortgages; and all publicly-issued, fixed-rate, non-convertible, investment-grade, dollar-denominated, SEC-registered corporate
debt securities with at least one year to maturity and an outstanding par value of at least $100 million.
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Interpreting Modern Portfolio Theory Statistics
Annualized Return – the constant one-year rate of return on an investment which would result in the same total return as the actual annual
returns over the performance period being measured. Example: A three-year investment has three yearly returns of +5%,
-4%, and
+10%, for a total return of +10.9%. The annualized return on this investment is +3.5%, since a return of 3.5% for each of the three years
would result in the same total return of +10.9% with compounding.
Alpha – the expected return of the actively managed portfolio when the return of the index is 0%; it is determined by comparing the monthly or
quarterly returns of the portfolio and the index over a period of time. A positive alpha is always good, although it is not abnormal to have
a low alpha accompanied by a high beta (see beta below)
Beta – a measure of the market-related risk of a portfolio, expressed as a multiple of its benchmark. A beta of 1.10 means that the portfolio is
10% riskier than its benchmark; a beta of 0.90 means that the portfolio is 10% less risky than its benchmark. Modern Portfolio Theory
states that higher betas should be rewarded with proportionally higher returns over long investment periods.
R-Squared (R2) – a measure of the effectiveness of the alpha and beta statistics in estimating the expected risk and return levels of a
portfolio. As a rule of thumb, an R2 statistic of 0.70 or higher means that there is a significant relationship between the performance of
the portfolio and the performance of the index to which it is being compared. Lower numbers are acceptable if the measurement period is
longer, and vice-versa
Standard Deviation – a measure of the consistency of periodic returns of a portfolio or index over time. For any given twelve-month period,
the investment has a 68% probability of producing a return within the range defined by its long-term average return plus or minus its
standard deviation. Similarly, it has a 95% chance of providing a return in the range defined by its long-term average return plus or minus
two standard deviations.
Sharpe Ratio – a measure of the tradeoff between the value added through active management of a portfolio and the amount of risk incurred
through the management process. There is no constant number that is considered “good” or “bad”; the only objective for an actively
managed portfolio is to produce a Sharpe Ratio that is higher than its benchmark. The Sharpe Ratio uses standard deviation as its
measure of risk. (Note: The Sharpe Ratio statistic has a slight bias in favor of more conservative portfolios.)
Tracking Error – A measure of the similarity between the periodic returns of a portfolio and its benchmark. A low tracking error indicates a
high degree of similarity, and vice-versa. Like the standard deviation statistic, the interpretation of tracking error is that a portfolio has a
68% probability of performing in a range defined by its benchmark return plus or minus its tracking error over any twelve-month period.
There is no “good” or “bad” tracking error – it is simply a reflection of the investment policy of the portfolio manager.
Information Ratio – a comparable measure to the Sharpe Ratio in that it measures the tradeoff between return and risk; however, the return
used is the alpha, and the measure of risk is the tracking error.
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