City of Yuba City; 457(b); YUBA-001
12 Section 12.11 Force Majeure
Trustee shall have no liability for any losses arising out of delays in performing the services which it renders under this Agreement which result from events beyond its control, including without limitation, interruption of the business of Trustee due to acts of God, acts of governmental authority, acts of war, riots, civil commotions, insurrections, labor difficulties (including, but not limited to, strikes and other work slippages due to slow-downs), or any action of any courier or utility, mechanical or other malfunction, or electronic interruption.
Section 12.2 Shareholder Communications Act
Trustee is obligated to provide to issuers of securities identifying information such as Employer’s name(s), address(es), and share positions, unless Employer objects below or through subsequent notice to Trustee in writing.
Employer requests that Trustee withhold Employer’s identifying information from issuers.
REMAINDER OF PAGE LEFT INTENTIONALY BLANK
City of Yuba City; 457(b); YUBA-001
13 IN WITNESS WHEREOF, the Employer and Trustee have caused this Agreement to be executed by their respective duly authorized officers, all as of the day and year first above written.
Employer
By: Employer: City of Yuba City
Title: Signature:
Trustee
By: John Luviano Trustee:
Lincoln Financial Group Trust
Company, as Trustee
Title: President Signature:
City of Yuba City; 457(b); YUBA-001
14 Self-Directed Brokerage Accounts Addendum
Effect of Addendum
This Addendum is part of the Trust Agreement between the Employer and the Trustee upon Employer establishing self-directed brokerage accounts (SDBAs) for its participants as described herein. Except as otherwise provided in this Addendum, Participant SDBAs (as hereafter defined) shall be subject to all of the terms and conditions of the Trust Agreement and the TD Ameritrade Documents (as hereafter defined) governing the Participant SDBAs.
Participant SDBAs
The Plan provides that certain self-directed brokerage accounts (the “Participant SDBAs”) may be invested by a participant in investments selected solely by the participant, subject to such limitations as may be determined by the Employer from time to time, and not solely from among the eligible investments otherwise applicable to all participant accounts or the Trust in its entirety. The Employer shall communicate any such limitations in writing to the Trustee. The Employer acknowledges and agrees that the Trustee, if and as directed by the Administrator or other person or entity authorized to give instructions under the Agreement on behalf of a participant, shall establish accounts representing Participant SDBAs through TD Ameritrade, Inc. (“TD Ameritrade”), a registered broker-dealer, and shall enter into an agreement or agreements with TD Ameritrade governing such Participant SDBAs (the “TD Ameritrade Documents”). Participant SDBAs shall be subject to the TD Ameritrade Documents and to such terms and procedures as are agreed upon by the Trustee, the Employer and the Administrator or its delegate from time to time, and also to such other terms and procedures as may be reasonably required by TD Ameritrade from time to time and communicated in writing by TD Ameritrade or the Trustee to the Employer and the Administrator or other person or entity authorized to give instructions under the Agreement on behalf of a participant.
Authority of Participants Regarding Participant SDBAs, Etc.
Once a Participant SDBA is established through TD Ameritrade, a participant shall communicate all investment and investment related instructions relating to such account to TD Ameritrade, and TD Ameritrade, on behalf of the Trustee, shall invest the Participant SDBAs pursuant to the directions of the participant. The participant shall be solely responsible for managing his or her Participant SDBA subject to the terms and conditions applicable to such Participant SDBA. The Employer shall be responsible for communicating to participants (or causing to be communicated to participants) all applicable terms and conditions. Notwithstanding the foregoing, unless and until otherwise agreed in writing by the Employer and the Trustee, the Administrator or its delegate shall direct the Trustee with respect to: (i) the terms and conditions of all transfers of cash and/or other property between a Participant SDBA and the remainder of the Trust, including, without limitation, any sale or liquidation instructions associated with such transfers; and (ii) all withdrawals and distributions on behalf of each participant.
City of Yuba City; 457(b); YUBA-001
15 Reliance on Participants, Etc.
The Trustee and TD Ameritrade shall be fully protected in relying upon the directions of the participant with respect to investments and investment related decisions within Participant SDBAs. The Trustee shall not be liable to the participant or any of his or her beneficiaries for any loss resulting from any action taken at the direction of the participant or the Administrator, or other person or entity authorized to give instructions under this Addendum. Neither the Trustee nor TD Ameritrade shall have any investment responsibility with respect to the Participant SDBAs, or any duty to inquire into the directions of the participants, to solicit such directions or to review and follow the investments made pursuant to any such directions. Any such investment direction by a participant shall constitute a representation and warranty that the transaction will not constitute a non-exempt prohibited transaction under the Code and that the investment is authorized under the Agreement, the Plan and any other applicable agreement affecting the participant’s investment authority under the Plan. Further, the Trustee and TD Ameritrade shall also be fully protected in relying upon the directions of the Administrator, or other person or entity authorized to give instructions under this Addendum.
Costs of Participant SDBAs
The costs and expenses of establishing and maintaining Participant SDBAs shall be borne by the respective participants and Participant SDBAs, except to the extent otherwise paid by the Employer or the Trust. TD Ameritrade shall be entitled to the payment of fees for each Participant SDBA, including without limitation as TD Ameritrade’s compensation for executing securities transactions, without diminution of the compensation otherwise payable to Trustee under the Agreement.
FOR RETIREMENT
Issued November 5, 2024
RPS22210-AL-NE
RETIREMENT PLAN SERVICES
Administration Manual
Lincoln Alliance® program
Table of contents
Introduction..................................................................................................................................4 Transaction processing responsibilities .................................................................................... 4 Guidelines for transaction processing responsibilities............................................................ 5 Accelerated transition and special services ........................................................................... 5 Investments..................................................................................................................................5 Default investments .............................................................................................................. 5 Fund trade restrictions .......................................................................................................... 5 Trade monitoring................................................................................................................... 6 Fund changes....................................................................................................................... 6 Dividend allocations and earnings accruals ........................................................................... 7 Eligibility and enrollment plan provisions.................................................................................. 7 Investment elections ................................................................................................................... 9 Fund-to-fund transfers .......................................................................................................... 9 Plan contributions ....................................................................................................................... 9 Administrative procedures................................................................................................... 10 Company contribution allocations........................................................................................ 11 Rollovers/Plan-to-plan transfers ............................................................................................... 12 Rollovers ............................................................................................................................ 12 Plan-to-plan transfers in...................................................................................................... 13 Plan-to-plan transfers out.................................................................................................... 14 Domestic Relations Orders (DROs) .......................................................................................... 14 Procedure for processing DRO requests ........................................................................ 14 Withdrawals ............................................................................................................................... 16 In-service withdrawals......................................................................................................... 16 Unforeseeable emergency withdrawal................................................................................. 16 Vesting and forfeitures plan provisions ................................................................................... 17 Final distributions...................................................................................................................... 17 Involuntary cash-outs* – if applicable .................................................................................. 18 Required Minimum Distributions (RMD) .............................................................................. 19 Other special considerations............................................................................................... 21 Compliance requirements ......................................................................................................... 21 Participant level compliance................................................................................................ 21 Notices ............................................................................................................................... 22 Reports and statements ............................................................................................................ 22 Plan participant statements................................................................................................. 22 Tax reporting.............................................................................................................................. 22 Outstanding checks................................................................................................................... 23 Employer Direction Regarding Uncashed Checks ............................................................... 23 Lincoln Financial Group® Privacy Practices Notice................................................................. 23 What Does Lincoln Financial Group Do with Your Personal Information? ............................ 23 Information We May Collect and Use .................................................................................. 23 How We Share and Use Your Personal Information ............................................................ 24 Security of Information........................................................................................................ 26
Your Rights Regarding Your Personal Information .............................................................. 26 Fraud..................................................................................................................................27 Lincoln Financial Group inadvertent processing error correction policy............................... 29 Lincoln National Corporation Continuity Plan Summary......................................................... 30 Record Retention Policy............................................................................................................ 31 Appendix A
4 Introduction
This Lincoln Alliance® program Administration Manual (the “Manual”) represents information gathered from a variety of sources, including:
• Input from City of Yuba City (“Employer”) regarding the provisions of the 457(b) Plan(s) participating in the Lincoln Alliance® program (the “Program”). • Information found in the Plan document(s).
• Input from Lincoln Retirement Services Company, LLC (“LRSC”) regarding generallyaccepted Plan procedures and administrative practices that result in efficient, accurate Plan administration.
The primary purpose of this document is to serve as a standard administration guide. All of the services and processes described may not apply to your Plan(s). As such, this Manual includes the following information:
• Administrative processes
• Overview of valuation processing
• Roles and responsibilities of:
- Employer
- LRSC
- Lincoln (Affiliates of Lincoln National Corporation include, but are not limited to, The Lincoln National Life Insurance Company, Lincoln Life & Annuity Company of New York, and Lincoln Retirement Services Company, LLC, herein separately or collectively referred to as "Lincoln".)
- Lincoln Financial Group Trust Company, Inc. (“LFGTC”) Trustee for the 457(b) Plan(s) It is critical that this document is maintained and updated as Plan provisions, practices, and procedures change. Although LRSC will incorporate all changes into this document, it is the responsibility of the Employer to notify LRSC of any changes by contacting your account manager. To ensure copies are updated, an issue date will be placed in the lower left-hand corner of the cover of the Manual. In the event of a conflict between the terms of this Manual and the terms of the Recordkeeping Service Agreement (the “Service Agreement”), the Service Agreement executed between LRSC and the Employer will prevail. Terms defined in the Service Agreement will have the same meaning when used in this Manual unless otherwise specified.
This Manual will occasionally be subject to modification, consistent with the policies of LRSC.
If the Manual is amended, it will be done with notice to the Employer pursuant to the terms of the Service Agreement. In the event of any pertinent change in the Code, federal law, or other applicable law, this Manual will be deemed automatically amended for all legally required changes.
Transaction processing responsibilities
All times stated in this Manual are stated in Eastern Time and refer to business days on which the New York Stock Exchange is open. Trading restrictions may apply on days when the New York Stock Exchange is open but the Federal Reserve is closed. All transaction cut-off times may be adjusted to reflect an earlier than normal closing time for the New York Stock
5 Exchange. Normal closing time for the New York Stock Exchange is 4:00 pm unless it is an early market close.
Guidelines for transaction processing responsibilities
The timing and completion of all transactions described in this Manual are dependent upon receipt from Employer, Plan(s), or Plan participant, as applicable, of all necessary information and funds in good order “(IGO)”. “Good order” is defined as complete and accurate information. Specific requirements to be considered in good order are outlined in later sections of this Manual. The processing of all such transactions described in this Manual will begin with the receipt of all required information and funds in good order.
Subject to express limits that may be imposed under the Code and subject to the limitation of liability and indemnification provisions of Article 3 of the Service Agreement, the processing of any contribution, distribution, or other transaction may be delayed for any legitimate business reason (including, but not limited to: failure of systems or computer programs, failure of the means of the transmission of data, force majeure, the failure of LRSC to timely receive values or prices, and correction for errors or omission or the errors or omissions of any service provider). The processing date of a transaction will be binding for all purposes of the Plan(s).
Accelerated transition and special services
LRSC makes all reasonable efforts to comply with its target timelines consistent with the terms of this Manual and the Service Agreement. However, sometimes an Employer may desire or require an accelerated transition or other service. LRSC will use its best efforts to meet the Employer’s needs. However, if the Employer demands performance faster than that set forth by the Manual and the Service Agreement, the Employer waives all remedies provided in this Manual or in the Service Agreement for incidental errors that occur as a result, except in cases of gross negligence by LRSC.
Investments
The following describes the administrative responsibilities of the parties.
Default investments
LRSC will track those participants who have not made their own investment selections and who have been defaulted. LRSC will send a confirmation notice to participants when they are defaulted or when they affirmatively make their own investment elections based on the default rules established by the Employer. You will be able to produce a report of these participants.
Fund trade restrictions
Fund trading restrictions are requested by the fund company. These may or may not apply to the funds selected for your Plan. The restrictions act as a preventative method to avoid higher fees as a result of short term trading and market timing. Though fund companies may request these types of restrictions, they are not limited to these restrictions. A fund company may request a participant be restricted from a fund at any time and for any reason. Please review
6 the fund prospectus, prior to electing a fund, for further information. LRSC will notify the Employer prior to the calendar quarter the restriction is in place. • Redemption fee
This is a fee incurred when shares are redeemed. The requirements of the fund company include a specific time period and a percentage of the cash raised on the redemption to be used for a fee. When a participant makes a purchase into a fund, they cannot sell back out of that fund within the specified time period unless they pay the percentage fee. The Securities Exchange Commission (SEC) limits redemption fees to 2%. These fees are paid directly to the fund company.
• Purchase block
This is a block on a purchase into a fund for a specified time period after shares are redeemed out of that fund. The fund company will specify the time period and may also specify a dollar amount threshold for the purchase block. If a dollar amount threshold is specified by the fund company, the dollar amount of the redemption must be greater than the specified dollar amount threshold in order for the purchase block to apply. • Limit round trip
This is a block on purchasing shares or redeeming shares of a fund after a purchase followed by a sale or a sale followed by a purchase within a pre-determined number of days. The fund company specifies the number of days.
Trade monitoring
Each fund company is required to enter into a written agreement with each of its financial intermediaries under which each intermediary must provide the fund company, upon request, participant level transaction information (SEC Rule 22c-2). Fund companies can use this information to monitor trading and identify participants in omnibus accounts engaged in frequent trading that is inconsistent with the investment fund company’s market timing policies. This rule also requires the agreement with financial intermediaries to contain a provision under which the intermediary agrees to execute the fund company’s instructions to restrict or prohibit further purchases or exchanges by a participant who has engaged in trading that violates the fund’s market timing policies.
Fund changes
• The Employer will consult with LRSC prior to adding or deleting investment funds. A lead-time of at least eight weeks is required to ensure that proper authorization for new fund(s) is implemented and transition for daily trading of affected fund(s) is not interrupted. • The account executive and/or the account manager assigned to your case will be available to support the process of implementing a fund change once a request is received in writing. • Mutual fund changes will go through a 3-day blackout period for the Plan(s). • LRSC will support fund changes to your Plan(s) once per year. Additional fund changes may result in additional cost to the Employer.
7 Dividend allocations and earnings accruals
• Earnings are adjusted on a daily basis as the unit value changes. Accrued income is calculated independently at the fund level and is reconciled on a monthly basis. Refer to each fund’s prospectus for specific details related to these calculations. • The Lincoln Stable Value Account will be unitized and a daily price which builds in the daily increase attributable to interest earned for each day will be applied to reflect earnings. • A daily interest accrual factor will be calculated on the Lincoln Stable Value Account and any other daily interest earned fund and applied to participant accounts. Values are reviewed and reconciled.
• LRSC will allocate dividends to only those participants in the funds on the record date (date upon which an investor must own shares of a mutual fund in order to participate in declared dividends). The date upon which dividends are posted will be driven by the dividend reporting procedures of the investment fund or vehicle.
• Reinvested income distributions, such as dividends and capital gains, will be allocated to participant accounts within a reasonable time after completed dividend information is reported by the fund company.
Complete income distribution information will include the dollar value of the reinvested income, units purchased and the unit base for the Plan’s holding in the fund on the record date of the distribution. Income distributions paid at the end of a quarter by a fund company may not be reflected on the current quarter’s participant statement. Participant balances accessed through the Interactive Voice Response Unit (IVR) and the internet will reflect income as of the prior market day’s close, plus any dividends that were posted during the current day.
Eligibility and enrollment plan provisions
The following describes the administrative responsibilities of the parties. The Employer confirms that Appendix A, along with the administrative processes detailed below, accurately reflect such responsibilities.
• LRSC or the Employer will determine when an employee has satisfied the Plan eligibility requirements based on the data provided through ongoing payroll feeds. Once it has been determined that the employee is eligible, the Employer will add them to the payroll file and provide them with an enrollment kit. If this data is inaccurate, out-of-date, or missing, any losses or adjustments that are necessary will be the responsibility of the Employer. • Generally, when LRSC is determining eligibility for a specified entry, it is done 30 to 60 days in advance using the most current data received. Employees will be made eligible within the recordkeeping system so a welcome letter is mailed. If applicable, the newly eligible report is sent to the Employer for their records.
• LRSC will set up an account on its recordkeeping system for a participant either based on the payroll information received or through an enrollment form if paper enrollments are utilized.
The following information is required in order to establish an account for the participant:
– Participant first name, last name, and middle initial – Social Security number
– Home address
– Date of birth
8 – Gender
– Marital Status
– Date of hire
– Date of termination (if applicable)
– Employment status
– Eligibility status
– Participation status
• The Employer will provide the information needed for a newly-eligible participant to enroll in the plan(s). If an enrollment kit is utilized, they can be requested by contacting your account manager.
• LRSC will generate and provide a welcome letter which contains information necessary to allow all newly-eligible employees to log into either the website or IVR to access their balances, make an election, or change existing elections.
Participants can make elections according to the following chart:
Election Website
Customer
Contact
Center
IVR Paper
enrollment**
Contribution rate
changes* Yes Yes Yes Yes
Personalized
investment elections Yes Yes Yes Yes
LifeSpanSM or
YourPath® portfolios
investment elections*
Yes Yes No Yes
Beneficiary
designations* Yes Yes No Yes
* May not be available for all Plan(s).
** May not be available for all Plan(s). If used, must only be used for initial elections and not changes to elections • If paper enrollment forms are utilized, LRSC will review the forms to ensure all of the above information is available before establishing an account for a participant. In addition to reviewing the required information above, LRSC ensures the form is signed by the employee and that the elections are completed accurately. If any of the required information is missing, LRSC will work with the participant and/or the Employer to collect the incomplete data. • LRSC will process forms once they are in good order and any information and/or elections will supersede any existing information and/or elections completed via any other media, even if completed after the date the form was signed.
• Generally, LRSC will send a confirmation letter to the participant following completion of the request.
9 Investment elections
The following describes the administrative responsibilities of the parties. • A participant may direct the investment of his or her account by completing the appropriate section of the enrollment form.
- Investment election changes must be made in 1% increments through the IVR, Customer Contact Center, or the internet. In the absence of investment elections set forth by the Plan participants, LRSC will process contributions to any default investment selected by the Employer.
- Once it is determined that an investment election change request is complete and in good order, it will be processed as soon as administratively practical. • Generally, LRSC will send a confirmation letter to the participant following completion of the request.
• All future contributions and loan payments will be posted based on the new election until another investment election is received in good order and processed.
Fund-to-fund transfers
Core investment funds (includes all funds except Self-Directed Brokerage Accounts):
Fund-to-fund transfers
Participant makes a transfer request via IVR or internet. 24 hours a day, seven days a week
Participant makes a transfer request via the Customer Contact Center.
8:00 am to 8:00 pm
each business day
IVR and the internet reflect impacts of pended transfer. Upon request LRSC processes exchanges and updates participant accounts.
