The Principal: Overview of the 401k Business

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The PrincipalOverview of the 401(k) Business
May 2006 UBS Teach-In

• Chris Bowman
• Vice President, Retirement and Investor Services

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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 managements 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 companys Annual Report on Form
10-K for the year ended December 31, 2005 and in
the companys 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.
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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.
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Agenda

• Market Overview
• Segmentation
• Business models
• Value propositions
• Distribution
• Models
• Wholesale Model
• Broker/Dealers
• Sales Process
• Sales Cycle
• Conversion process

• Focus on Participants
• Increasing participation
• Increasing deferrals
• Investment options
• Capturing plan distributions
• Retire SecureSM
• Financials
• Earnings drivers
• Fees and plan costs

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Market Overview
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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

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Primary CompetitorsBusiness Model
Bundled
Fidelity
Diversified
Prudential
Mass Mutual
Vanguard
Merrill Lynch
BUSINESS MODEL
MetLife
Aetna/ING
Nationwide
Manulife
Unbundled
TARGET MARKET
Large Case
Small Case
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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

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Value Propositions
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Value Propositions (cont.)
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Distribution
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Distribution Models

• Direct (Fidelity, ADP)
• Semi-Direct (Merrill Lynch, Citigroup)
• Wholesale through Advisors (Fidelity, MassMutual,
  Prudential)
• Wholesale through TPAs with or without Brokers
  (Hancock, Nationwide)

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Distribution Models
Role of the Wholesaler
VP of Sales or Director of Sales
Emerging Market Rep
Dedicated to driving sales throughout the
US Focus on larger clients Broker Network
Focus on smaller clients Broker Network
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PFG Wholesaler Support
RIS Distribution
Directors of Business Development
Producer Support Team for Emerging Market Reps
Alliance Partner Development
Market Specialists RIA, TPA, Payroll,
Consultants, Non Profit, DB
Independent Small Plan Brokers
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PFG Local Service Model
RIS Distribution and Service
Relationship Managers
Account Executives
Education Specialists
Institutional Clients (25m)
Emerging (Participants
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Unique Enhanced Distribution Networks Local
presence matters 8 service centers
nationwideOver 45 retirement offices
Scored 18 above market average for having
knowledgeable and professional qualified plan
sales reps or wholesalers. Brightwork Partners
2004
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Typical Sales Cycle
1
2
4
0
3
Level
5
Week 1
Week 32
 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  
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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
Live date
Prior recordkeeper
new recordkeeper
Blackout Start . Blackout
Stop

• Industry average blackout period is 8 calendar
  days
• Principal offers 24-hour conversions
• Principals conversion project manager has 8-14
  years of experience vs. Industry average of 6
  years

Source 2004 Deloitte
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Focus On Participants
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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.

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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.

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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.

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Investment Options

• Retirement plan participants fall into two basic
  profiles when it comes to how they prefer to
  invest1

Do-it-For-MeInvestors
Do-it-Myself Investors

• May not have time to regularly rebalance
  retirement accounts
• May not feel comfortable with concepts of
  investing
• May not want to be very involved in retirement
  planning

• May take time to regularly check investment
  options and rebalance accounts
• May feel comfortable with concepts of investing
• May want to be very involved in retirement
  planning

1 EBRI 2004 Retirement Confidence Survey, and
Independent Research conducted by The Principal?
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Investment Options that support a simple,
flexible approach
Do-it-For-MeInvestors
Do-it-Myself Investors

• Principal LifeTime Portfolios
• Russell LifePoints
• Principal Managed Account ProgramSM

• Choose your own investment options
• Brokerage Account
• Retirement Saving Worksheet
• Investor Profile Quiz

1 EBRI 2004 Retirement Confidence Survey, and
Independent Research conducted by The Principal?
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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.

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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.)

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Financials
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Promises Made, Promises KeptRetirement Services
Pension full service accumulation
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Principals 2005 Retention Rates

• Employer Plan Assets

94
Retention Leader average 401(k) client tenure
35 above industry norm Boston Research Group
Participant Assets
52
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Average Fees Charged in the Industry
1.55
1.40
1.31
1.26
1.20
1.17
1.17
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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.

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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

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Thank you!