Transcript The Principal Title Page

May 2006 • UBS Teach-In
The Principal®:
Overview of the 401(k) Business
Chris Bowman
Vice President, Retirement and Investor Services
Forward Looking Statements
Certain statements made by the company which are not historical facts may be
considered forward-looking statements, including, without limitation, statements as to
sales targets, sales and earnings trends, and management’s beliefs, expectations, goals
and opinions. These statements are based on a number of assumptions concerning
future conditions that ultimately may prove to be inaccurate. Future events and their
effects on the company may not be those anticipated, and actual results may differ
materially from the results anticipated in these forward-looking statements.
The risks, uncertainties and factors that could cause or contribute to such material
differences are discussed in the company’s Annual Report on Form 10-K for the year
ended December 31, 2005 and in the company’s quarterly report on Form 10-Q for the
quarter ended March 31, 2006, filed by the company with the Securities and Exchange
Commission. These risks and uncertainties include, without limitation: competitive
factors; volatility of financial markets; decrease in ratings; interest rate changes; inability
to attract and retain sales representatives; international business risks; foreign currency
exchange rate fluctuations; and investment portfolio risks.
Use of non-GAAP
Financial Measures
A non-GAAP financial measure is a numerical measure of our performance, financial position, or
cash flows that includes adjustments from a comparable financial measure presented in
accordance with U.S. GAAP.
We use a number of non-GAAP financial measures that management believes are useful to
investors because they illustrate the performance of our normal, ongoing operations which is
important in understanding and evaluating our financial condition and results of operations. While
such measures are also consistent with measures utilized by investors to evaluate performance,
they are not a substitute for U.S. GAAP financial measures. Therefore, in the back of the handouts,
we have provided reconciliations of the non-GAAP financial measures to the most directly
comparable U.S. GAAP financial measure. We adjust U.S. GAAP financial measures for items not
directly related to ongoing operations. However, it is possible that these adjusting items have
occurred in the past and could recur in the future. Management also uses non-GAAP financial
measures for goal setting, to determine employee and senior management awards and
compensation, and to evaluate performance on a basis comparable to that used by investors and
securities analysts.
We also use a variety of other measures that we do not consider to be non-GAAP financial
measures. These are operational measures and do not have U.S. GAAP counterparts. Assets
under management is an example of an operational measure.
Agenda
Market Overview
Focus on Participants
•
Segmentation
•
Increasing participation
•
Business models
•
Increasing deferrals
•
Value propositions
•
Investment options
•
Capturing plan
distributions
•
Retire SecureSM
Distribution
•
Models
•
Wholesale Model
•
Broker/Dealers
Sales Process
•
Sales Cycle
•
Conversion process
Financials
•
Earnings drivers
•
Fees and plan costs
Market Overview
PFG Market Segmentation
Institutional Segment: Over $25 million
Total Retirement Solution
Dynamic Segment: $5 - $25 million
A more personal approach
Emerging Segment: $750,000 - $5 million
A complete solution made easy
Micro Emerging: Under $750,000
A bundled solution with small company affordability
Primary Competitors:
Business Model
Bundled
BUSINESS MODEL
Fidelity
Diversified
Mass Mutual
Prudential
Vanguard
Merrill Lynch
Aetna/ING
MetLife
Nationwide
Manulife
Unbundled
Small
Case
TARGET MARKET
Large
Case
Total Retirement Outsourcing
•Reduce administrative burdens
•Cost savings
•Efficiency and time savings
•Expanded resources to meet fiduciary obligations
•Speeds service to employer and employee
•Easier for employers and employees to plan
Value Propositions
Principal
ADP
BISYS
Fidelity
Emerging: Experience, Service, Investments
Dynamic: Client Service, Investments, Technology
Institutional: Customized solutions, Commitment, Due Diligence Program
Offers integrated payroll, human resource and benefits services for small,
medium and large businesses
Ability to operate as a seamless resource, providing an expanding array of
solutions, leading edge technology, and expertise in every segment of the
converging financial services industry.