During the nightly trade
cycle for all transactions
received prior to the
stock market close of
4:00 p.m. (ET)
LRSC sends confirmation to the employee of their transfer. 3 to 5 business days following the transfer
Plan contributions
The following describes the administrative responsibilities of the parties. The Employer confirms that Appendix A, along with the administrative processes detailed below, accurately reflect such responsibilities.
10 Administrative procedures
Payroll may be submitted online via our website or through submission of an electronic data file.
Trade requests are subject to the receipt of completed instructions from the Employer or participant in good order.
LRSC must receive data in good order first and will not request the funds until all data issues are resolved. Late receipt of data or data issue resolution could cause delays in the investment of contributions. Any losses due to late receipt of data or inaccurate data from the Employer will be the Employer’s responsibility.
Definition of good order for payroll data files includes control totals balancing to pre-specified data fields such as contributions and loan payments. Data file should also be in approved layout without missing data elements from individual records. All outstanding data edits related to missing and inaccurate data should be resolved by the Employer.
Contributions and payroll deducted loan payments
The Employer provides the payroll data via Managed File Transfer System to LRSC. A user name, password, and instructions for this system will be sent to the Employer during the implementation process. To obtain another copy of the instructions for the Managed File Transfer System, please contact your account manager.
Day 1 per pre-defined
schedule
LRSC edits file and notifies the Employer of problems.
Within 2 to 5 business
days after receipt of
file by 1:00 pm
The Employer sends contributions to State Street Bank and Trust (via wire, Automated Clearing House (ACH), or ACH debit transfer). By using the ACH debit funding method, funds are automatically invested, and participant accounts are updated.
After receipt of funding
confirmations from
LRSC
LRSC will process the Plan contribution and update the
participant’s account. At that point the IVR and internet reflect the pending transactions and the data processed.
Each business day upon
receipt of funding
Contributions submitted Online
During the implementation process, LRSC will provide the Employer with a payroll format and login instructions to Lincoln’s website. The Employer will load the payroll using instructions given by LRSC. The Account Manager will be available to troubleshoot any issues that the Employer can’t solve using the instructions.
Day 1 per pre-defined
schedule
11 The Employer sends contributions to State Street Bank and Trust (via wire, Automated Clearing House (ACH), or ACH debit transfer). By using the ACH debit funding method, funds are automatically invested, and participant accounts are updated.
After completion of
Employer loading payroll
file
LRSC will process the Plan contribution and update the
participant’s account. At that point the IVR and internet reflect the pending transactions and the data processed.
Each business day upon
receipt of funding
Company contribution allocations
• Processing as part of the payroll process (e.g., company match), requires up to five business days.
• Processing not part of the payroll process (e.g., annual profit sharing or quarterly match), is based on the frequency and timing determined for each Employer based on the complexity of the calculation and the integrity of the data.
• Once the calculation has been determined and approved by the Employer, LRSC will process the file based on the steps outlined for payroll files. Refer to Plan document for calculation.
Contribution rate changes
Participant submits request(s) through Salary Reduction Agreement to the Employer’s Human Resources Department or via IVR or the internet.
Each business day
upon receipt
Employer to login to the Lincoln plan sponsor website and generate a Payroll Notification report for those submitted through IVR or the internet. Employer updates payroll system(s) with new salary reduction information for those submitted to the Employer’s Human Resources Department. A user name and password will be provided to the Employer during the implementation process.
To request access to the Lincoln plan sponsor website, please contact your account manager.
Prior to each payroll or
as determined by the
Employer
LRSC will report and update all contribution rate changes received via IVR, the internet, or via payroll (per payroll schedule).
Per the rate change
frequency
LRSC provides the employee with a confirmation statement if contribution rates are received via IVR or internet.
After receiving the
request
12 Rollovers/Plan-to-plan transfers
The following describes the administrative responsibilities of the parties. The Employer confirms that Appendix A, along with the administrative processes detailed below, accurately reflect such responsibilities.
Rollovers
The Employer may delegate to LRSC the administrative task of processing the rollover request based on criteria established in the Manual or Service Agreement. If a participant completes a rollover request form and does not have an existing account on the LRSC recordkeeping system, the participant must also include a completed enrollment form with the following information:
• Social Security number
• Name
• Address
• Date of birth
• Date of hire
The steps below are required to coordinate the rollover with the prior vendor and to update the participant’s balance once the funds are received. The process may take several business days to complete once the form is determined to be in good order. Other forms may be required by the prior vendor. It is the Employer’s responsibility to identify these forms and make them available to the employees.
1. The participant completes the enrollment form and rollover request form and send to LRSC at the address provided on the forms. The forms are available via the Customer Contact Center or internet.
2. LRSC reviews the paperwork to ensure that it is in good order and contains the following information:
- Participant’s name, address, date of birth, date of hire, Social Security number, and signature
- Complete and accurate information for the prior Plan
- Complete investment elections for the rollover monies. In the absence of investment elections set forth by the Plan participants, LRSC will process contributions to any default investment selected by the Employer.
- Complete required documentation, such as retirement statement, distribution request form, or IRS Letter of Determination from the prior Plan or a letter from the prior Employer that identifies the Plan type from which the rollover is being made - Employer approval, if appropriate
3. LRSC will send a letter of acceptance to the prior vendor requesting that assets be liquidated and sent to LRSC only if the prior vendor requires a letter of acceptance.
13 4. The prior vendor should generate a rollover check payable to Lincoln Financial Group Trust Company, Inc. for the benefit of [Plan name] [participant name] and [participant Social Security number].
5. The check should be sent directly to the Plan at the following address:
City of Yuba City
Processing Agent
c/o Lincoln Retirement Services Company
P.O. Box 7876
Fort Wayne, IN 46801-7876
6. Upon receipt of assets, LRSC will review the check and will invest the funds as soon as administratively possible according to the rollover paperwork on file.
Note: If a rollover check is received without the required rollover paperwork, LRSC will attempt to obtain the paperwork. LRSC will send back the check within five business days if paperwork is not received.
Plan-to-plan transfers in
If a participant completes a plan-to-plan transfer form and does not have an existing account on the LRSC recordkeeping system, LRSC will add the participant to the recordkeeping system based on the following information on the form:
• Social Security number
• Name
• Address
• Date of birth
• Date of hire
The steps below are required to coordinate the plan-to-plan transfer with the prior vendor and to update the participant’s balance once the funds are received. The process may take several business days to complete once the form is determined to be in good order.
1. The participant completes the plan-to-plan transfer form for assets and sends it to LRSC at the address on the form.
2. LRSC reviews the paperwork to ensure that it is in good order and contains the following information:
- Participant’s name, address, date of birth, date of hire, Social Security number, and signature
- Complete and accurate information for the prior vendor - Complete investment elections for the transferred monies - Prior vendor’s distribution paperwork attached, if necessary
3. LRSC will send a letter of acceptance to the prior vendor requesting that assets be liquidated and sent to LRSC only if the prior vendor requires a letter of acceptance.
14 4. The prior vendor should generate a plan-to-plan transfer check payable to Lincoln Financial Group Trust Company, Inc. for the benefit or [Plan name] [participant name] and [participant Social Security number].
Plan-to-plan transfers out
The Employer may delegate to LRSC the administrative task of processing the plan-to-plan transfer out request based on criteria established in the Manual or Service Agreement. To request a plan-to-plan transfer out, the participant must complete a “distribution request” form.
The steps below are required to coordinate the plan-to-plan transfer with the new vendor. The process may take several business days to complete once the form is determined to be in good order.
1. The participant completes the distribution request form and sends it to LRSC at the address on the form.
2. LRSC reviews the paperwork to ensure that it is in good order and contains the following information:
- Participant’s name, address, date of birth, date of hire, Social Security number, and signature
- Complete and accurate information for the new vendor
- Prior vendor’s distribution paperwork attached, if necessary
3. A letter of acceptance is required only at the direction of the Plan.
4. A plan-to-plan transfer check will be generated payable to the requested vendor for the benefit of [Plan name] [participant name] and [new vendor’s account number].
Domestic Relations Orders (DROs)
The following describes the administrative responsibilities of the parties.
Procedure for processing DRO requests
The review of a DRO can be performed by the Employer or delegated to LRSC. If elected by the Employer, the delegation of this responsibility and any changes in the process may be turned over to LRSC. This election must be communicated to the account manager. Whether the DRO is reviewed by the Employer or delegated to LRSC, qualification of the DRO as a Qualified Domestic Relations Order (QDRO) remains the responsibility of the Employer. The following steps will be taken in the processing of DRO requests:
LRSC Reviewing/Processing the Domestic Relations Order request
15 Upon receipt of a DRO, the Order will be reviewed to ensure compliance with all Internal Revenue Code and/or ERISA
guidelines by LRSC.
10 business days
from receipt
Once a DRO has been received, the participant account(s) will be “frozen,” meaning no distributions/withdrawals or loans will be processed.
10 business days
from receipt
If LRSC is to complete the review: Upon completion of the review, a summary letter will be sent to the participant, alternate payee, as well as any legal representative designated by the involved parties. Orders received by the Employer should be forwarded to LRSC for review and acceptance or denial. LRSC will contact the participant to collect any other required information. LRSC’s acceptance of the DRO is deemed to be the qualification of the Employer of the DRO as a QDRO for purposes of ERISA.
10 business days
following the acceptance
or denial
A distribution form will also be provided to the alternate payee by LRSC/Employer. The QDRO must be IGO and LRSC must be
able to process the request.
10 business days
from receipt in IGO
Employer Approving the Domestic Relations Order request Upon receipt of a DRO by either the Employer or LRSC, the Order will be reviewed by the Employer or LRSC to ensure compliance with all Internal Revenue Code and/or ERISA
guidelines as highlighted in Appendix A. If the Employer is to approve the DRO request, requests received without Employer’s approval will be returned before any action is taken.
If LRSC reviews:
10 business days
from receipt
Once a DRO has been received, the participant account(s) will be “frozen,” either upon the Employer’s direction or LRSC’s initiative (depending on whether the Employer or LRSC received the DRO initially), meaning no distributions/withdrawals or loans will be processed.
If LRSC receives DRO:
10 business days
from receipt
DROs are to be sent to the Employer for review and qualification approval. The Employer is then to submit the DRO to LRSC with documentation that the DRO has been received, reviewed and qualified as a QDRO. The Employer may refer the DRO to LRSC for LRSC’s review before the Employer qualifies the DRO. A copy of the QDRO should be retained by the Employer for their records.
If Employer refers DRO
to LRSC for review:
10 business days
from receipt
A distribution form will also be provided to the alternate payee by LRSC/Employer. The QDRO must be IGO and LRSC must be
able to process the request.
10 business days
from receipt in IGO
16 Withdrawals
The following describes the administrative responsibilities of the parties. The Employer confirms that Appendix A, along with the administrative processes detailed below, accurately reflect such responsibilities.
For paperless requests, if the withdrawal request is not completed within 45 days from the day it was requested, the withdrawal request will expire and a new withdrawal will need to be requested.
In-service withdrawals
The Employer may delegate to LRSC the administrative task of processing the in-service withdrawal request based on criteria established in the Manual or Service Agreement. If elected by the Employer, the delegation of this responsibility to LRSC and any changes in the process are to be communicated to the account manager. These withdrawal types will be processed according to the steps outlined below. Other withdrawal types, such as withdrawals of after-tax dollars or rollover money, may be offered and may not be subject to documentation requirements. These withdrawals will be processed in accordance with the provisions in the Plan document.
Additional restrictions may be placed on withdrawals from the Lincoln Group Fixed Annuity, Lincoln Separate Account Stable Value Account, or Lincoln Stable Value Account. Please refer to the Group Fixed Annuity contract for more details.
LRSC Approval
A distribution request is available via the internet or by calling the Customer Contact Center.
The participant provides all necessary information by completing the distribution request.
LRSC will review the request for completeness and either submit for processing or notify the participant of any exceptions.
Each day upon receipt, LRSC will process the distribution and update the participant’s account.
Distribution checks are mailed the following business day. If direct deposit is requested, funds will be received within five business days.
Unforeseeable emergency withdrawal
The Employer may delegate to LRSC the administrative task of processing an unforeseeable emergency request based on criteria established in the Manual or Service Agreement. An unforeseeable emergency is a severe financial hardship to the participant or beneficiary resulting from an illness or accident of the participant or beneficiary, the participant’s or beneficiary’s spouse, or the participant’s or beneficiary’s dependent (as defined in Code Section 152(a)); loss of the participant’s or beneficiary’s property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by homeowner’s insurance, e.g., as a result of a natural disaster); or other similar extraordinary
17 and unforeseeable circumstances arising as a result of events beyond the control of the participant or the beneficiary.
The Plan must contain provisions for allowing unforeseeable emergency withdrawals and the term “unforeseeable emergency” must be defined in the Plan document.
Vesting and forfeitures plan provisions
The following describes the administrative responsibilities of the parties. The Employer confirms that Appendix A, along with the administrative processes detailed below, accurately reflect such responsibilities.
LRSC will calculate vesting based on Plan rules as well as on data provided through ongoing payroll feeds. In order to accurately track and update vesting and forfeitures, LRSC must receive accurate and timely data regarding dates of hire, termination dates, rehire dates, and hours worked, if applicable. Inaccurate or missing data, as well as delays in receiving accurate information, will detrimentally impact the accuracy of vesting calculations on the system. Any losses resulting from inaccurate or non-timely data will be the responsibility of the Employer. • All forfeitures incurred in the plan year are held in a forfeiture account and invested in the Lincoln Stable Value Account or fund elected by the Employer. • Earnings are credited to forfeitures in the account.
• Forfeitures will be taken from the participant’s account and transferred to the forfeiture account when a final distribution is processed or based on data provided by the Employer. LRSC will process forfeitures prior to distribution to those employees designated by the Employer. • The Employer will provide instructions to their account manager at LRSC via e-mail on how and when forfeitures should be used.
• Upon receiving the required instructions and information from the Employer, LRSC will reinstate vesting and accounts for a rehired employee. In addition, LRSC will work with the Employer to determine the amount forfeited and the participant will redeposit this amount to the Plan before reinstatement is complete. The required information includes:
- Date of hire
- Original date of termination
- Rehire date
- Amount to be reinstated
- Number of breaks in service since termination date
Final distributions
The following describes the administrative responsibilities of the parties. The Employer confirms that Appendix A, along with the administrative processes detailed below, accurately reflect such responsibilities.
The Employer may delegate to LRSC the administrative task of processing the final distribution request based on criteria established in the Manual or Service Agreement. A distribution is available to a participant who has experienced a distributable event in
18 accordance with the Plan document, such as normal retirement, disability, death, or severance from employment.
Final distributions will be processed according to the review process outlined below and in accordance with the provision in the Plan document.
The participant may request a distribution through our Customer Contact Center or via the internet.
The distribution request includes the following items:
• Distribution Application
• Systematic withdrawal request form, if applicable
• Special Tax Notice, if applicable
Administered by LRSC
If LRSC is administering the final distribution, LRSC will review the request for completeness and submit for processing or notify the participant of any exceptions.
Each day upon receipt, LRSC will process the distribution and update the participant’s account.
Distribution checks are mailed the following business day. If direct deposit is requested, funds will be received within five business days.
Involuntary cash-outs* – if applicable
The Employer may select an involuntary cash-out provision which follows one of the following scenarios:
• No cash-outs of small accounts
• Cash-out of $1,000 or less in cash
• Cash-out of $1,000 or less in cash and amounts over $1,000 but $5,000 or less to the Lincoln SSIRA or the WMSI as selected by the Employer.
• Cash-out of $5,000 or less to the Lincoln SSIRA or the WMSI as selected by the Employer.
If a participant’s vested account balance falls below the amount prescribed by the Plan, (including active loans), an involuntary cash-out will be processed. The Employer has the option to determine if rollover accounts will be included in determining the cash-out criteria.
19 Involuntary cash-out
LRSC will process Involuntary Cash-Outs based on the account value and the option(s) chosen by the Employer in the Plan Document.
Per agreed upon
frequency pursuant to
LRSC business
processes and
procedures
LRSC will send a letter containing the options to roll over the vested portion to another eligible retirement Plan or IRA of the participant’s choice.
Participants are given a
timeframe to respond
LRSC will process any distribution forms that are received from the participants. As received
If the participant does not request a distribution within the prescribed number of days, the vested account balance of the terminated participant will be distributed based on the account value and the option(s) chosen by the Employer.
Processing will begin
after the timeframe for
participant response
Please note, any plan and/or participant who falls into one of the below categories will be excluded from the automated cash-out process described in this section:
- Plan and/or participant has years of service, vesting or other data inaccuracies in the system of record at Lincoln that impact the cash out population - Plan and/or participant has assets at another recordkeeper - Participant does not pass ID verification
• Identified as deceased
• Over age 70
The Employer must work with the account manager outside of this automated process to correct data inaccuracies, reconcile assets with the other recordkeeper(s), and or address “know your customer” verification process for deceased and age 70 participants in order to process remaining cash-out distributions.
*When a third party force out IRA provider is selected fee information related to the force out solution will be delivered by that provider to impacted plan participants. Lincoln will have no responsibility or liability for the delivery of that information on behalf of the plan.
Required Minimum Distributions (RMD)
LRSC will be responsible for administering the Required Minimum Distribution (RMD) rules of Code Section 401(a)(9) as they apply to the Plan, based on information provided to LRSC by the participant and the Employer.
An RMD is the amount of money that a participant must withdraw from their retirement account each year once they reach their required beginning date (RBD). The RBD is defined below.
20 The first RMD must be made to the participant by no later than their RBD and then no later than December 31 thereafter. A participant can wait until their RBD to take their first RMD, but then they will need to take the second RMD by the end of the same calendar year. Or a participant may take their first RMD in the “first distribution calendar year” (the calendar year prior to the RBD) to avoid having two payments made in the same taxable year. A participant is not allowed to delay their first required minimum distribution beyond their RBD.
RMD Age is based on the participant’s birth date:
Date of birth RMD Age
Born on or before June 30, 1949 70½
Born after June 30, 1949, but before January 1,
1951 72
Born in 1951 through 1959 73
Born in 1960 or later 75
The RBD is established by the Internal Revenue Code and varies depending on whether the participant is a >5% owner of the employer sponsoring the retirement plan. • Not a 5% owner:
– RBD is April 1 following the calendar year in which the later of the following occurs:
Participant attains RMD Age.
Participant retires from the employer (or related employer) sponsoring the retirement plan.
• >5% owner:
– RBD is April 1 following the calendar year in which the participant attains RMD Age, regardless of whether they retire.
Each year, LRSC will begin the RMD process based on the participant data received through payroll feeds. A participant who will have attained the RMD Age as defined above, by the end of the calendar year in which the aforementioned RMD Age is attained, will be mailed a communication from LRSC to the address on file, notifying them of the RMD requirements.
LRSC will process the annual RMD as requested by the participant. If the participant does not respond to the RMD communication, LRSC will distribute the required amount prior to the end of the year. LRSC will continue to send a communication each year until new instructions are received.
If a participant has been identified as a lost or missing participant and LRSC and the Employer have taken reasonable actions to locate the participant, or the participant has requested a “stop mail” status, the affected participant will not be included in LRSC’s automated RMD distribution process.
Please note, any plan and/or participant that has years of service, vesting or other data inaccuracies in the system of record at Lincoln that impact the RMD population will be excluded from the RMD administration described in this section. The Employer must work with the account manager outside of this automated process to correct data inaccuracies in order to process RMD distributions. In addition, the Employer may request that the plan be removed if they do not want LRSC to oversee the RMD administration described in this section.
21 Other special considerations
• If a residual balance exists, participant must complete a new distribution request.
Compliance requirements
The following describes the administrative responsibilities of the parties. The Employer confirms that Appendix A, along with the administrative processes detailed below, accurately reflect such responsibilities.
Participant level compliance
LRSC may rely, without making its own investigation, on the information provided by the Employer, or its representatives, including, but not limited to accountants, business managers, and current and/or former investment or service providers. Failure to meet the requirements described below can result in refunds and additional taxation of Plan participants and ultimately, Plan disqualification, if not corrected.
Required Minimum Distributions (RMD) – 401(a)(9)
LRSC will monitor the Plan for participants who are subject to the RMD rules and above based on dates of birth supplied by the Employer. LRSC will contact the participant for written RMD elections for the RMD calculation. The Employer will provide data needed for LRSC to calculate the RMD via the payroll feed. The Employer or participant may direct LRSC to defer the RMD payment to a specific date or indefinitely. This information can be sent via e-mail to the account manager and should contain the participant’s name. LRSC will calculate the RMD amount and process the distribution prior to December 31 of the appropriate year.
Annual deferral limit – 402(g), 457(c)
The Employer and/or LRSC will monitor the elective deferrals of each Plan participant for compliance with limits imposed under Code sections 402(g) (with the exception of 402(g)(7), Special Rule for Certain Organizations) or 457(c) (with the exception of 457(b)(3), Special Section 457 Catch-up). The Employer and LRSC agree to make timely corrections of any excess deferrals.
Annual additions limit – 415(c)
The Employer and/or LRSC will perform the Annual Additions Limitation (415) test at yearend. The Internal Revenue Code section 415(c) limits the amount of annual additions that may be credited to an individual participant’s account during a year. Annual additions include Employer contributions, employee contributions (both voluntary and mandatory), and forfeitures. Failure to comply can result in disqualification.
Annual compensation limit – 401(a)(17)
The Employer and/or LRSC will limit contributions based on the published 401(a)(17)
22 compensation limits. These limits also apply to eligible compensation supplied by the Employer to be used for any required year-end nondiscrimination testing.
Notices
Universal availability notice
If applicable, LRSC will provide the notices annually about universal availability to the Employer for distribution to all applicable participants.
Reports and statements
The following describes the administrative responsibilities of the parties.
LRSC have many types of reports and data extracts available on the website to help make your job easier. All reports can be run as you need them and you have the ability to store them for 30 days.
Several reports are available via the Lincoln plan sponsor website. A user name and password will be provided to the Employer during the implementation process. To request access to the Lincoln plan sponsor website, please contact your account manager. Access to the website, including access to Plan level reports and individual participant accounts, can be granted by submitting a request to LRSC in writing via e-mail to your account manager. It is the responsibility of the Employer to notify LRSC in writing of changes to authorized access to the Lincoln plan sponsor website. Please contact your account manager with questions about access to the Lincoln plan sponsor website.
Plan participant statements
LRSC will generate quarterly plan participant statements. These statements will be made available to the participant within ten business days after quarter-end. Custom messaging is available for you at the company level subject to space limitations.
LRSC has many more helpful tools to share with you. Please note that a description of all available reports will be sent to you with your login information.
If you have any questions regarding reports, statements, message customization or have concerns regarding access, please do not hesitate to contact your account manager.
Tax reporting
Tax reporting, withholdings, production and submission of applicable tax forms to the IRS for federal income tax purposes will be completed by the Party indicated in the Trustee/Custodial agreement for the Plan(s) noted.
23 Outstanding checks
The Employer is responsible for reviewing the Outstanding Distribution Checks Report. The report details all outstanding checks and is automatically run and available on a monthly basis on the Lincoln plan sponsor website.
The Employer must attempt to locate these participants via the methods described in the Plan document and determine if they are now located at a new address. If the Plan document is silent on this issue, please review the Department of Labor (https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistancebulletins/2014-01) or Internal Revenue Service websites for generally accepted search methods.
Once the participant has been located, the Employer will provide instructions to the account manager (Reissue check to old address, reissue check to new address, forfeit the funds, rollover the funds, etc.), as applicable to the provisions in your Plan document.
Employer Direction Regarding Uncashed Checks
If a check is issued from the Plan to a participant who does not cash the check within 180 days of check issuance, the responsible Plan fiduciary hereby directs LRSC handle the check in an appropriate manner based on the terms of the plan and trust, if applicable.
Lincoln Financial Group® Privacy Practices Notice
What Does Lincoln Financial Group Do with Your Personal Information? The Lincoln Financial Group companies* are committed to protecting your privacy. To provide the products and services you expect from a financial services leader, we must collect personal information about you. This Notice describes our current privacy practices. While your relationship with us continues, we will update and send our Privacy Practices Notice as required by law. Even after that relationship ends, we will continue to protect your personal information. You do not need to take any action because of this Notice, but you do have certain rights as described below.
We are committed to the responsible use of information and protecting individual privacy rights. As such, we look to leading data protection standards to guide our privacy program.
These standards include collecting data through fair and lawful means, such as obtaining your consent when appropriate.
Financial companies choose how they share your personal information. Federal and state law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this carefully to understand what we do.
Information We May Collect and Use
We collect personal information about you:
• to help us identify you as a consumer, our customer or our former customer;
24 • to process your requests and transactions;
• to offer investment, insurance, retirement and other financial services to you; • to pay your claim;
• to analyze in order to enhance our products and services; • to tell you about our products or services we believe you may want and use; and • as otherwise permitted by law.
The types of personal information we collect depend on your relationship and on the products or services you request and may include the following:
• Information from you: When you submit your application or other forms, you give us information such as your name; address; Social Security number; your financial health; and employment history. We may also collect voice recordings or biometric data for use in accordance with applicable law.
• Information about your transactions: We maintain information about your transactions with us, such as the products you buy from us; the amount you paid for those products; your account balances; payment details and your payment and claims history.
• Information from outside our family of companies: If you are applying for or purchasing insurance products, we may collect information from consumer reporting agencies, such as your credit history; credit scores; and driving and employment records. With your authorization, we may also collect information (such as medical information, retirement information, and information related to Social Security benefits), from other individuals or businesses.
• Information from your employer: If your employer applies for or purchases group products from us, we may obtain information about you from your employer or group representative to enroll you in the plan.
When you are no longer our customer, we continue to share your information as described in this notice.
How We Share and Use Your Personal Information
We may share your personal information within our companies and with certain service providers. They may use this information:
• to process transactions you, your employer, or your group representative have requested;
• to provide customer service;
• to analyze in order to evaluate or enhance our products and services; • to gain customer insight; to provide education and training to our workforce and customers; and/or
• to inform you of products or services we offer that you may find useful.
Our service providers may or may not be affiliated with us. Affiliates are companies related by common ownership or control. Nonaffiliates are companies not related by common ownership or control. They include:
• Financial service providers: third party administrators; broker-dealers; insurance agents and brokers; registered representatives; reinsurers and other financial services
25 companies with which we have joint marketing agreements. A joint marketing agreement is a formal agreement between nonaffiliated financial companies that together market financial products or services to you. Our joint marketing partners include, but are not limited to, insurance providers and financial technology solutions. • Non-financial companies and individuals: consultants; vendors; and companies that perform marketing services on our behalf.
Information we obtain from a report prepared by a service provider may be kept by the service provider and shared with other persons; however, we require our service providers to protect your personal information and to use or disclose it only for the work they are performing for us, or as permitted by law. We may execute agreements with our service providers that permit the service provider to process your personal information outside of the United States, when not prohibited by our contracts and permitted by applicable law.
When you apply for one of our products:
• We may share information about your application with credit bureaus. • We may provide information to group policy owners or their designees (for example, to your employer for employer- sponsored plans and their authorized service providers). • We may provide information to regulatory authorities, law enforcement officials, and to other nonaffiliated or affiliated parties as permitted by law. • In the event of a sale of all or part of our businesses, we may share customer information with the acquiror as part of the sale.
• We do not sell or release your information to outside marketers who may want to offer you their own products and services unless we receive your express consent; nor do we release information we receive about you from a consumer reporting agency.
All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons Lincoln chooses to share; and whether you can limit this sharing.
Reasons we can share your personal information Does Lincoln share? Can you limit
this sharing?
For our everyday business purposes—such as to
process your transactions, maintain your account(s),
respond to court orders and legal investigations, or
report to credit bureaus
Yes No
For our marketing purposes—to offer our products and
services to you
Yes No
For joint marketing with other financial companies Yes No For our affiliates’ everyday business purposes—
information about your transactions and experiences
Yes No
For our affiliates’ everyday business purposes—
information about your creditworthiness
No We Don’t Share
For our affiliates to market to you No We Don’t Share
For nonaffiliates to market to you Yes Yes
26 (We don’t share
unless we
receive your
express consent)
Federal law gives you the right to limit only:
• sharing for our affiliates’ everyday business purposes – information about your creditworthiness;
• sharing for our affiliates to market to you; and
• sharing for nonaffiliates to market to you.
State laws and individual companies may give you additional rights to limit sharing. California residents can review our California Privacy Notice located at https://www.lincolnfinancial.com/public/general/privacy/californiaprivacynotice Security of Information
We have an important responsibility to keep your information safe. We use safeguards to protect your information from unauthorized disclosure. To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and buildings. Our employees are authorized to access your information only when they need it to perform their job responsibilities. Employees who have access to your personal information are required to keep it confidential. Employees are required to complete privacy training annually.
Your Rights Regarding Your Personal Information
This Privacy Notice describes how you can exercise your rights regarding your personal information. Lincoln complies with all applicable laws and regulations regarding the provision of personal information. The rights provided to you in this Privacy Notice will be administered in accordance with your state’s specific laws and regulations.
Access to personal information:You must submit a written request to receive a copy of your personal information. You may see your personal information in person, or you may ask us to send you a copy of your personal information by mail or electronically, whichever you prefer. We will need to verify your identity before we process the request. Within 30 business days of receiving your request, we will, depending on the specific request you make, (1) inform you of the nature and substance of the recorded personal information we have about you; (2) permit you to obtain a copy of your personal information; and (3) provide the identity (if recorded) of persons to whom we disclosed your personal information within two years prior to the request (if this information is not recorded, we will provide you with the names of those insurance institutions, agents, insurance support organizations or other persons to whom such information is normally disclosed). If you request a copy of your information by mail, we may charge you a fee for copying and mailing costs.
Changes to personal information: If you believe that your personal information is inaccurate or incomplete, you may ask us to correct, amend, or delete the information. Your request must be in writing and must include the reason you are requesting the change. We will respond within 30 business days from the date we receive your request.
If we make changes to your records as a result of your request, we will notify you in writing
27 and we will send the updated information, at your request, to any person who may have received your personal information within the past two years. We will also send the updated information to any insurance support organization that gave us the information and any insurance support organization that systematically received personal information from us within the prior 7 years unless that support organization no longer maintains your personal information.
If we deny your request to correct, amend or delete your information, we will provide you with the reasons for the denial. You may write to us and concisely describe what you believe our records should say and why you disagree with our denial of your request to correct, amend, or delete that information. We will file this communication from you with the disputed information, identify the disputed information if it is disclosed, and provide notice of the disagreement to the recipients and in the manner described in the paragraph above.
Basis for adverse underwriting decision: You may ask in writing for the specific reasons for an adverse underwriting decision. An adverse underwriting decision is where we decline your application for insurance, offer to insure you at a higher than standard rate, or terminate your coverage.
Your state may provide for additional privacy protections under applicable laws. We will protect your information in accordance with these additional protections.
If you would like to exercise your rights regarding your personal information, please provide your full name, address and telephone number and either email your inquiry to our Data Subject Access Request Team at [email protected] or mail to: Lincoln Financial Group, Attn:
Corporate Privacy Office, 1301 South Harrison St., Fort Wayne, IN 46802. The [email protected] email address should only be used for inquiries related to this Privacy For general account service requests or inquiries unrelated to this Privacy Notice, please call 1-877-ASK-LINC.
*This information applies to the following Lincoln Financial Group companies:
First Penn-Pacific Life Insurance Company Lincoln Life & Annuity Company of New York Lincoln Financial Distributors, Inc. Lincoln Life Assurance Company of Boston Lincoln Financial Group Trust Company, Inc. Lincoln Retirement Services Company, LLC Lincoln Financial Investments Corporation Lincoln Variable Insurance Products Trust (formerly Lincoln Investment Advisors Lincoln Financial Insurance Agency Incorporated Corporation) The Lincoln National Life Insurance Company Fraud
Residents of all states except Alabama, Arkansas, California, Colorado, District of Columbia, Florida, Kansas, Kentucky, Louisiana, Maine, Maryland, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia and Washington, please note: Any person who knowingly, and with intent to defraud any insurance company or other person, files or submits an application or statement of claim containing any materially false or deceptive information, or conceals, for the purpose of misleading, information concerning any fact material thereto, commits a fraudulent insurance act, which is a crime and may subject such person to criminal and civil penalties.
For Alabama residents only: Any person who knowingly presents a false or fraudulent claim for payment of a loss or benefit or who knowingly presents false information in an application for insurance is guilty of a crime and may be subject to restitution fines or confinement in prison, or any combination thereof.
28 For Arkansas, Louisiana, and Rhode Island residents only: Any person who knowingly presents a false or fraudulent claim for payment of a loss or benefit or knowingly presents false information in an application for insurance is guilty of a crime and may be subject to fines and confinement in prison.
For California residents only: Any person who knowingly presents false or fraudulent information to obtain or amend insurance coverage or to make a claim for the payment of a loss is guilty of a crime and may be subject to fines and confinement in state prison.
For Colorado, Kentucky, Maine, and Tennessee residents only: Any person who, knowingly and with intent to injure, defraud or deceive any insurance company or other person, files an application for insurance or statement of claim containing any materially false information or conceals for the purpose of misleading, information concerning any fact material thereto commits a fraudulent insurance act, which is a crime and may subject such person to criminal and civil penalties, fines, imprisonment, or a denial of insurance benefits.
For District of Columbia residents only: WARNING: it is a crime to provide false or misleading information to an insurer for the purpose of defrauding the insurer or any other person. Penalties include imprisonment and/or fines. In addition, an insurer may deny insurance benefits if false information materially related to a claim was provided by the applicant.
For Florida residents only: Any person who knowingly and with intent to injure, defraud, or deceive any insurer files a statement of claim or an application containing any false, incomplete, or misleading information is guilty of a felony of the third degree.
For Kansas residents only: Any person who knowingly, and with intent to defraud any insurance company or other person, files or submits an application or statement of claim containing any materially false or deceptive information, or conceals, for the purpose of misleading, information concerning any fact material thereto, may be guilty of fraud as determined by a court of law.
For Maryland residents only: Any person who knowingly or willfully presents a false or fraudulent claim for payment of a loss or benefit or who knowingly or willfully presents false information in an application for insurance is guilty of a crime and may be subject to fines and confinement in prison.
For New Jersey residents only: Any person who includes any false or misleading information on an application for an insurance policy is subject to criminal and civil penalties.
For New Mexico residents only: Any person who knowingly presents a false or fraudulent claim for payment of a loss or benefit or knowingly presents false information in an application for insurance is guilty of a crime and may be subject to civil fines and criminal penalties.
For New York residents only: Any person who knowingly and with intent to defraud any insurance company or other person files an application for insurance or statement of claim containing any materially false information, or conceals for the purpose of misleading, information concerning any fact material thereto, commits a fraudulent insurance act, which is a crime and shall also be subject to civil penalty not to exceed five thousand dollars and the stated value of the claim for each such violation.
For Ohio residents only: Any person who, with intent to defraud or knowing that he is facilitating a fraud against an insurer, submits an application, or files a claim containing a false or deceptive statement is guilty of insurance fraud.
For Oklahoma residents only: WARNING: Any person who knowingly, and with intent to injure, defraud or deceive any insurer, makes any claim for the proceeds of an insurance policy containing any false, incomplete, or misleading information is guilty of a felony.
For Oregon residents only: Any person who knowingly, and with intent to defraud any insurance company or other person, files or submits an application, or statement of claim containing any materially false or deceptive information, or conceals, for the purpose of misleading, information concerning any
29 fact material thereto, may commit a fraudulent insurance act, which may be a crime and may be subject such person to criminal and civil penalties.
For Pennsylvania residents only: Any person who knowingly and with intent to defraud any insurance company or other person files an application for insurance or statement of claim containing any materially false information or conceals for the purpose of misleading, information concerning any fact material thereto commits a fraudulent insurance act, which is a crime and subjects such person to criminal and civil penalties.
For Vermont residents only: Any person who knowingly presents a false statement in an application for insurance may be guilty of a criminal offense and subject to penalties under state law.
For Virginia residents only: Any person who, with the intent to defraud or knowing that he is facilitating a fraud against an insurer, submits an application or files a claim containing a false or deceptive statement may have violated the state law.
For Washington residents only: It is a crime to knowingly provide false, incomplete, or misleading information to an insurance company for the purpose of defrauding the company. Penalties include imprisonment, fines, and denial of insurance benefits.
Lincoln Financial Group inadvertent processing error
correction policy
As your retirement plan’s administrative service provider, Lincoln strives to process transaction orders received in good order from the plan accurately and on a timely basis.
Lincoln seeks to avoid transaction processing errors to the greatest extent possible, but inadvertent processing errors may occur. Inadvertent processing errors are exclusively defined as incorrect or untimely processing by Lincoln of transactions that are received in good order. Inadvertent processing errors do not include errors made by plan sponsors, third parties or processes delayed by transaction requests received that are not in good order.
Lincoln will correct any identified inadvertent processing error caused by Lincoln as soon as practicable after Lincoln has sufficient information to correct the error. In no event will Lincoln exercise discretionary authority or control over the correction of inadvertent processing errors.
The Lincoln Financial Group Inadvertent Processing Error Correction Policy is designed to restore the plan to the position it would have been in had the error not occurred, including restoration of the benefits and rights they would have had if the error had not occurred.
Accordingly, once an inadvertent processing error is identified, Lincoln will promptly take action to place the plan in a position financially equivalent to the position they would have been in had the error not occurred.
Such action may include, but is not limited to, Lincoln making the plan whole for any loss to the plan resulting from correcting the inadvertent processing error.
Our policy results in the participant receiving the benefit of what he or she requested, regardless of whether there is a gain or loss. This policy is consistent with Internal Revenue Service guidelines for correcting plan errors.
Please keep a copy of this policy with your plan records. Please contact Lincoln with any questions.