Unparalleled name recognition, a reputation for leading edge systems and
technology, and a commitment to the marketplace.
ING
Emphasizes local account management. ING has a major presence in the
small market where it partners with TPAs and financial advisors; it is
building position in the middle market.
John Hancock/
Manulife
Experienced pension field sales and service network, one of the largest in
the industry. Highly developed network of TPA relationships, linked by
automated data exchange. Investment platform includes name brand
mutual funds or sub-advised options.
Value Propositions (cont.)
MassMutual
Comprehensive retirement plan service provider (DC, DB, NQ).
Has developed a fully integrated product and service capabilities
with robust in house investment capabilities.
Nationwide
Has the largest and most tightly linked network of Preferred
Pension Administrators (PPAs). Defines the PPA as the primary
customer and builds an approach that fits the PPAs way of doing
business.
Paychex
Provides integrated payroll, human resource and benefits
services for small to mid size businesses.
Prudential
Offers comprehensive array of retirement plan services (DC, DB,
NQ).
Putnam
The sophisticated buyers alternative to Fidelity and Vanguard.
“The intelligent choice.” Positions itself as a top quality, high end
provider across the board.
T. Rowe Price
Strong retail fund manager. Good relationships with
intermediaries.
Vanguard
Client service, technology, and the lowest expense ratios in the
industry (which equates to low total cost for their retirement
plans).
Distribution
Distribution Models
• Direct (Fidelity, ADP)
• Semi-Direct (Merrill Lynch, Citigroup)
• Wholesale through Advisors (Fidelity,
MassMutual, Prudential)
• Wholesale through TPA’s with or without Brokers
(Hancock, Nationwide)
Distribution Models
Role of the
Wholesaler
VP of Sales or Director of
Sales
Dedicated to driving sales
throughout the US
Focus on larger clients
Broker Network
Emerging Market Rep
Focus on smaller clients
Broker Network
PFG Wholesaler Support
RIS Distribution
Directors of Business
Development
Market Specialists:
RIA, TPA, Payroll,
Consultants, Non
Profit, DB
Alliance Partner
Development
Producer Support
Team for Emerging
Market Reps
Independent Small
Plan Brokers
PFG Local Service Model
RIS Distribution and Service
Relationship
Managers
Institutional Clients
($25m+)
Account
Executives
Emerging (<$5m) and
Dynamic ($5-$25m)
Clients
Education
Specialists
Participants
Unique & Enhanced Distribution Networks
Local presence matters
8 service centers nationwide
Over 45 retirement offices
Scored 18% above market average for having knowledgeable and
professional qualified plan sales reps or wholesalers. Brightwork Partners 2004
Typical Sales Cycle
Level
0
1
2
Week 1
Sales Milestones
Level 0 = Suspect/Initial Contact
Level 1 = RFP
Level 2 = Preliminary Presentation
Level 3 = Presentation to Key Decision Maker
Level 4 = Finalist Presentation
Level 5 = Committed
3
4
5
Week 32
Conversion Process (PFG)
Blackout is the time of participant inactivity from prior record
keeper cutoff date to live date at new record keeper.
Asset Transfer
Participant
activity
stopped
Data
received
Prior recordkeeper
Blackout Start
Live
date
new recordkeeper
…………………………………………………….
Blackout Stop
•
Industry average blackout period is 8 calendar days
•
Principal offers 24-hour conversions
•
Principal’s conversion project manager has 8-14 years of
experience vs. Industry average of 6 years
Source: 2004 Deloitte
Focus On Participants
Increasing Participation
Automatic Deferral
 Once employees are eligible, they are encouraged to enroll and
select their elective deferral percentage of pay.
 If they do not proactively enroll, they are automatically enrolled
at a pre-determined percentage (often 1-5 percent). This pay is
withheld from each paycheck and deposited into the retirement
plan.
 Once enrolled, few opt out.
Increasing Participation
with Principal
Smart Start
• Smart Start: Simplifies the deferral decision for participants –
Client determines the starting deferral rate and asset allocation
(Principal Lifetime).