30 Lincoln National Corporation Continuity Plan Summary Lincoln National Corporation (“LNC”) headquartered in Radnor, PA, is the parent corporation of, among others, The Lincoln National Life Insurance Company, First Penn-Pacific Life Insurance Company, and Lincoln Life & Annuity Company of New York. LNC’s subsidiaries have offices located in Atlanta, GA; Boston, MA; Charlotte, NC; Fort Wayne, IN; Greensboro, NC; Hartford, CT; Omaha, NE; Philadelphia, PA; Phoenix, AZ; Radnor, PA; Dover, NH; and Syracuse, NY. Lincoln Financial Advisors Corporation, Lincoln Financial Distributors, Inc., and Lincoln Financial Securities Corporation have business locations throughout the USA. Unless the context otherwise implies, as used herein LNC refers to LNC and its subsidiaries.
LNC is committed to safeguarding the interests of its clients and customers in the event of an emergency or significant business disruption ("SBD"). LNC’s broad business continuity strategy is designed to enable LNC to meet its existing obligations to its clients and customers in the event of an emergency or SBD by safeguarding employees and property, making a financial and operational assessment, recovering, and resuming operations, protecting LNC’s books and records, and allowing customers to conduct business.
Business Continuity Planning
LNC has a documented corporate policy requiring each Business Unit to develop a business continuity plan. In support of this policy, LNC’s Business Resilience area has the full-time responsibility of coordinating the development, testing and maintenance of all LNC Business Continuity Plans. Business Resilience determines and drives appropriate strategies for the development of a resilient business environment with formal systematic processes with auditable controls that enforces the corporate policy on continuity.
LNC’s Business Continuity Plans address advance preparations and actions to be taken in response to disruptions of various magnitudes. The Business Continuity Plans address the potential impact of varying risks of disruptions to LNC employees, equipment, computer and telecommunications systems, and office facilities. While it is impossible to anticipate every type of disruption that could affect LNC’s businesses, LNC takes an ‘all hazards’ approach to planning which encompasses reduction in workforce, loss of facility and loss of data.
Crisis Management
Local crisis management teams are in place in all LNC locations. These local crisis teams are charged with recording and managing any potential or actual crisis at the site from the time a situation occurs to the resolution of the incident and resumption of normal business operations.
Backup and Recovery
With the use of a co-located alternate Disaster Recovery data center solution LNC maintains back-up systems and power supplies that allow critical computer and telecommunications systems and facility functions to be maintained in the event of significant business disruption("SBD"). The duration of the disruption will depend on the nature and extent of the emergency or SBD.
In the event of an SBD, where it is not possible to conduct business from one of LNC’s offices, the company will utilize work from home solutions as well as the use of alternate sites equipped with resources to support critical business operations.
31 LNC’s Business Continuity Plans are reviewed as necessary, and at least annually, to ensure they account for technology, business, operations, structure, or location.
Critical Infrastructure and Application Test
LNC’s testing strategy incorporates the use of a Business Impact Analysis (“BIA”) for developing enterprise-wide and Information Technology (“IT”) Disaster Recovery (“DR”) testing strategies. The strategy identifies key roles and responsibilities and establishes the minimum requirements for testing, including baseline requirements for frequency, objectives, and reporting test results. It also drives the requirements for creating and updating Disaster Recovery Plans and Validation Recovery documentation. Testing allows for the evaluation of the level of preparedness that exists in our environment and supports recommendations for resources and funding needed for compliance with applicable federal laws and regulations.
Lincoln completes scheduled annual testing focused on pre-defined parts of critical infrastructure. Tests are designed to establish and/or validate recovery time objectives.
Additional tests are done periodically to recover individual applications based on criticality.
As an example, the scope of the tests may include:
• Evaluation of infrastructure (ex: computers, network, hardware) to demonstrate the anticipated operation of the components and system. Tests are often performed as part of normal operations and maintenance. Disaster Recovery tests are often included within these exercises.
• Operational readiness testing (“ORT”) is used to conduct operational readiness (prerelease) of a product, service, or system and/or physical infrastructure (ex: building systems, generators, utilities). ORT may include checking the backup/restore facilities, IT disaster recovery procedures, maintenance tasks and periodic check of security vulnerabilities.
• Activities performed to evaluate a plan relative to specified objectives or measurement criteria.
Record Retention Policy
Lincoln Retirement Services Company, LLC (LRSC) will maintain records of or access to information and/or documents directly associated with the Plan that are in the possession of Lincoln for a period six years following the date the applicable document came into the possession of Lincoln, including, but not limited to:
• Alliance Service Agreement, including related documentation and amendments thereto
• Lincoln SelectSolution® IRA Agreement
• Lincoln Small Account IRA Agreement
• payroll files
• Plan compliance testing
• Form 5500 documentation
• Participant forms and related paperwork
• Participant written correspondence
32 • Plan sponsor written correspondence
• Quarterly participant pension benefit statements
• Plan trust agreement and amendments thereto
©2023 Lincoln National Corporation
LincolnFinancial.com
Lincoln Financial Group is the marketing
name for Lincoln National Corporation and
its affiliates.
Affiliates are separately responsible for their
own financial and contractual obligations.
PAD-6152885-121123
RPS22210-AL-NE
Mutual funds in the Lincoln Alliance® program are sold by prospectus. An investor should consider carefully the investment objectives, risks, and charges and expenses of the investment company before investing. The prospectus and, if available, the summary prospectus contains this and other important information and should be read carefully before investing or sending money. Investment values will fluctuate with changes in market conditions so that, upon withdrawal, your investment may be worth more or less than the amount originally invested. Prospectuses for any of the mutual funds in the Lincoln Alliance® program are available at 800-234-3500.
The Lincoln Alliance program includes certain services provided by Lincoln Financial Advisors Corp. (LFA), a broker-dealer (member FINRA, SIPC) and retail and financial planning affiliate of Lincoln Financial Group, 1301 S. Harrison St., Fort Wayne, IN 46802. Unaffiliated broker-dealers also may provide services to customers. Account values are subject to fluctuation, including loss of principal.
The Lincoln Stable Value Account is a fixed annuity contract issued by The Lincoln National Life Insurance Company, Fort Wayne, IN 46802 on Form 28866-SV 01/01, 28866-SV20 05/04, 28866-SV90 05/04, AN 700 01/12, or AR 700 10/09. Guarantees for the Lincoln Stable Value Account are subject to the claimspaying ability of the issuer.
The Lincoln SelectSolution® IRA is a custodial account and is solely invested in a group fixed annuity contract issued by The Lincoln National Life Insurance Company, 1301 S. Harrison St., Fort Wayne, IN 46802, on contract form AN-700, to the Lincoln Financial Group Trust Company, Inc., held in trust for the benefit of the owners of the Lincoln SelectSolution IRA.
State Street Bank and Trust is not an affiliate of Lincoln Financial Group.
Affiliates of Lincoln National Corporation include, but are not limited to, The Lincoln National Life Insurance Company, Lincoln Life & Annuity Company of New York, Lincoln Retirement Services Company, LLC, and Lincoln Financial Group Trust Company, Inc., herein separately and collectively referred to as Lincoln.
Lincoln Financial Group Trust Company, Inc. (a New Hampshire company) is a wholly owned subsidiary of Lincoln Retirement Services Company, LLC.
APPENDIX A
Version Date: 7/19/2024
Plan information
Employer name City of Yuba City Plan code YUBA-001
Plan name City of Yuba City Deferred Compensation Plan Plan type 457(b) Roles and responsibilities
• Contract exchange reviewed by N/A
• Transfer(s) reviewed by LRSC
• Vesting tracked by Employer
• Final distribution(s) reviewed by LRSC
• Employer contribution(s) calculated by Employer
• Eligibility tracked by Employer
• Hardship(s) reviewed by N/A
• In-service withdrawal(s) reviewed by LRSC
• QDRO(s) reviewed by LRSC
• Rollover(s) reviewed by LRSC
• Loan(s) approved by N/A
• Unforeseeable emergency(ies) reviewed by LRSC
• Qualified birth or adoption distribution(s) reviewed by LRSC • Signature ready Form 5500 and 8955-SSA completed by N/A for and beyond • Applicable plan level required annual coverage and non-discrimination testing for and beyond completed by N/A
• Applicable participant level compliance for and beyond completed by LRSC
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc.
Morningstar Investment Management LLC Form ADV Part 2A: Firm Brochure Institutional Advisory Services
22 West Washington Street, Chicago, IL 60602
Phone: 312.696.6000
www.corporate.morningstar.com
March 25, 2024
This brochure provides information about the qualifications and business practices of Morningstar Investment Management LLC. If you have any questions about the contents of this brochure, please contact us at 312.696.6000 or send an email to
[email protected]. The information in this brochure has not been approved or verified by the United States Securities and Exchange Commission (“SEC”) or by any state securities authority.
Additional information about Morningstar Investment Management LLC is available on the SEC’s website at www.adviserinfo.sec.gov.
Morningstar Investment Management LLC is registered with the SEC as a registered investment adviser. Registration with the SEC does not imply a certain level of skill or training. Please retain this brochure for future reference.
All current versions of our firm brochures are available in the Part 2 Brochures section of this record on the SEC’s website. You can also request a copy of our current brochure free of charge by contacting our Compliance Department at 312.696.6000, or by email to [email protected]. In your request, please indicate the name of the company (Morningstar Investment Management) and the service brochure(s) (Retirement Plan Services for Individuals or Institutional Advisory Services) you are requesting.
Item 2. Material Changes
The Institutional Advisory Services Firm Brochure dated March 25, 2024 contains the following material changes since our last annual update dated March 27, 2023:
Item 4. Advisory Business, Item 5. Fees and Compensation, and Item 8.
Methods of Analysis, Investment Strategies, & Risk of Loss were updated to remove the Morningstar Wealth advisory service where model portfolios are offered through certain retirement service providers as investment options for their retirement plan participants and to add additional information about the Morningstar Retirement Personal Target-Date Fund Service.
The Institutional Advisory Services Firm Brochure contains the following nonmaterial changes since our last annual update:
All mentions of “Morningstar’s Investment Management group” were removed from the Firm Brochure in favor of using the brand names Morningstar Retirement and Morningstar Wealth.
Item 4. Advisory Business was updated to reflect our assets under management and advisement as of December 31, 2023.
Item 8. Methods of Analysis, Investment Strategies, and Risk of Loss was updated to provide updated information about the Global Investment Committee and the Custom Model Portfolios six-step process to construct investment portfolios, and to add a security type risk for mutual funds and collective investment trusts.
Item 10. Other Financial Industry Activities and Affiliations was updated to provide information about Morningstar Wealth’s Affinity Program. It was also updated to note that Morningstar Investment Management and Morningstar Research Services employee may have dual reporting or organizational lines and that separate office “neighborhoods” are used instead of separate floors when mitigating conflicts of interest. We removed a statement noting that we do not solicit Morningstar Research Services’ input prior to making investment decisions or recommendations. As a result of an internal reorganization, investment professionals of Morningstar Investment Management and Morningstar Research Services may consult each other prior to making an investment decision or creating a written analysis of a security, but they may not share material non-public information and all decisions and analyses must be made by the appropriate entity without inappropriate influence from the other. Finally, we replaced all mentions of “DBRS Morningstar” with its new name, “Morningstar DBRS.” The Brochure Supplement accompanying this Firm Brochure was updated since the last annual update to note updated investment team responsibilities and supervisors.
We made other edits where necessary to correct grammar or punctuation, to provide clarification or further information, for consistency in terminology or content, or to improve the readability of the brochure.
Item 3. Table of Contents
Advisory Business ....................................................................................... 1 Fees and Compensation .............................................................................. 5 Performance Based Fees and Side-by-Side Management........................... 6 Types of Clients........................................................................................... 6 Methods of Analysis, Investment Strategies, and Risk of Loss................... 7 Disciplinary Information .............................................................................18 Other Financial Industry Activities and Affiliations.....................................18 Code of Ethics, Participation or Interest in Client Transactions and Personal Trading ........................................................................................21 Brokerage Practices...................................................................................22 Review of Accounts ..................................................................................22 Client Referrals and Other Compensation..................................................23 Custody.....................................................................................................23 Investment Discretion................................................................................23 Voting Client Securities.............................................................................23 Financial Information..................................................................................24 Item 4. Advisory Business
Firm Information
Morningstar Investment Management LLC is a Delaware limited liability company that was incorporated in 1999. Morningstar Investment Management is a wholly owned subsidiary of Morningstar, Inc.
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. (“Morningstar”). Morningstar is a publicly traded company (Nasdaq Ticker:
MORN) with Mr. Joseph Mansueto, Executive Chairman of Morningstar, holding more than 35% of Morningstar’s outstanding shares. Because of that ownership, Mr. Mansueto is an indirect owner of Morningstar Investment Management.
Morningstar Investment Management is registered with the SEC under Section 203(c) of the Investment Advisers Act of 1940, as amended (“Advisers Act”). Morningstar Investment Management has filed the appropriate notices to conduct business in all 50 states, the District of Columbia, Guam, and the Commonwealth of Puerto Rico. Morningstar Investment Management is registered with the U.S. Commodity Futures Trading Commission as a Commodity Pool Operator (“CPO”) and is a member of the U.S. National Futures Association.
Morningstar Investment Management, along with other Morningstar subsidiaries authorized in appropriate jurisdictions to provide investment management and advisory services, is part of a global investment team composed of investment analysts, portfolio managers, and other investment professionals. These investment and operations teams span the globe, with primary offices in Chicago, London, and Sydney.
This brochure focuses on the products and services we provide to institutional clients. You can obtain a copy of our brochure describing our products and services for individuals (managed account, advice, and personal target-date fund services for retirement investors) by following the instructions above.
Advisory Services We Offer – Overview
Morningstar Investment Management offers various investment advisory services that focus on our core capabilities in asset allocation, investment selection, and portfolio construction to financial or other institutions including, but not limited to, asset management firms, banks, broker/dealers, consultants, endowments, foundations, insurance companies, investment advisers, investment fiduciaries, plan sponsors of retirement plans, providers of retirement plan services, trusts, and other business entities (collectively “Institutional Clients” or individually, an “Institutional Client”.) Morningstar Wealth and Morningstar Retirement each offer certain advisory services provided by Morningstar Investment Management.
The advisory service below is offered through both Morningstar Wealth and Morningstar Retirement:
Institutional Asset Management
For Institutional Clients who sponsor registered or pooled investment products, we serve as a portfolio manager, portfolio construction adviser, or sub-adviser. We provide recommendations for asset class allocation targets and/or selection of underlying holdings to fulfill each asset class allocation target. Underlying holdings may include, but are not limited to, open-end mutual funds, exchange-traded funds (“ETFs”), and collective investment trusts. The universe of underlying holdings is generally defined by the Institutional Client and can include investment products that are affiliated with that Institutional Client. This service typically includes ongoing responsibilities such as monitoring the underlying holdings and reviewing and updating asset allocation percentages and/or underlying holdings as necessary.
We are an investment adviser to Morningstar Funds Trust, registered with the SEC as an open-end management investment company under the Investment Company Act of 1940, as amended. We have overall supervisory responsibility for the general management and investment of the fund portfolios within the Morningstar Funds Trust (“Morningstar Funds”), which are managed in a multimanager structure. Subject to the review and approval by the Morningstar Funds Trust’s board, we set each Morningstar Fund’s overall investment strategy. We are also responsible for the oversight and evaluation of each Morningstar Fund’s sub-advisers. The Morningstar Funds will be used as the underlying holdings for certain model portfolios, most notably mutual fund model portfolios, offered by Morningstar Investment Management and our subsidiary, Morningstar Investment Services LLC The Morningstar Funds include the Morningstar Alternatives Fund, Morningstar Defensive Bond Fund, Morningstar Global Income Fund, Morningstar International Equity Fund, Morningstar Multisector Bond Fund, Morningstar Municipal Bond Fund, Morningstar Total Return Bond Fund, Morningstar U.S.
Equity Fund, and the Morningstar Global Opportunistic Equity Fund. More information about the Morningstar Funds is at
http://connect.rightprospectus.com/Morningstar.
Wealth
The advisory services below are offered through Morningstar Wealth:
Model Portfolios and Separately Managed Accounts
For Institutional Clients who offer a proprietary advisory program, or a platform that makes investment strategies available for use by other financial institutions, we create model portfolios and separately managed accounts (collectively, “Portfolios”) for use through such programs or platforms. The Portfolios are typically designed for use by a financial professional with their retail investor clients, and can include risk- or target date-based asset allocation portfolios, portfolios designed to address a certain financial planning need or goal, or relatively focused stock or bond portfolios. We generally provide sales support on behalf of the Institutional Client by educating financial professionals who use the program or platform about the strategies we provide. In providing this service, we act as either a discretionary investment manager or a non-discretionary model manager. We select and monitor the asset allocation and underlying holdings of each Portfolio based on a universe of investments typically defined by the Institutional Client. In general, we provide ongoing monitoring of the Portfolios, along with rebalancing and reallocating recommendations. As an investment manager, we invest each investor’s account in their chosen Portfolio(s), taking into consideration any requested reasonable restrictions, and submit trade instructions to the investor’s custodian. The investor’s financial professional or the investor is responsible for suitability, choice of custodian, and other services as detailed in the agreement between the Institutional Client and us. As a model manager, the Institutional Client or the financial professional using the advisory program or platform has discretion over the accounts invested in each Portfolio and has the ability to deviate from our recommendations.
In addition, our subsidiary, Morningstar Investment Services LLC, offers Portfolios on a discretionary and non-discretionary basis. Morningstar Investment Management’s investment professionals provide portfolio construction and ongoing monitoring of those Portfolios on behalf of Morningstar Investment Services.
The Portfolios, most notably those utilizing mutual funds, may have underlying holdings that include one or more of the Morningstar Funds. The Morningstar Funds became accessible through certain Portfolios in November 2018. Each Morningstar Funds’ summary prospectus, prospectus, statement of additional information (‘SAI”), and other regulatory filings are available at http://connect.rightprospectus.com/Morningstar.
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc.
Asset Allocation Services
We provide Institutional Clients and their financial representatives tools for identifying their clients’ investment goals and risk tolerance (such as risk tolerance questionnaires), and a mechanism to match those goals and risks with an appropriate asset allocation strategy. Asset allocation services are typically used by our Institutional Clients in their investment products, wrap programs, variable annuity asset allocation programs, or similar programs. If included in an agreement with an Institutional Client, asset allocation models are periodically reviewed and adjusted as needed. We may provide Institutional Clients with rebalancing triggers and recommendations on when the allocations for asset classes should be revisited or adjusted.
Investment Analytics, Monitoring, and Comparative Analysis Reports We offer Institutional Clients investment performance and style monitoring reports. These reports range from a one-page snapshot view of multiple investments, such as those investments in a defined contribution plan lineup to multi-page, in-depth reports on a single investment that provides information on various aspects of the investment such as profile, style and sector analysis, total return/risk summary, performance, expense, portfolio metrics, top holdings, and an optional written analysis of the investment. To fulfill any monitoring responsibilities, we follow the same comprehensive due diligence process that we use to facilitate our investment selection research in these reports.
Morningstar Retirement
Morningstar Retirement is committed to helping people improve their financial health and prepare for retirement by offering investment advice and managed accounts, custom model portfolios, and fiduciary services to plan providers, employers, and retirement investors. The advisory services below are offered through Morningstar Retirement:
Custom Model Portfolios
We construct custom asset allocation model portfolios for use with employersponsored retirement plan accounts using the investment options available in a plan’s lineup. Model portfolios can be time-based, risk-based, or a combination of time- and risk-based. Model portfolios, including target-date glide paths where relevant, are customized to the specific plan, and can take into account a wide range of factors including the presence of defined benefit assets, company stock holdings, savings rates, and account balances. We provide monitoring of the model portfolios (and glide paths), making recommendations to change investment allocations, and/or to add, remove, or modify the model portfolios’ underlying investment options when necessary. Our recommendations and investment decisions are limited to those investment options available under the client’s retirement plan lineup.
Fiduciary Services
We provide Institutional Clients with retirement plan services that include the construction, monitoring, and/or management of plan lineups. These services typically include automated reporting capabilities, marketing and sales support, and an online reporting delivery mechanism. We provide documentation of the process used to select, review, monitor, and update the funds chosen. We offer a workforce profile questionnaire designed to help a plan sponsor identify the investment sophistication, funding status, investment goals, and/or risk tolerance of the retirement plan or its participants. We also typically provide methodology documents, an investment policy statement, quarterly fund and plan performance reports, annual summary reports, and a quarterly market summary.
In providing these services, we serve as a fiduciary, as defined in section 3(21)(A) ERISA, as amended, and may additionally serve as an investment manager, as defined in section 3(38) of ERISA.
We construct a list of lineup options (including, but not limited to, collective investment trusts and/or mutual, money market, and/or stable value funds) from the universe of investment options defined by the Institutional Client.
We provide asset-class requirements for the lineup, with specific investment options identified for each asset class, for use in developing a lineup for a defined contribution or defined benefit retirement plan. This process is designed to provide the Institutional Client with investment choices that will result in a lineup that is appropriately diversified with a sufficient broad range of risk/return characteristics.
Under our standard 3(21) service, we serve as a fiduciary with respect to the investment selection and monitoring we provide, but the Institutional Client retains responsibility for investing plan assets in accordance with our recommendations. We provide ongoing monitoring of the specific investments in the approved investment list and monitor individual plans to ensure they are meeting our asset-class requirements and investing in approved funds. Typically, if we recommend modifications to a lineup, we provide notice to the Institutional Client who has discretion to implement our recommended changes.
For our “flexible” 3(21) service, we offer the services outlined under our standard 3(21) service but allow the Institutional Client the flexibility to choose investments from our approved investment list along with nonapproved investment options for their lineup. Our fiduciary support covers the use of investment options from our approved list only. Under this service, we do not provide any fiduciary coverage on the end lineup.
In some cases, Institutional Clients delegate discretionary management responsibilities to us. For our standard 3(38) service, we serve as a fiduciary with respect to the investment selection and monitoring we provide and we act as an investment manager for the plan, with full authority to select, remove and replace investment options from the plan lineup. We provide periodic monitoring of the specific investments in the approved investment list and monitor individual plans to ensure they are meeting our asset-class requirements and investing in approved funds.
For our “flexible” 3(38) service, we offer the services outlined in our standard 3(38) service but allow the Institutional Client the flexibility to request some variability in our standard process, such as the ability to include more approved investment options in asset classes than we allow under our standard service. This service is designed to help avoid too much disruption as Institutional Clients convert their plans to our service.
We offer Morningstar® Plan AdvantageSM, an online platform designed to help retirement plan sponsors served by financial professionals of Institutional Clients (1) identify a category-level plan lineup, (2) choose a plan provider from those available through Morningstar Plan Advantage (choice of plan provider can be further limited by the Institutional Client), and (3) access 3(21) or 3(38) fiduciary services as part of a bundled offering. Once enrolled, plan sponsors and their designated plan advisor can review their lineup and access reports, view notifications, and learn more about plan lineup changes.
Managed Accounts, Advice, and Guidance
We offer services to Institutional Clients for use with individual retirement investors in their employer-sponsored retirement plans or other retirement products, like individual retirement accounts or health savings accounts
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. earmarked for retirement (each a “retirement account”). These services are intended for citizens or legal residents of the United States or its territories and are offered through retirement plan sponsors and/or plan providers, plan administrators, retirement product providers, and/or other investment advisers (each a “service provider.”) These services typically include guidance, advice and/or managed account options, along with an online platform to access those services. Guidance includes general and educational information and tools to help retirement investors manage their retirement account. Under Guidance, the retirement investor is responsible for determining the suitability of investments, implementing changes to their retirement account, and monitoring their account on an ongoing basis. Advice offers each retirement investor a target retirement income goal, projected retirement income amount, recommendations on savings rate and retirement age, personalized asset allocation strategy, and professional investment selection. Under Advice, the retirement investor is responsible for the implementation of any changes to and the monitoring of their retirement account. Under Managed Accounts, we will manage the retirement investor’s account on an ongoing basis, in addition to the items provided under Advice.
Our account management includes ongoing monitoring, automatic account rebalancing and implementation of changes, quarterly progress reports, and an annual progress report. We use the investment options available in the retirement plan or product to construct a portfolio and, when applicable, monitor model portfolios designed for retirement investors across a broad range of risk exposure levels.
Advisor Managed Accounts is a product name for Managed Accounts or Advice that allows investment advisers, consultants, or asset managers to incorporate their own asset allocation and fund selection capabilities into our offering. Under this service, the investment adviser, consultant, or asset manager is responsible for building plan-level portfolios from each plan or product’s investment options or non-core investment options, if available through the service provider. The plan-level portfolios are used in our portfolio assignment methodology to create hundreds of retirement investor-level portfolios that span the equity spectrum. If we engage an asset manager as a sub-adviser (“Sub-Adviser”) to provide portfolio construction services for Advisor Managed Accounts, we are responsible for the investment-level portfolios created for users of our services and there is no advisory relationship between you, your retirement investors or product users, and the Sub-Adviser. Each retirement investor is then assigned to a portfolio appropriate for their retirement goals. As part of Managed Accounts, each retirement investor receives a target retirement income goal, projected retirement income amount, and recommendations on savings rate and retirement age. We manage the retirement investor’s account on an ongoing basis, which includes ongoing monitoring, automatic account rebalancing and implementation of changes, quarterly progress reports, and an annual progress report.
If made available by the plan sponsor or service provider, retirement investors have the option to complete an annuity questionnaire. Through this questionnaire they can indicate whether they would like to receive a recommendation for how much of their retirement account could be invested in an annuity while still aligning with our investment strategy. We do not recommend, endorse, or sell any specific annuity products as part of this allocation recommendation and do not provide advisory or discretionary investment management services to assets invested in an annuity. If requested by the plan sponsor or service provider, we will integrate access to an annuity marketplace or provider into our platform to help facilitate the retirement investor’s purchase of an annuity, if they decide to do so. In such instances, the annuity or annuities available are chosen by the plan sponsor or service provider and we have no role in selecting those annuities. An annuity allocation recommendation is only available through the Managed Accounts service.
We offer advisory services to Institutional Clients who offer their own investment advice or managed account programs to their clients. In most cases, we serve as the independent “Financial Expert” as defined within the Department of Labor’s Advisory Opinion 2001-09A dated December 14, 2001 (commonly referred to as the “SunAmerica Opinion.”) We use the investment options available in a retirement investor’s lineup or product to construct and, when applicable, monitor model portfolios designed for retirement investors across a broad range of risk exposure levels. We may also use information provided by independent third parties such as mutual fund data or index providers in the construction of advice for the program.
Personal Target Date Fund Service
We offer a personalized target date fund service to Institutional Clients for use with retirement investors. This service includes a personalized asset allocation strategy and professional investment selection for individual retirement investors invested in employer-sponsored retirement plans or other retirement products, like individual retirement accounts (“IRAs”) or health savings accounts (“HSAs”) earmarked for retirement through an online platform. The asset allocation strategy utilizes one or more target date fund vintages, is based on the retirement investor’s financial situation and retirement goals using the information the retirement investor, plan sponsor, service provider(s) and/or an account aggregator provides, and includes ongoing monitoring and automatic account rebalancing and implementation of allocation changes. After determining the retirement investor’s asset allocation target, the target-date funds available in the retirement investor’s plan or product are used to create an investment-specific portfolio. We manage the retirement investor’s account on an ongoing basis and communicate our investment decisions to the plan or product’s service provider.
The target date fund series available in the retirement plan or product could be associated with an Institutional Client or plan or product’sservice provider.
In such instances, the service provider, or their affiliate, may receive compensation based on the assets in those investments which gives the service provider an incentive to make those investments available.
Retirement investors will periodically receive progress reports reflecting progress towards their retirement goals and other information in regard to their investments. Typically, these reports are available electronically through our website on a quarterly basis. On an annual basis, those eligible for, but not currently enrolled in the Personal Target-Date Fund Service may receive a Personalized Strategy Report. Using data provided by the plan sponsor or service provider, we outline a retirement strategy that we feel is appropriate for the retirement investor based on the information available to us.
Customized Services
At an Institutional Client’s request, we will take under consideration a request to provide them with a customized version of the above services or a different type of advisory services that would utilize our core capabilities in asset allocation, investment selection, or portfolio construction. Given the customized nature, the Institutional Client can impose constraints/restrictions on such things as security types, asset classes, or proprietary security requirements and/or wish to collaborate with us on such things as investment methodology and screening criteria.
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc.
Wrap Fee Programs
We do not sponsor a wrap fee program, but we do provide portfolio management services to a wrap fee program offered by our subsidiary, Morningstar Investment Services LLC, through the Morningstar Wealth program.
Assets Under Management
As of December 31, 2023, the discretionary regulatory assets under management for Morningstar Investment Management (rounded to the nearest $100,000) were:
Retirement Services to Individuals: $19,580,600,000
Investment Management Services to Institutional Clients:
$35,112,600,000
Total Regulatory Asset Under Management: $54,693,200,000 The non-discretionary assets under advisement for Morningstar Investment Management (rounded to the nearest $100,000) were $190,639,500,000.
Item 5. Fees and Compensation
Fees and Compensation – Overview
We typically negotiate our fees, payment terms, and payment schedules on an individual basis with each Institutional Client. The services we provide, the specific fees for such services, and the contract term are governed by the contractual agreement between us and our Institutional Client. Institutional Clients may not receive all of the services listed above. Our fees vary depending on the services selected and could include a fixed fee, a basispoint fee, and/or a technology licensing fee. Fees for some services take into consideration such factors as the number of services being provided and service specific variables such as the universe of investments, variables in monitoring frequency, delivery type, investment types, and frequency of written analysis.
Institutional Asset Management
Our Institutional Asset Management fees are negotiable, but generally include an asset-based fee and can include a minimum annual fee. The assetbased fee typically ranges from 2 to 15 basis points of the assets being managed or consulted upon while the minimum annual fee is $100,000 - $200,000. The actual fee depends on a range of variables including our role in providing the services, the type of security we are providing services for, and the amount of assets involved. The fee is typically charged monthly in arrears.
As the investment adviser to the Morningstar Funds Trust (“Trust”), we are compensated by the Trust based on assets within the Morningstar Funds for our investment management activities in accordance with the Investment Management Agreement between the Trust and us. We are entitled to receive an annual management fee calculated daily and payable monthly equal to the following percentage of a Morningstar Fund’s average daily net assets:
Morningstar Fund Management Fee
Morningstar U.S. Equity Fund 0.67%
Morningstar International Equity Fund 0.83%
Morningstar Global Income Fund 0.35%
Morningstar Total Return Bond Fund 0.44%
Morningstar Municipal Bond Fund 0.44%
Morningstar Defensive Bond Fund 0.36%
Morningstar Multisector Bond Fund 0.61%
Morningstar Global Opportunistic Equity Fund 0.47%
Morningstar Alternatives Fund 0.85%
More information about the Morningstar Funds’ fees and expenses can be found in the prospectus at http://connect.rightprospectus.com/Morningstar.
Morningstar Wealth
Model Portfolios and Separately Managed Accounts
Portfolio fees are typically non-negotiable and range from 0 – 55 basis points.
The actual fee depends on our role in offering the service including whether we act as a model manager or have discretion over client portfolios, asset size, the complexity involved, whether Morningstar Funds are included in the Portfolios, and any other services we provide to the Institutional Client. The fee is typically charged monthly and may be charged in advance or arrears. If, in accordance with the contractual terms, the Institutional Client terminates the agreement they have with us prior to the end of the billing period, we will refund any unearned fees on a pro rata basis after the termination of the contract.
For any Portfolio in which one or more of the underlying holdings is a Morningstar Fund, no investment management fee is charged with respect to the Morningstar Funds. As disclosed above, in accordance with the Investment Management Agreement between us and Morningstar Funds Trust, we receive compensation from Morningstar Funds Trust based on the assets invested in the Morningstar Funds for the investment management activities we perform for the Morningstar Funds. Since we receive compensation for this activity, we don’t charge a separate investment management fee with respect to the Morningstar Funds in a Portfolio.
Therefore, it’s important to note that for those Portfolios that include Morningstar Funds and other securities (such as third-party mutual funds or ETFs), the investment management fee is only applicable to the investment management activities carried out for the non-Morningstar Funds securities.
Asset Allocation Services
Our Asset Allocation Services fees are negotiable, but generally range from $50,000 to $500,000 annually. The actual amount charged depends on a range of variables including the terms of distribution, number of sets, type and scope of the models requested (including the number of asset classes used in the asset allocation models), and whether the client receives other advisory services from us. The fee is typically charged annually in arrears. In addition to the fee, payment terms and schedules are negotiable.
Investment Analytics, Monitoring, and Comparative Analysis Reports Our Investment Analysis, Monitoring, and Comparative Analysis Report fees are negotiable, and vary widely. A flat fee is typically charged per report. The actual amount charged depends on a range of variables including the type of service being sought, the type of securities involved, the intended purpose for our service, the type of output being sought from us, and the intended use of the Morningstar name. The fee is typically charged annually and is due upon delivery of the report(s). In addition to the fee, payment terms and payment schedules are negotiable.
Morningstar Retirement
Custom Model Portfolios
Our Custom Model Portfolio fees are negotiable, but generally include a minimum and an asset-based fee. Asset-based fees generally range between 3 and 8 basis points. Minimum fees typically vary from $100,000 to $300,000.
The actual fees depend on a range of variables including our fiduciary role, services used, asset size, and whether services are opt-in or opt-out. The licensing and/or minimum fee is typically charged in arrears. The asset-based fee is generally charged quarterly by applying the pro-rated basis point rate to the average assets in a retirement account during the quarter.
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc.
Fiduciary Services
Our 3(21) and 3(38) Fiduciary Services fees are negotiable, but generally include a minimum and an asset-based fee. Asset-based fees generally range between 2 and 8 basis points. Minimum fees typically vary from $100,000 to $450,000. The actual fees depend on a range of variables including our fiduciary role, service used, asset size, and whether services are opt-in or optout. The fee is typically charged quarterly in arrears based on assets held at calendar quarter-end or the average assets in the service over the quarter.
Our Morningstar Plan Advantage fees are negotiable, but generally include a minimum and an asset-based fee that typically ranges between 3 and 8 basis points annually. The actual fee depends on a range of variables including our fiduciary role, services used, and asset size. The fee is typically charged quarterly in arrears by applying the pro-rated basis point rate to the average assets in a plan during the quarter.
Managed Accounts, Advice, and Guidance
Managed Accounts, Advice, and Guidance fees are negotiable, but generally include a minimum and/or licensing fee, and an asset-based fee. Minimum and/or licensing fees typically vary from $100,000 to $800,000. Asset-based fees for Managed Accounts typically range from 10 to 50 basis points annually. The actual fees depend on a range of variables including our fiduciary role, services used, asset size, and whether services are opt-in or opt-out. The licensing fee is typically charged annually in advance. The assetbased fee is typically charged quarterly in arrears by applying the pro-rated basis point rate to the average assets in a retirement account during the quarter.
Please note, in instances where a Sub-Adviser has been engaged to undertake portfolio construction for these services, the portfolios they create will typically consist of associated investment products in which they receive compensation based on the amount of assets invested.
Personal Target Date Fund Service
Personal Target Date Fund Service fees are negotiable, but generally include a one-time set-up fee, a minimum fee, and an asset-based fee. The set-up fee typically ranges from $100,000 to $200,000. The annual minimum is generally in the range of $200,000 to $500,000. The annual asset-based fee typically ranges from 4.5 to 7 basis points. The actual fees depend on a range of variables including the asset manager size and the overall fees charged.
The set-up fee is typically charged annually in advance. The asset-based fees are typically charged quarterly in arrears by applying the pro-rated basis point rate to the assets in the retirement account enrolled in the service.
Payment
Payments, payment terms and payment schedules are negotiated and governed by the contractual agreement we enter into with each Institutional Client. We typically send an invoice on a periodic basis (e.g., monthly or quarterly), although in some instances, we bill annually. For services we provide to an affiliate, fees are charged through an intercompany charge.
Fixed and licensing fees are typically paid in advance of services being provided, and basis-point fees are typically charged in arrears.
Other Costs in Connection with Our Advisory Services
Our fees are separate from fees and expenses charged by the investment products (including redemption fees or asset- or transaction-based trading fees), fees and expenses charged by the Institutional Client for their products (including any revenue sharing arrangements that they have with the investment option’s investment adviser and/or distributor), or fees that are charged by a third party, such as a proprietary advisory program, financial advisor, platform, custodian, transfer agent, plan provider, or recordkeeper.
The investment options’ fees and expenses are described in the prospectus or an equivalent document. These fees will generally include a management fee, other investment expenses, and possibly a distribution fee (e.g., 12b-1).
In some cases, an investment option may also charge an initial or deferred sales charge. Annuities typically have additional fees, such as surrender charges, mortality and expense risk charges for death benefits or payout options like guaranteed income for life, administrative fees, underlying fund expenses related to investment sub-accounts, and other charges for special features, like guaranteed minimum income benefits, principal protection, or stepped-up death benefits. Neither Morningstar Investment Management nor any of our employees receive transaction-based compensation for the investment recommendations we make.
Fees Charged in Advance
Our services can be terminated as outlined in the contractual agreement between Morningstar Investment Management and the Institutional Client.
Termination of services and refunds of fees, if any, are governed by the contractual agreement between the parties, which is negotiated on an individual basis. Upon termination, any earned, unpaid fees by the Institutional Client are due and payable. If, in accordance with contractual terms, the Institutional Client terminates their contract prior to the end of the billing period, we will refund any unearned fees on a pro rata basis after the termination of the contract.
Compensation from Sales of Securities
We do not expect, accept or receive compensation for the sales of securities, including asset-based sales charges or service fees from the sale of openend mutual funds.
You may have the option to purchase investment products we recommend or similar services through other investment advisers or financial professionals not affiliated with us. Because our services are not exclusive, the fee for our services may be higher than fees charged by other financial firms who provide services similar to ours or if you paid separately for investment advice and other services. In addition, because the underlying holdings of our portfolios are not exclusive to the services described herein, you may buy securities (e.g., mutual funds, exchange-traded funds, equity securities, etc.) outside of this service without incurring our fees.