• Simplifies Selection– Since the plan sponsor determines the
starting deferral amount and asset allocation, the participant is
already on the right track
• Maximize Match Opportunity – Plan sponsors typically choose a
deferral amount that guarantees the maximum match contribution
• Participant Choices – The participant remains in control and can
choose a different contribution and asset allocation.
Increasing Deferrals
Principal Step Ahead Retirement OptionSM:
Participant deferral rates are automatically increased
each year on a set date.
•Allows the participant to save more for retirement
automatically.
•Helps the participant stay on track when saving for
retirement.
Investment Options
Retirement plan participants fall into two basic profiles when it
comes to how they prefer to invest1
Do-it-For-Me
Investors
•
May not have time to regularly
rebalance retirement accounts
•
•
1 EBRI
Do-it-Myself
Investors
•
May not feel comfortable with
concepts of investing
May take time to regularly
check investment options and
rebalance accounts
•
May not want to be very
involved in retirement planning
May feel comfortable with
concepts of investing
•
May want to be very involved
in retirement planning
2004 Retirement Confidence Survey, and Independent Research conducted by The Principal
Investment Options that support a
simple, flexible approach
Do-it-For-Me
Investors
•
•
•
1 EBRI
Principal LifeTime Portfolios
Russell LifePoints
Principal Managed Account
ProgramSM
Do-it-Myself
Investors
•
•
•
•
Choose your own investment
options
Brokerage Account
Retirement Saving Worksheet
Investor Profile Quiz
2004 Retirement Confidence Survey, and Independent Research conducted by The Principal
On-Site Enrollment and Guidance
Principal Retire SecureSM
A Next-Generation Retirement Program
That Helps Employees Achieve Financial Security
• Provides a Retire Secure team for professional financial
assistance at the workplace for all participants.
• Delivers enrollment in person, face-to-face
• Offers deeper professional resources that help with other
financial needs at any stage of life.
Capturing Plan Distributions
•Sophisticated “benefit event” processing
•Call Center with access to licensed transition
professionals
•Automatic rollovers for Small Amount Force Outs
•Encourage retention of vested deferred accounts inside
the plan
•Easy transition from employer to individual products
(IRA, annuity, etc.)
Financials
Promises Made, Promises Kept:
Retirement Services*
’01
‘02
‘03
’04
’05
CAGR
$42.9
$42.9
$55.9
$68.9
$77.3
16%
Deposits ($B)
8.5
11.2
12.6
13.3
15.4
16%
Organic Sales ($B)
3.3
4.6
5.6
5.2
6.1
17%
Net Cash Flow
1.9
2.9
4.9
3.8
3.3
15%
Member Asset Retention
49%
51%
54%
54%
52%
Account Values ($B)
*Pension full service accumulation
Principal’s 2005 Retention Rates
Employer Plan Assets
Retention Leader;
average 401(k) client
tenure 35% above
industry norm
– Boston Research Group
94%
Participant Assets
52%
Average Fees Charged in
the Industry
1.80%
1.60%
1.55%
1.40%
1.40%
1.31%
1.26%
1.20%
1.17%
1.17%
500 Ptps,
$20M in
assets
1000 Ptps,
$40M in
assets
2000 Ptps,
$80M in
assets
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
25 Ptps, $1M 50 Ptps, $2M
100 Ptps,
200 Ptps,
in assets
in assets
$4M in assets $8M in assets
Investment
Recordkeeping Administration
Trustee
The Most Common Commissions
We See at the Principal
• Emerging Market – Typically see 1% finders
fee and annual trail of 0.25% on assets
• Dynamic Market – Typically see 0.50%
finders fee and annual trail of 0.25% or flat
trail amounts starting at 0.40% and grading
down.
• Institutional Segment – Typically flat trail
amount starting at 0.20% or consultants
charge at one-time consulting fee.
Fees and the Market
• The market is highly competitive
• Total costs are important
• Retirement services are not a commodity!
• Still a big opportunity to offer an above-the-rest
value proposition
• The market demands Transparency and Full
Disclosure