Revenue Sharing Arrangements
We do not have any revenue sharing arrangements with any registered investment advisers or mutual funds.
Item 6. Performance Based Fees and Side-by-Side
Management
We do not have performance-based fee arrangements with any qualified client pursuant to Rule 205-3 under the Advisers Act.
Item 7. Types of Clients
Our clients include advisory programs or platforms of third-party advisory or platform providers, entities such as financial institutions, third-party investment advisers, broker/dealers, investment companies (including the Morningstar Funds Trust), and other business entities, consultants, plan providers, product providers, and sponsors who offer investment advice programs to individual retirement investors in defined contribution plans such as 401(k), 457, and 403(b) retirement plans, individual retirement plan participants, health savings accounts, and individuals who are in retirement.
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc.
Please see our Retirement Services for Individuals brochure, available on the SEC website, for further information about Morningstar Retirement’s advisory services provided to retirement investors.
We do not require a minimum account size for our institutional investment advisory services, and we generally do not impose other conditions for using our institutional advisory services.
Item 8. Methods of Analysis, Investment Strategies, and Risk of Loss
Investment Philosophy
Our investment philosophy is driven by the investment principles that are promoted throughout our organization. The principles are intended to guide our thinking, behavior and decision making. These principles have been inspired by a number of the most experienced and successful investors in the last century. These principles also reflect and align with the history and foundation of Morningstar. The investment principles are:
- We put investors first
- We’re independent-minded
- We invest for the long term
- We’re valuation-driven investors
- We take a fundamental approach
- We strive to minimize costs
- We build portfolios holistically
Building upon our investment principles, our investment philosophy is built on the belief that portfolios should maintain a risk profile commensurate with the desired long-term asset allocation guidelines we provide to the client. We focus extensively on the portfolio structure to maintain a careful balance between being allocated similarly to the portfolio benchmarks and one that reflects our assessment of the value available in the current market environment. We select managers that we believe manage fund assets with a consistent and disciplined process that can provide for sustainable longterm results. We prefer managers with a prudent, logical, and repeatable process and remain keenly focused on the consistency of the implementation of their investment disciplines.
To align with our business structure, we have two Investment Policy Committees. The investment advice used in the products and services referenced in this brochure from Morningstar Investment Management is provided by investment teams. Information on key members of these investment teams is included in our Form ADV Part 2B Brochure Supplement for Institutional Advisory Services. For Advisor Managed Accounts, the registered investment adviser responsible for portfolio construction has their own Brochure Supplement that you should obtain and review.
Global Investment Committee
Morningstar Wealth’s Global Investment Committee and its regional governance bodies, in addition to the Americas Investment Product Committee, are responsible for oversight of the investment methodologies across some of our Institutional Asset Management, Model Portfolios and Separately Managed Accounts, Asset Allocation Services, and some of our Investment Analytics, Monitoring, and Comparative Analysis Reports products and services. Members of the Global Investment Committee may include officers, chief investment officers, managing directors, or managers of Morningstar Investment Management or its affiliates. The regional governance bodies meet quarterly to review guideline changes and performance across portfolios. Formal and informal global best practice working groups also exist with the goal of sharing methodologies and research across regions. These groups focus on specific investment areas such as valuation models driven by our capital markets research and methodologies used for asset allocation, investment selection, portfolio construction for different investment strategies and advice. In addition to governance bodies, the investment team has regional research and portfolio construction workflows that surface best thinking across investment opportunities and guide portfolio construction.
Morningstar Retirement Investment Policy Committee
The Morningstar Retirement Investment Policy Committee is responsible for oversight of the investment methodologies across Morningstar Retirement’s products and servicesincluding some of our Institutional Asset Management, Managed Accounts, Advice, and Guidance, Personal Target Date Fund Services, Custom Model Portfolios, Fiduciary Services, and some of our Investment Analytics, Monitoring, and Comparative Analysis Reports.
Members of the Morningstar Retirement Investment Policy Committee include Morningstar Investment Management’s chief investment officers, portfolio managers, investment analysts, and the director of automated portfolios solutions.
Model Portfolios and Separately Managed Accounts, Institutional Asset Management, and Asset Allocation Model Portfolios Investment Process
Our investment process starts with scouring the globe for opportunities.
Instead of hewing closely to an index-defined universe, we look broadly, investigating asset classes, sub-asset classes, sectors, and securities in markets around the world. Our capital markets research extends to more than 200 equity and 150 fixed-income asset classes. We also track around 30 world currencies.
We apply deep valuation analysis supported by in-depth fundamental research to find opportunities around the globe.
Alongside this analysis, which looks at both absolute and relative valuation, we also consider investor sentiment and positioning, which adds contrarian elements to our process and tells us how the market consensus views an investment idea we’re considering. We prefer to invest in ideas contrary to the market consensus because one needs to be different to be able to outperform.
We also look closely at each asset class’s risk, which can be complex, multifaceted, and vary over time. We believe that one of the best ways to control for risk is to buy fundamentally strong assets that seem underpriced.
Our in-depth valuation analysis and contrarian indicators, when brought together, are the key ways we generate investment ideas. These ideas might be names to include in a stock portfolio or our best thinking on reward for risk at the asset class-level. In addition, our valuation-driven asset allocation process paired with our in-house investment selection skill allows us to holistically build portfolios for our clients for the long term. The Investment Management group, as a global team, works to understand markets and opportunities, monitor risk in existing portfolios, and vet ideas to make investment changes. We use this ongoing investment process to manage a variety of equity and multi-asset portfolios for our Institutional Clients.
Investment Selection
Finding investment opportunities isn’t just about great ideas; it’s also about selecting great investments for our clients. Investments may be individual stocks, or active managers and/or passive exchange-traded products in a
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. multi-asset portfolio. Our research-driven approach to selecting investments is designed to help investors reach their goals and objectives.
When building multi-asset portfolios, we need to evaluate the active investment managers and/or passive funds we use to implement our investment strategies. Our investment selection process begins with analysis from Morningstar and its affiliates, which covers hundreds of thousands of investment offerings globally, including mutual funds, closed-end funds, separate accounts, exchange-traded products, individual stocks, and hedge funds. We then build upon that analysis with reviews by our internal investment team, which includes not only quantitative screens and assessments, but also one-on-one conversations with portfolio managers as part of our fundamental due diligence.
In our due diligence, we assess whether their investment team is qualified, experienced, and talented; that they follow a consistent and disciplined investment process; that their organization is strong and stable; and that they operate professionally and ethically.
We study managers’ holdings using our proprietary tools and analytics to assess how well their strategy may work in combination with those of other managers. And we consider managers’ ability to outperform in different market environments. Rather than following simple style analytics or style neutrality blends, we seek process diversification and try to avoid the pitfalls of over-diversification often found in fund-of-fund investment strategies.
Once we have selected active managers, we tend to keep them in place for the long haul. We believe hiring independent managers to run high-conviction strategies is a far better approach to multimanager portfolios.
As for passive vehicles, our selection process begins with the thousands of exchange-traded products in the Morningstar database and includes the work of Morningstar and its affiliates’ ETF analyst team. Our own analysts perform qualitative work that can’t be found in an automated service. ETFs are often less expensive than their open-end mutual fund counterparts but assessing them has to go beyond this fact. We closely examine the risk characteristics that define ETFs—including tracking to the index, trading volume, bid/ask spread, and premium/discount—to help ensure the goals are realistic and the liquidity is what we expect. As with other funds, we assess ETFs within a portfolio context to achieve access to a particular market segment or subasset class.
Individual stock selection relies heavily on our asset class research to identify attractive segments of the market (sectors, countries, or factors like quality) and a review of the valuations and fundamentals of the underlying stocks. We rely heavily upon Morningstar’s Equity Research group in addition to our own proprietary insights.
Specific to our Institutional Asset Management and Asset Allocation Model Portfolio services, the portfolios we build for an Institutional Client are typically constrained to a universe of investment options defined by our client, which include their affiliated investment products in some instances. Our analysis will still include quantitative analytics and fundamental research on the investment options available. We draw on Morningstar’s comprehensive database of fund and security analytics as well as utilizing portfolios information provided by our Institutional Client, if applicable. In some instances, we work closely with our Institutional Client to identify and evaluate manager candidates for possible addition to or removal from the available investment universe.
Building Portfolios
Armed with investment ideas, our global team works together to holistically build portfolios suited to each strategy we offer or the objectives of our clients. Portfolio construction is about ranking and risk management. We seek to gain the largest exposure to our best ideas, while building robust portfolios designed to stand up to challenging investment environments or investment errors.
This judgment-driven approach also allows us to evaluate the complexity and multifaceted nature of investment risk. We view risk as the permanent loss of capital. Our valuation-based approach (that is, seeking underpriced assets and avoiding overpriced assets), fundamental diversification, and forwardlooking approach to viewing asset class co-movements (that is, those that buffer gains and losses), all help mitigate risk in the portfolios we build.
To prepare investors for the future, we seek to construct robust portfolios designed to perform well in different environments rather than being considered “optimal” based on expected results or a specific environment.
We avoid forecasts and building strategies based on our ability to predict specific environments. Instead, we aim to prepare for different environments through constructing portfolios that will hold up under many possible environments—even ones that we haven’t seen before. In effect, this involves trade-offs of aggregate reward for risk and a calibration of the probability and impact of negative outcomes.
Asset allocation guidelines for multi-asset portfolios are developed by our Asset Allocation Committee, which comprises most of the investment professionals in Morningstar’s Investment Management group. Our investment professionals serve in different asset-class specialties on the committee. The committee jointly decides on organization-wide portfolio positioning policy, and strategy teams and portfolio managers adapt the positioning decision, as applicable, to their particular strategies and client portfolios. Teams of our portfolio managers are supported by the broad array of investment professionals within the Investment Management group, who contribute to manager research, asset-class research, investment-process enhancement, and the development and maintenance of portfolio management tools used in providing this service. All portfolios are reviewed by a team of peers before we deliver them to our Institutional Client.
Managing Portfolios
Once we’ve holistically built portfolios, we manage them. This part of the process is simply continuing to find opportunities, thinking through ways those opportunities might be included in our portfolios, and watching markets closely for any signs that would call for adjustments within the portfolio.
Portfolio management is not a stop/start process. We constantly review our positions, seeking to maximize reward for risk. Each strategy we manage has a set of investment guidelines that outline the investment objectives, risk levels, and investment constraints. These are monitored to stay within the defined ranges.
As valuation-driven investors, we primarily focus on price changes relative to fair value through time. Given that markets are dynamic, we reassess the portfolio given the changes in investment ideas, aggregate risks, and portfolio exposures. This iterative process reconsiders the opportunity set, with a constant eye on fundamental diversification and portfolio allocations.
Turnover and trading reduce returns for investors and therefore any changes should be expected to add value by a comfortable margin. Investment decisions happen in the real world rather than on paper—transaction costs
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. and taxes are real. This means being biased toward inaction and long-term holdings, keeping turnover and transaction costs as low as possible.
Our global investment team works around the clock to understand markets and opportunities, monitor risk in existing portfolios, and vet ideas to make investment changes. This ongoing investment process powers every portfolio managed by the entities within Morningstar’s Investment Management group.
We have processes and risk controls in place at multiple levels of the investment process to ensure that our portfolios are created in a manner consistent with their risk and return objectives. We evaluate risk at both the asset class model level and the portfolio level. At the asset class level, we monitor easily observable metrics such as standard deviation, skew, kurtosis, historical beta and overall tracking error relative to our stated benchmark. Our standard deviation and covariance matrix figures are estimated by a proprietary factor analysis system that ensures consistency across multiple asset classes and time periods. We delve deeper by examining conditional value-at-risk and conducting scenario analysis testing under different market conditions.
At the portfolio level, we conduct a detailed style analysis of our underlying funds using holdings information, quantitative regressions, and manager meetings. The underlying styles allow us to determine the effective rolled up portfolio asset class exposures and compare them to our asset allocation targets. Further, we analyze each manager’s style consistency to make sure we monitor and adjust for huge swings in our effective asset class exposures.
This analysis ensures that we are aware of, and comfortable with, our effective asset class exposures. Additional analysis is done routinely to measure our fund portfolio duration, tracking error, sector exposures and betas.
While actively managed portfolios will exhibit certain biases in terms of asset class weightings or security characteristics relative to their blended benchmarks at times (based our intended investment decisions and the actions of the underlying managers), they are constrained by setting minimum and maximum allocations to different asset classes, as stated in our investment policy guidelines. Establishing allowable ranges for asset classes helps enable the strategy to take advantage of opportunities and avoid risks at the asset class level, but also keeps the portfolios tethered to their blended benchmarks.
Ongoing monitoring of the underlying position weights is critical to keeping the portfolio exposures as intended. Each fund is assigned a target position and a “deviation threshold,” which governs the degree to which a fund may sway from its target. Each fund has a different degree of latitude, based on both its weight in the portfolio and the volatility of the assets in which it typically invests. If a fund deviates from its target weight, we evaluate whether the accounts that contain the fund need to be adjusted (i.e., rebalanced) to bring the alignment back in order.
For registered or collective investment products we manage on behalf of an Institutional Client, we review and revise portfolio allocation targets on a continuous basis to ensure that asset class targets outlined in the prospectus are maintained. Reviews are implemented to ensure that the underlying investments in the portfolio don’t exceed allocations noted in the product’s prospectus or breach other restrictions.
Morningstar Funds Trust Subadvisor Oversight and Multi-style Management We are responsible for hiring, terminating, and replacing sub-advisers to the Morningstar Funds, subject to board approval. Before hiring a sub-adviser, we perform due diligence on them including, but not limited to, quantitative and qualitative analysis of their investment process, risk management, and historical performance. We are responsible for the general supervision of the sub-advisers as well as allocating each Morningstar Fund’s assets among the sub-advisers and rebalancing the portfolio as necessary, the timing and degree of which will be determined by us.
At times, allocation adjustments among sub-advisers may be considered tactical with over- or under-allocations to certain sub-advisers based on our assessment of the risk and return potential of each sub-adviser’s strategy.
Sub-adviser allocations are also influenced by each sub-adviser’s historical returns and volatility, which are assessed by examining the performance of strategies managed by the sub-advisers in other accounts that we believe to be similar to those that will be used for a Morningstar Fund.
Asset Allocation Services – Capital Market Assumptions and Risk Tolerance Questionnaires
As part of our Asset Allocation Services, we typically offer a combination of Asset Class Model Portfolio(s), Risk Tolerance Questionnaire(s) (“RTQ”), and our Capital Market Assumptions (“CMAs”). Our construction method for Asset Class Model Portfolios is described above. This section will focus on our CMA and RTQ methods.
Capital Market Assumptions
We provide forward-looking CMAs for both taxable and tax-deferred account types. Our CMAs consist of expected return, standard deviation and correlation among asset classes based on our proprietary equity, fixed income, currency and risk models. In our CMAs, we use valuation-implied returns, which are based on the idea that asset class returns can be decomposed into underlying corporate and economic fundamentals and the valuations impact near-term returns. Our research team develops and enhances our capital market models on an ongoing basis to reflect the latest best practices and innovations. We analyze the available opportunity set of asset classes and constructs long-term expected returns, standard deviations, and correlation coefficients for each.
For equity valuation-implied returns, we use a supply-side approach to forecast equity returns. The supply-side model is based on the idea that equity returns can be decomposed into underlying economic and corporate fundamentals. Our approach separates the expected return of each equity asset class into four key return drivers:
1) Inflation: Our long-term inflation expectations are based on several consensus and professional long-term inflation forecasts, as well as central banks’ medium- to long-term inflation targets where inflation targeting is part of the monetary policy mandate. 2) Total Yield: We base our estimates of future total yield on an analysis of the historical payout rates and total payout yields for a given asset class. We estimate total yield for each equity asset class at both the country and sector level.
3) Growth: The growth term measures the change in corporate cash flows per share excluding the impact of repurchases. Our long-run growth expectations are based on expected growth of the asset class based on underlying fundamentals.
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. 4) Change in Valuation: We use several valuation models to estimate the fair value of equity asset classes and assumes reversion to fair value over a 10-year period. Specifically, our valuation models rely on several forward-looking measures of normalized earnings such as profit margin, return on book-equity, and inflation-adjusted average earnings over the business cycle.
For fixed-income valuation-implied returns, we use a building-block approach to forecast returns of fixed-income asset classes. The key inputs into our fixed-income model are:
1) Inflation: The inflation forecast is the same as the one used in our equity model.
2) Real Rate: The real rate of return is the expected return of cash after inflation. We forecast real rates based on an examination of long-run historical real-rate data and consideration of the macroeconomic environment for each fixed-income asset class. 3) Term Spread: We base our forecast of the term spread on the long-run shape of the yield curve, current market data, and surveys. The expected shape of the yield curve also determines our forecast of the roll return of a fixed-income asset class. 4) Credit Spread: We forecast default and recovery rates across credit ratings and industries. Our model takes into account the impact of rating upgrades and downgrades (credit migration) on credit bond prices.
For currency valuation-implied returns, the currency return is our forecast of the change in the spot exchange rate. In general, for any asset not denominated in the reference currency, the valuation-implied return of the asset is based on the expected return in local currency plus the expected currency return. The currency valuation-implied return has two main components: 1) the inflation differential between the local currency and the reference currency, and 2) the reversion of real exchange rate to its fair value.
The inflation differential is the difference between the expected inflation rate of the local and reference currencies, where the inflation forecast is based on the same methodology as the one discussed in the equity section above. In the very long run (i.e., at the unconditional horizon), we expect the inflation differential to be the sole driver of changes in the spot rate. The change in the real exchange rate is estimated based on multiple deflators (including CPI and PPI) to account for potential differences in the importance of the tradable versus non-tradable sector in a given economy. These price-based measures of real exchange rates are adjusted for differences in export quality and productivity differentials, accounting for potential differences in the value of goods not reflected in the price indexes. The expected change in the real exchange rate is generally based on the assumption that the real exchange rate will revert to a long-run average.
Risk Tolerance Questionnaire
A risk tolerance questionnaire is a tool designed to measure an investor’s selfreported perceptions of their general willingness and ability to withstand the volatility inherent in investing in capital markets. Our measure is based on three self-reported factors: (1) time horizon, (2) feelings about the trade-offs between expected returns and expected volatility, and (3) beliefs about the investor’s anticipated emotional reactions to changes in their portfolio’s value, in particular drawdowns. Using a unit weighted sum of the responses to the questions within this questionnaire, two overall scores are generated. The first is a score in regard to the investor’s time horizon, which serves as a proxy for the investor’s ability or capacity to take on risk. The second score reflects an investor’s overall risk preferences. These two scores can be used independently, and/or they can be systematically mapped to a spectrum of risk tolerance profiles ranging from conservative to aggressive. The spectrum of risk tolerance profiles and scores can be represented as distinct profiles, such as Very Conservative, Conservative, Moderately Conservative, Moderate, Moderately Aggressive, and Very Aggressive.
Ultimately, the investor and/or their financial professional has the final decision in determining the investor’s portfolio, which may differ from the risk tolerance profile or scores and be based on additional information not captured by the risk tolerance questionnaire. Our risk tolerance questionnaire is a measurement tool for helping a financial professional discover information about the investor’s time horizon, risk and return preferences, and their anticipated responses to volatility. This information can—and should—help initiate and facilitate conversations that assist the financial professional in gaining a broader understanding of the investor’s financial situation, including additional information about an investor’s assets, anticipated cash-flows, needs, goals, and other relevant information. Based on this more complete understanding of the investor, financial professionalshould be able to develop a suitable investment strategy. Risk tolerance questionnaire scores alone should not be the predominant indicator used to match an investor to a portfolio or investment products.
Although the risk tolerance questionnaire scoring process is objective, subjectivity cannot be completely eliminated when using such measurement tools. For example, some investors may struggle to understand the questions or may not have clearly defined risk preferences. There is no guarantee that this risk tolerance assessment tool or its scoring method perfectly assesses a person’s tolerance to risk or attitudes about gains and losses. In addition, although the financial professional may have directly or indirectly used the results of a risk tolerance questionnaire to inform a suggested asset allocation, there is no guarantee that the resulting asset mix appropriately reflects an investor’s ability to withstand investment risk.
Investment Analytics, Monitoring, and Comparative Analysis Reports For Institutional Clients that request investment analytics, monitoring, or comparative analysis reports, we begin the process by defining the scope of the report(s) in consultation with the Institutional Client. During this phase, various items are determined including, but not limited to, the universe of investments or asset classes from which we are to work from, the number of investments, the intended user(s) of the report(s), the type of display for the report(s), and the data points or written analysis to be included. If the Institutional Client requests ongoing monitoring of a universe of investments, we will determine how often report(s) are to be generated. We then utilize our resources to create the requested reports. Our reporting services typically are one-time projects in which we do not provide ongoing reviews or updates.
Morningstar Retirement
Custom Model Portfolios
For our Custom Model Portfolios service, we build portfolios for Institutional Clients that are typically constrained to a universe of investment options defined by our client, which include their affiliated investment products in certain situations. Our analysis includes quantitative analytics and fundamental research on the investment options available. We draw on Morningstar’s comprehensive database of fund and security analytics as well as utilizing portfolio information provided by our Institutional Client, if applicable.
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc.
We believe that asset allocation policy is one of the most important determinants of a portfolio’s risk and return characteristics over time. When constructing a model portfolio, we believe it is critical to take advantage of potential diversification benefits over the long run. The primary objective of our investment selection process is to find the best combination of investment options that will maximize alpha (excess return above a benchmark) for any given level of tracking error (risk/standard deviation of the alpha), while maintaining the appropriate target asset allocation.
We use a six-step investment process that relies on a number of complex optimization routines to find the right mix of asset classes and managers to meet our objective. We use the following six-step process to construct an investment portfolio for our custom models:
Step 1: Asset Class Inputs
Asset class performance expectations are critical in developing a diversified portfolio that aims to help meet an individual’s retirement income goal. We rely on the capital market assumptions described in the section above. We forecast expected risk and returns for each asset class under consideration by gathering and analyzing a broad range of data points, including historical data, current market information, and the correlations between asset classes.
More details on this step are provided above, in the Capital Market Assumptions section.
We use historical data for these benchmarks/proxies in an attempt to forecast the expected return, standard deviation, and cross-correlation of the asset classes. We use multiple statistical techniques to extend the returns data for all domestic equity asset classes back to 1926. Fixed income and non-U.S. equity asset classes go back to 1970, due to significant structural changes in the fixed income market that made the interest rate environment since 1970 inherently different from previous periods. We then use a "building-blocks" approach to set expected returns for asset classes. The return building blocks are based on forward-looking assumptions about an asset's underlying economic and corporate fundamentals. We use historical data to help forecast standard deviation. Since most data series only extend back to the 1970s, we use the ratio method to extend the standard deviation estimates of the shorter-lived asset class benchmarks so that they incorporate relevant economic events. The ratio method attempts to extend the standard deviation estimate for certain asset class benchmarks using a short benchmark (an asset class benchmark that does not have historical data over the full, relevant time period starting from 1926 for domestic equities and 1970 for fixed income and non-U.S. equities) and a long proxy (an index that has historical data over the full, relevant time period and is economically similar to the short benchmark). The ratio method leads to an estimate of what the standard deviation of the short benchmark would have been had it existed over the full, relevant period.
We use correlation coefficients based on the historical returns of the asset class benchmarks from 1970 to the present. Correlation coefficients must be extended for series that do not have history for the full relevant period. In an attempt to create this history, we use a sophisticated statistical process that extends asset class benchmarks that do not have complete data histories but that have a relatively high correlation coefficient with another proxy (or benchmark). This estimate approximates what the correlation coefficient between the two series might have been if both had existed over the longer period.
The capital markets assumptions that help inform the portfolio construction and wealth forecasting aspects of our advisory services are updated periodically to reflect our expectations of the capital markets. The detailed asset allocations of the target-date models are strategic in nature and are closely tied to our long-term, unconditional capital market expectations (rather than our valuation-implied returns). Moreover, the allocations do not change significantly on a year-over-year basis.
As part of our overall process, we continually search for ways to enhance our inputs, understanding of market behavior, and forecasting methodology to provide our clients with optimal advice.
Each year, we update the capital market assumptions. We focus on return forecasts over multiple time horizons: 10 years, 20 years, and long-term unconditional expected returns. The 10-year forecasts assume that various valuation metrics will return to “fair value” over a 10-year period. Similarly, the 20-year forecasts assume the return to fair value for the various valuation metrics will occur over a 20-year period. The long-term unconditional expected returns do not have a valuation component, essentially assuming the markets are fairly valued.
Step 2: Total Wealth: Building Glide Paths
Our method for creating glide paths builds on our asset-allocation expertise and applies a total wealth approach. When determining the optimal portfolio for investors, we take a holistic view of their total wealth so we can construct the most appropriate glide path based on the total value and risk attributes of the different assets owned by that investor.
Our total wealth approach considers assets that are often overlooked, like human capital and pension wealth. Human capital can be thought of as the present value of an individual’s future wage income, whereas pension wealth represents assets like Social Security retirement benefits and defined benefit pensions.
A fundamental part of our total wealth approach requires an understanding of how an individual’s wealth changes over their lifetime. For example, the total wealth of younger investors is almost always dominated by human capital. As individuals age, they tend to save money for retirement, accumulating financial assets and accruing benefits in pension plans such as Social Security. In other words, most investors convert a portion of their salary over time into financial capital by saving and accruing pension benefits, which can be used to fund retirement.
Human capital is a relatively bond-like asset. We say “relatively” because the riskiness of human capital varies across business cycles, by job skills, and by the individual’s occupation or industry. Our research suggests that, for the average investor, human capital is approximately 30% stock-like and 70% bond-like. Individuals with riskier human capital who have jobs in cyclical industries should have more conservative portfolios, and individuals with secure jobs and stable incomes can invest in more aggressive portfolios.
Younger workers typically have higher weights to human capital as a function of their total wealth. Because human capital is untradeable, from a total wealth perspective these young workers have an overweight to a bond-like asset.
That’s why their financial assets should generally be invested more aggressively to achieve a more balanced risk level from a total wealth perspective. When the relative value of human capital (as a percentage of total wealth) declines as the individual ages, financial capital often needs to be invested more conservatively to balance the risk of the total wealth.
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Risk tolerance and risk preference are often used interchangeably, but we treat them as two related, but different, concepts. Risk tolerance should be driven by risk capacity and risk preference. Risk capacity is an investor’s ability to take on risk given the composition of his or her total wealth, while risk preference is the individual’s desire to take on risk. These two types of risk combine to determine an appropriate total wealth allocation for participants.
Our approach to constructing the glide path is based on a significant number of assumptions.
At a high level, our approach to determining the glide path is based on using the financial assets (i.e., the 401k plan balance) as a “completion portfolio” that is optimized based on the other assets owned by the investor and the risk attributes of those assets (a concept referred to as background risk).
Determining the glide path effectively means determining the appropriate stock/bond split for different retirement investors, we generally refer to this process as “portfolio assignment”. Our approach towards portfolio assignment considers an individual’s total wealth, of which human capital is a dominate asset for younger individuals.
When building a glide path, we determine the optimal allocation for each retirement investor individually, and then aggregate the individual allocations into an aggregate cohort portfolio (e.g., into a 2040 Target Date portfolio).
These cohort portfolios can then be viewed in combination to form the glide path. The actual portfolio selected to represent a given cohort can be based on a number of different factors, and it is possible for us to create different glide paths for different groups of employees (e.g., hourly versus salary, union versus non-union). This enables to determine the relative difference for different employee groups and cohorts. It is worth noting that our glide path approach is not static, and the actual portfolios will change over time based on the risk characteristics of the defined contribution plan participants in that cohort.
Step 3: Asset Allocation
Using our total wealth approach, we first create the stock/bond allocation for an investor and then determine the asset class targets for the portfolio.
We use some of the most advanced asset allocation techniques to determine these weights. Three examples include: our proprietary approach to formulating capital market assumptions; how we incorporate non-normal returns and downside risk in the portfolio optimization routine; and how we build portfolios based on the specific objectives of the investor.
As the median plan participant’s overall economic situation evolves and as the participant transitions from accumulation into drawdown, the asset allocation evolves throughout their lifetime. Overall, as investors age, we believe asset allocations should have a more pronounced home country bias to help pay for their U.S. dollar denominated retirement income liability (e.g. a real inflation adjusted income in retirement) and shift from growthoriented asset classes, such as small cap equities to lower-risk, high-quality asset classes such as U.S. large cap equities. Additionally, we find intrabond allocations should gradually shift from high-return, long-duration, nominal-bond-oriented asset allocations towards a less volatile, shorterduration, real-return-oriented asset allocation.
Step 4: Analyze Investment Options
Investment screening is particularly important when working with investment menus that have many options for an investment option-level model portfolio from which to choose. Once we’ve built the asset allocation targets for the portfolio, we determine which investment options from the lineup to use to meet our asset class targets and our standards for quality. Our selection process relies on both quantitative and qualitative measures. The selection criteria we use to narrow the available universe include manager experience, performance record, manager history, alpha, style consistency, fund type, and fund fees. Here is an overview of the some of the key steps:
Once investment options pass the initial screening, we then peer group all remaining funds for further analysis. The peer grouping process begins by evaluating investments based on their Morningstar Category (if available).
Returns Based Style Analysis (“RBSA”), which looks at the “behavior” of an investment option rather than its actual holdings, is used to determine the appropriate category, because it takes a longer-term view of an investment option’s style and consistency, which is important for peer grouping. The category is validated through a series of regression analyses against sets of benchmark returns. The Morningstar Category determines which set of benchmarks is used in the initial regression. Based on this initial regression result, R-square, and benchmark exposures, the investment option may be sent for further regression analysis to better determine the appropriate peer group. If the R-square of the final regression is greater than or equal to 65, then the peer group is assigned. If through all sets of regression analysis, the investment option does not achieve an R-square of 65 or greater, then the investment option is unclassified and may not be used.
If an investment option is not a public fund or does not have a Morningstar Category, the same process is followed, but the initial set of benchmarks used in the regression analyses is a general set. Again, the investment option goes through a series of regression tests to determine the best peer group fit.
One of the quantitative inputs we use when constructing fund-level portfolios is a proprietary measurement known as forward-looking alpha (“FLA”). This measure helps us identify managers that we believe will add alpha and help drive the long-term positive performance of their portfolios.
FLA uses historical data to forecast how well an investment option is likely to perform in the near-term future. Unlike traditional methods of calculating alpha, FLA is based on alpha over two time periods (12 months and 60 months), and rewards managers for consistent performance over both the short and long term. By using these two time periods, we believe that they are better able to predict how a manager might perform in the future.
From the investment options that pass all of the prior screening criteria above, we will form a “main” list, and ultimately a “select” list of the funds that are included in the final fund optimization process. However, arriving at the select list is a two-tiered screening process. To form the main list, index funds are ranked by their tracking error. The top two funds in each peer group (with the lowest tracking error) form the main list. When there aren’t enough index funds available, the actively managed fund with the lowest tracking error is chosen instead. The two index funds on the main list are then ranked by expense ratio, and the one with the lowest expense ratio is included in the select list. Actively managed funds are evaluated based on their information ratio and FLA. The three funds in each peer group with the highest information ratio and FLA form the main list. Active funds are then ranked on R-square relative to a single peer-group primary benchmark, the number of years the fund outperformed its customized benchmark from the RBSA results over the past five years, and a customized consistency score from the RBSA results. One fund from the “highest information ratio” main list and one fund from the “highest FLA” main list, each with the highest average score, form the select list.
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In addition to using the above quantitative steps based, we may also consider qualitative measures such as an investment option’s holdings, style changes, style drift over time, manager changes, and SEC actions. These qualitative steps are mainly used when the quantitative results are questionable due to low statistical significance, quantitative results differing from expectations, or simply to ensure that the quantitative techniques are accurate. For example, this analysis may help confirm the peer group and style analysis, confirm that the processes in place that generated past returns are still relevant, and gives us an opportunity to apply human judgment to the process.
Step 5: Construct the Portfolio
Once we determine the asset class models and which funds from the plan’s lineup will be included in the portfolio, our portfolio construction team then determines what combination of these funds will help us reach our asset class weights. The team also considers the combination of funds that we think will help drive the portfolio’s performance in the future.
Using the select list, we construct the fund-level model portfolios using a proprietary alpha-tracking error optimization process. The primary objective is to find the best combination of investment options (for each of seven risk levels) that will maximize the FLA for any given level of tracking error, while hitting the asset class allocation targets.
This alpha-tracking error optimization is similar to MVO described earlier.
MVO is conducted using as inputs the expected return, standard deviation, and correlations of the asset class returns. The alpha-tracking error optimization, however, is conducted using the FLA and tracking errors of each investment option. The asset class exposures of the available investment options are determined using HBSA.
HBSA calculates the exposure of a fund based on the characteristics of each of its underlying securities. The most recent portfolio available in our database is used for this analysis. In addition, there are certain tolerances, constraints, and maximum fund allocations.
The alpha-tracking error frontier offers an entire spectrum of efficient allocations among all funds for the target asset allocation. We select the appropriate portfolio based on multiple iterations of evaluating possible outcomes, starting with a higher emphasis on alpha (i.e., portfolios with higher excess returns). If the portfolio is found to be outside these tolerances, the emphasis on alpha is lowered and a new set of portfolios is generated for evaluation.
The final step is to generate portfolios that place all the emphasis on the tracking error, to help ensure the asset allocation targets are met. If at this point the portfolios generated are not within the tolerances set, including hitting the asset allocation targets, then the investment menu would not qualify for our advice services. This multiple iterative process helps ensure that for each portfolio the investment options chosen maximize the potential portfolio alpha within the tolerances for tracking error while hitting the asset allocation targets.
We first attempt to build fund-level portfolios at the highest level of complexity/granularity. The large-, mid-, and small-cap asset classes are split into growth and value; aggregate bonds are split into long- and short-term bonds. If we are unable to hit the asset class targets at the highest complexity, then a second attempt is made at a lower complexity. The process continues until the asset class targets are met (within the tolerances), while minimizing tracking error and maximizing alpha. If an investment menu fails at all of the asset class complexities, we will not be able to construct fund-level portfolios.
Step 6: Monitor the Portfolio
Once the portfolio is constructed, we will monitor and re-evaluate the investments on an ongoing basis to ensure it is still aligned with asset allocation targets and diversification objectives.
When a new fund is added to an investment menu, we reevaluate the new investment mix and determines if new asset class and fund-level model portfolios are necessary. When a fund that is used in a portfolio is dropped from a plan menu or closes, the plan’s portfolios will be immediately rebalanced, as it would not be possible to implement the existing fund-level portfolios.
We monitor fund lineups on a quarterly basis to determine if changes are needed. We review and rebalance the fund-level portfolios quarterly. We’ve established a range of +/– 5% based on the most recently delivered fundlevel allocations to prevent large fluctuations in investment option allocations from quarter to quarter. If a more attractive alternative is present, an investment option will be phased out over time rather than in one quarter, to minimize large portfolio reallocations on a quarterly basis. This approach also helps to minimize short-term redemption fees to investors, should they exist.
All asset class model portfolios are updated annually, as we review and update the MVO inputs (expected returns, standard deviations, and crosscorrelation).
Fiduciary Services
Investment Selection for Investment Lineups
For our Fiduciary Services, the lineups we build for an Institutional Client are typically constrained to a universe of investment options (typically a subset of the entire universe of investment options publicly available for purchase by investors) defined by our client, which include their affiliated investment products in certain situations. We have no ability to choose the investment options that are made available under our Institutional Client’s products and contracts and may have more favorable opinions of certain investment options which are not included in the defined universe of investment options.
Our analysis includes quantitative analytics and fundamental research on the investment options available, holdings-based style analysis to determine an investment’s style over time. We draw on Morningstar’s comprehensive database of fund and security analytics as well as utilizing portfolio information provided by our Institutional Client, if applicable.
When analyzing investment options or managers for use in a lineup, our goal is to determine their true investment style, identify what we believe to be best-in-class managers, and identify the factors contributing to their performance and risk characteristics with the aim of assessing whether their performance appears to be sustainable over time.
We start with a propriety peer grouping analysis using the available investment options. Once investment options have been placed into their appropriate peer groups, our methodology begins with a quantitative review process. First, we apply a series of screens designed to flag funds that exhibit characteristics that are apt to hinder long-term performance in order to efficiently filter a large universe of investment options to focus our efforts on a more manageable opportunity set. Second, we use a multitude of statistics to begin to assess the overall quality of an investment option. We gather current and historical data points to evaluate investment style, structure, and performance and consider key factors that include fees, management tenure,
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We conduct further style analyses on managers that pass our initial screens to identify nuances of their strategies. Just as important as selecting qualified managers is determining how well an investment option will fit with other investments in the lineup. We want each investment to fill a distinct stylistic role within a plan lineup, so we carefully assess how it can be expected to complement other options we are recommending in adjacent styles. In general, we want to have a number of strategies investing in a specific space while employing different investment approaches.
To accomplish this, we rely largely on a holdings-based style analysis to build a picture of an investment option’s style positioning based on its underlying holdings. This means drilling down to examine the asset class exposure within the investment option. We evaluate overall diversification to ensure that the investment option is not exposed to undue security or sector specific risk. The goal is to provide a selection of investments that are likely to meet their investment mandate, but also to provide options that differ in their pursuit of that objective.
After an extensive quantitative review, we review an investment from a qualitative perspective. The purpose here is to allow our investment professionals to gain conviction in their investment thesis by developing a firm fundamental understanding of the strategy. Our professionals draw from their extensive experience in evaluating investment managers to analyze the people and process behind the investment. In doing so, our goal is to anticipate how an investment option is likely to be positioned in the future, which helps us build expectations of performance and capability of consistently playing a specific portfolio role.
In our fundamental assessment, we review a number of characteristics of the investment option and its manager that could be relevant to how well it can fill the role for which it is being considered. Those include reviewing the manager’s performance and risk record against his or her peers in the same style—not just at the manager’s current fund but also any other investment vehicles they’ve managed in the past. We analyze the subtleties of the manager’s investment process to understand what drives performance. We observe which types of markets the investment option fares best in and which types are trouble for its style. We also determine what it is about their style that explains the performance pattern.
We assess whether a manager’s investment process leads to a more aggressive or more conservative performance profile relative to its style peers, and how a manager’s process might lead to persistent over- or underweights in certain sectors. We also assess how performance, both absolute and relative to a peer group, has changed as a manager’s assets have grown.
We use many factors to evaluate funds depending on the specific situation and the questions we are trying to answer including investment sub-style, manager skill, impact of asset growth on performance, sources of investment ideas, investment decision-making process, actions in previous market environments, manager ownership, process repeatability, and performance attribution.
Our qualitative assessment of a fund will draw on Morningstar’s forwardlooking Morningstar Medalist RatingTM, when available, for additional perspective in evaluating factors such as those noted above.
Lineup Design and Construction
The area of behavioral finance has shown that investors don’t always behave rationally and that the manner in which a problem is posed can impact individual actions. We are mindful of simple heuristics employed by retirement investors in making investment-related decisions and design lineups that attempt to drive better action on the part of investors. When constructing a lineup, we consider issues around choice overload, naïve allocations, and loss aversion. We strive to select investments to fill a distinct stylistic role within a lineup, and carefully assess how each investment can be expected to fit with other investments. We strive to choose funds that are clearly different from one another, rather than similar or redundant. The goal is to establish a specific role for each investment option in the lineup that minimizes holdings overlap and maximizes diversification.
Managing Lineups
We formally review investment options in our investment lineups quarterly.
The majority of our watch-list notifications (a notice to indicate an investment option is under extra scrutiny due to factors such as performance, risk, straying from its stated investment style, or management changes) and approval changes occur on a regular quarterly schedule. However, we are always monitoring our approved investment options and if something occurs intra-quarter that we believe merits immediate action, we will take action outside of the normal review schedule.
When an investment option is removed by one of our investment professionals, a memo to the plan is produced outlining the rationale for such a decision, and for Institutional Clients of our 3(21) services, a timeframe is typically noted for a plan to make a particular change. If the plan opts out of the replacement investment option or fails to choose a replacement investment option from the approved list of investment options, the plan is terminated from the service. A negative consent process for changes can also be implemented wherein an investment option change is automatically implemented if the plan does not take any action within a specified window of time. For Institutional Clients of our 3(38) services, we will direct the plan’s provider to implement the change as detailed in the memo.
For Institutional Clients utilizing our Fiduciary Services website, notices are sent to the plan sponsor via the website portal. For those Institutional Clients who opt to own communications to plan sponsors, they are responsible for creating their own notifications, but we will provide memos outlining our rationale for any change decision.
Managed Accounts, Advice, and Guidance
Investment Process
In providing Managed Accounts and Advice, we start with the five-step investment process detailed above in the Custom Model Portfolios section to build model portfolios. In providing Guidance, we use the first two steps of the investment process described above in the Custom Model Portfolio section to create an asset allocation model. Data incorporated in the recommendations include the plan’s or product’s investment lineup and for retirement plans, plan design requirements such as plan limits and matching formulas.
For these services, the portfolios we build are typically constrained to a universe of investment options defined by our Institutional Client, which include their or Sub-Adviser’s affiliated investment products in certain situations. Our analysis will still include quantitative analytics and fundamental research on the investment options available. We draw on Morningstar’s comprehensive database of fund and security analytics as well as utilizing portfolios information provided by our Institutional Client, if applicable.
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We use a combination of model portfolios and customization as part of a larger portfolio construction and fund implementation process. For Managed Accounts and Advice, we generate hundreds of unique model portfolios (ranging from conservative to aggressive) for each retirement plan or product using a customized approach to blending traditional asset allocation models with liability-driven investing and decumulation strategies. Which asset classes and sub-asset classes are used to build these model portfolios is dependent on the specific investment lineup for each retirement plan or product. We always try to build the model portfolios with the greatest number of sub-asset classes, but this is contingent on whether the investment options available can fulfill each asset class.
Each retirement investor that receives investment advice as part of Managed Accounts or Advice is assigned into one of up to 589 model portfolios for the account we advise on (“retirement account”). The large number of model portfolios is to address the personalization that is needed by retirement investors. These model portfolios account for not only varying equity/fixedincome allocations but also how close the individual is to retirement. As the individual nears retirement, the sub-asset allocation changes to reflect a liability-driven investment overlay used in the model portfolios for a retirement investor near or in retirement. Any change within the model portfolios is reflected at the individual level as soon as the retirement investor is reevaluated each quarter.
In creating recommendations, we believe that the more information the retirement investor provides to us, the better the investment strategy we are able to deliver. We collect information the plan provider, plan sponsor, or other service provider is able to provide to us, which is pre-populated into the user interface. The retirement investor is prompted to provide any additional data that wasn’t available from other sources. After collecting those key pieces of data, the user is presented with an initial strategy as a starting point.
The retirement investor can model many scenarios by changing variables such as retirement age, desired retirement income, and savings rate. We will dynamically update the retirement investor's retirement strategy to reflect any changes made. The retirement investor is also encouraged to enter, and/or use an account aggregator to enter, additional information for savings earmarked for retirement such as out-of-plan assets or benefits for themselves or their spouse/partner (“outside assets”) in order to further personalize the recommendations. They can provide detail regarding the investments or select from one of the pre-defined investment styles. We do not provide investment specific advice on outside assets but provide an asset allocation recommendation for outside assets as a whole and will take those into consideration when determining the investment strategy for the retirement account. The portfolio recommendation for the retirement account will take into consideration the amount of advisable retirement account relative to outside assets as well as the equity/fixed composition of those outside assets.
We start with all of the available retirement investor-specific data and then makes assumptions about certain pieces of information. A retirement investor can review and refine some of these assumed data points through the user interface. These assumptions can have a significant impact on the strategies we will create for them and are related to social security income, salary growth, retirement age, inflation rates, estimated taxes, retirement income goal, and risk capacity. We combine this information with other factors into a proprietary software program that can provide investment recommendations and a projection of different outcomes. Using this model, we develop an investment strategy tailored to each retirement investor’s investment goals.
For those retirement investors that are accumulating for retirement, our investment strategy is generally based on information such as their retirement account balance, expected retirement age, contribution rate and other preferences. If a retirement investor has already retired, and our Institutional Client makes available our In-Retirement services, our strategy is based on information such as their current account balance, additional cash flows and life expectancy. This retirement strategy may include some or all of the following:
Retirement Income Goal (accumulation phase). We define the retirement income goal as the projected amount of money that the retirement investor will need during retirement. We calculate this amount based on current income, adjusted to reflect the estimated dollar value at retirement age. Typically, we use an amount equal to 100% of take-home pay, however, some plan or service providers request we use a different rate. We then project the value of that amount at retirement age to determine the retirement income goal. A retirement investor using our user interface has the option to change this projected retirement income amount.
Income Outlook (accumulation phase). We define the income outlook as a projection of the annual income that the retirement investor may receive during retirement. We base this on an annualized view of the investment wealth accumulated, combined with social security benefits and any pension or other income the retirement investor might receive.
Total Retirement Income (in-retirement phase).For those plans that offer our In-Retirement service, we define total retirement income as the projected amount of money, typically at some level of probability that the retirement investor can expect to receive on an annual basis in order to maintain income throughout retirement.
For our Advice services, many of our Institutional Clients offer a similar experience to retirement investors either through our user interface or their proprietary user interface.
We believe in long-term strategic asset allocation based on an individual’s risk capacity. Changes in an investor’s financial situation, such as the addition of outside retirement accounts, pension benefits, or contribution rates, can result in a change to their model portfolio assignment. In addition, changes to their personal situation, such as the addition of a spouse or partner or a different retirement age, could also impact the model portfolio assignment.
For Managed Accounts, we will typically review portfolios on a quarterly basis to determine if market shifts require a rebalancing of the portfolio. Retirement investor wealth re-forecasting occurs on an annual basis for our Managed Accounts service. For Advice, we encourage retirement investors to re-enter our user interface on a periodic or as-needed basis, in order to review their information and receive an updated strategy. At a minimum, we recommend that a retirement investor’s portfolio is rebalanced on an annual basis. At this point, the retirement investor is one year closer to retirement, and we will shift them along their glide path.
Our projections are provided based upon an investor’s personal financial situation using our total wealth approach and an optional risk tolerance questionnaire. We use MVO, resampling the mean-variance outputs using a Monte Carlo simulation, and our process incorporates liability-relative optimization. We solve for a specific probability of success when determining the sustainable retirement income. The Monte Carlo simulation uses our longterm capital market assumptions when projecting the future returns for the various asset classes. For risk capacity, we use the FinaMetrica risk profiling
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. methodology, which is built using ‘psychometrics’, a combination of psychology and statistics. The retirement investor’s result will be a score ranging from 0 (very low risk group) to 100 (very high risk group). This score accounts for a 20% weighting in our target equity determination for the retirement investor’s investment strategy, with the other 80% weighting coming from our total wealth determination.
Approximately 20,000 cases are used to routinely test engine functionality to help ensure our recommendations are in line with our expectations. The test data consists of real retirement investor information as well as generated cases, and covers a gamut of possible ages, balances, salaries, and other optional data points. Running these cases and analyzing the results help ensure we are confident in the advice we provide retirement investors.
Key Assumptions
Social Security - We can incorporate Social Security for both the retirement investor and their spouse. This can be calculated using an estimate based on calculations/formulas from the Social Security Administration or input by the retirement investor. To calculate the estimate, a retirement investor/spouse must have 35 years of contributions. If the retirement investor/spouse has more than 35 years of service remaining, all projections are forward-looking.
If the retirement investor/spouse has fewer than 35 years of service remaining, the difference in contributions is back-calculated. Social Security payments are inflated using a simulated cost-of-living allowance designed to replicate the actual Social Security Administration formulas and are applied at the maximum benefit age as defined by the Social Security Administration.
Retirement investors can override the estimate by including information from their Social Security statement. In addition to standard payments, we account for reduction in payments while working in retirement, increases in benefits for the spouse 50% rule and increased benefits for the surviving spouse 100% rule. The program assumes the retirement investor/spouse completes all applications required to collect the maximum benefit. We treat Social Security as similar to income from fixed-income investments. We also take Social Security into consideration while analyzing income replacement.
We default to the age at which the retirement investor will receive full benefits from the Social Security Administration. Retirement investors can adjust the benefit amount and start age if desired, however, the start age must be between the ages of 62 and 70.
Salary Growth - To estimate future salary, we use a salary growth curve based on academic research rather than assuming a single, fixed growth rate. This curve takes into account the fact that salaries tend to grow most rapidly for young employees, peak around age 51, and then slightly decline later in life.
Retirement Age - We assume a default retirement age of 67, or the retirement investor’s current age plus one year if they are older than 67.
Retirement investors have the option to change this to a different retirement age.
Income Projections – A retirement investor’s income projection is the level of annual income we project the retirement investor has at least a 70% chance of achieving and is calculated for both the retirement investor’s current strategy and our proposed strategy. We use forecasts for investment returns, portfolio risk, and correlation for each of the 12 asset classes and an average expense ratio for each asset class to estimate investment fees. The projections consider different scenarios for life span, based on standard published mortality tables (based on the Society of Actuaries Individual Annuity Mortality (IAM) table). We assume that the retirement investor’s risk capacity (and corresponding asset allocation) will change over time, generally growing more conservative as they approach retirement, and that their savings rate will not change.
Estimated Tax - We estimate federal and state income, and capital gains taxes based on marginal tax rate calculations. Tax data is updated annually based on U.S. Internal Revenue Code (IRC) and similar state tax data. We use income data for the retirement investor, as well as for a spouse/partner, to estimate federal and state tax exposure. Tax exposure is appropriately reduced for pretax deferrals, tax-deferred capital gains, and yield and distribution of Roth proceeds. Based on the information we know about the retirement investor, we provide an estimate of tax exposure, but may not include all tax considerations.
Inflation Assumptions - When projecting the growth of various income sources and expenses, we use a variety of different inflation rates. These rates are reviewed and updated annually by our research team. Different inflation rates are used for different projections and major expenses. We believe that our multifaceted approach to calculating inflation results in more realistic and more accurate projections compared with using one set rate.
IRS Limitations and Application of Penalties - We incorporate all IRS contribution limits, eligibility requirements, and withdrawal penalties into the retirement strategies.
Brokerage Accounts - Some plan sponsors allow retirement investors to maintain a brokerage account within their retirement plan. If allowed this option, the retirement investor will be responsible for managing and monitoring those assets. We do not manage brokerage account assets; however, if the retirement investor provides us with detailed information on the holdings within the brokerage account, our methodology will consider these holdings in developing an appropriate investment strategy for their retirement account. If the retirement investor does not provide detailed information, our methodology will assume that the balance in the brokerage account is 45% stocks and 55% fixed income.
Our Advisor Managed Accounts methodology is the same as our Managed Accounts and Advice methodology described above, except that we do not use our Custom Model Portfolios investment process to build the mode) portfolios. The model portfolios are built by our Institutional Client; with the exception of Sub-Advisers, we do not review their portfolios, nor do we have the ability to make any changes to those portfolios. If applicable under Advisor Managed Accounts, the plan sponsor or product provider is responsible for choosing the Sub-Adviser. However, we must agree to engage and are responsible for ongoing monitoring of the Sub-Adviser. In making portfolio recommendations, we are limited to those portfolios created by the Sub-Adviser but have discretion to reject or edit those portfolios if we feel necessary. The model portfolios created by a Sub-Adviser will typically consist of associated investment products in which they receive compensation based on the amount of assets invested. These investment products generally must be added to the retirement plan or product lineup by the plan sponsor or product provider. You should be aware that the use of affiliated investment products gives the Sub-Adviser an incentive to build model portfolios using those investments.
Enrollment
Plan and product providers have the option to make one or more websites available to retirement investors for enrollment in Managed Accounts. You should be aware that the streamlined version of our enrollment process does not consider all information relevant to a retirement investor’s financial situation, including some of the information discussed in this section. (The
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. streamlined process takes into account age, retirement plan or product type, and the balance, investment allocation, and contributions for their retirement account as provided by the retirement plan or product provider.) Retirement investors can access our full enrollment process at any time by logging into the Morningstar® Retirement ManagerSM platform through their Plan or product provider’s website. The full enrollment process allows retirement investors to provide us with additional information about their retirement situation and goals so that we can further customize their retirement strategy.
If the retirement investor has additional retirement assets outside their retirement account, have a spouse or partner they’d like us to consider, want to restrict certain securities from being used in their retirement account, or want to change suggestions made in the streamlined enrollment process (i.e., savings rate), or if they want to see how changes would impact their retirement strategy, we encourage them to use our full enrollment process instead of the streamlined process.
Personalized Target-Date Fund Service
With the Personalized Target-Date Fund Service, we start with a basic set of retirement investor inputs to generate a personalized asset allocation target.
This target is then fulfilled by allocating to target-date funds available within the retirement investor’s retirement plan or product lineup. Our choice of funds is constrained to the universe of the retirement plan or product’s chosen target-date fund series.
Risk of Loss and Strategy Risk
Investments in securities are subject to market risk, risk of loss, and other risks and will not always be profitable. There is no assurance or guarantee that the intended investment objectives of our recommendations will be received. We do not represent or guarantee that our investment recommendations can or will predict future results, will successfully identify market highs or lows, or will result in a profit or protect clients from loss. Past performance of a security may or may not be sustained in the future and is no indication of future performance. A security’s investment return and an investor’s principal value will fluctuate so that, when redeemed, an investor’s shares may be worth more or less than their original cost. We are unable to predict or forecast market fluctuations or other uncertainties that may affect the value of any investment.
Asset allocation and diversification are investment strategies which spread assets across various investment types for long-term investing. However, as with all investment strategies, these strategies do not ensure a profit and do not guarantee against losses.
Capital market assumptions are forecasts which involve known and unknown risks, uncertainties, and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance, or achievements expressed or implied by those projections for any reason. Past performance does not guarantee future results.
Income projections used in our Guidance, Advice, and Managed Account services are based on hypothetical performance data and do not represent actual or guaranteed results. Projections may vary over time and with each use of our service.
Our recommendations are made without taking into consideration potential tax consequences and we do not provide tax advice. Potential tax consequences may exist. We encourage you to consult with a tax professional about these and other tax consequences.
Information Sources
Our global resources used in the formulation of our advisory services go down to our roots—the data and analysis from Morningstar that form the base of our investment process. This expansive, in-house network of global data and investment analysis spans asset classes and regions to help drive timely new ideas. Morningstar or its affiliates have more than 800 analysts and make data available on more than 700,000 investment options and 3.5 million privately-held companies. The extensive data, analysis, and methodologies from these resources, along with external research reports, data, and interviews with investment managers are combined with financial publications, annual reports, prospectuses, press releases, and SEC filings to serve as the basis of our primary sources of information.
For some of our services, we combine this information with other factors— including actuarial data, stock market exposure, probability analysis, and mean-variance optimization—into a proprietary software program to analyze a complex set of market data and variables that results in an advanced model that can provide investment recommendations and a projection of different outcomes.
Security Type Risks
Mutual Funds and Collective Investment Trusts
Investments in mutual funds and collective investment trust (CITs) funds involve risk, including loss of principal as a result of changing market and economic conditions and will not always be profitable.
A collective investment trust may also be called a commingled or collective fund. CITs are tax-exempt, pooled investment vehicles maintained by a bank or trust company exclusively for qualified plans, including 401(k)s, and certain types of government plans. CITs are unregistered investment vehicles subject to banking regulations of the Office of the Comptroller of the Currency (OCC), which means they are typically less expensive than other investment options due to lower marketing, overhead, and compliance-related costs. CITs are not available to the general public but are managed only for specific retirement plans.
Money Market Funds
A money market fund may impose a fee upon the sale of shares or may temporarily suspend your ability to sell shares if the fund’s liquidity falls below a required minimum because of market conditions or other factors. An investment in a money-market vehicle is not insured or guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) or any other government agency. For most money market funds, their sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time. Although some money market funds seek to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. It is possible to lose money by investing in money market funds.
Stable Value Funds and Guaranteed Investment Contracts (“GICs”) The interest rate on a stable value fund or GIC is typically only guaranteed for a certain amount of time and may vary with changing market conditions.
Withdrawal fees or penalties, sometimes substantial, may be charged if you decided to move money out of a stable value fund or GIC. Stable value funds and GICs are less likely to provide long-term protection against inflation, as compared to other options.
Exchange-traded Funds
ETFs, like all investments, carry certain risks that may adversely affect their net asset value, market price, and/or performance. An ETF’s net asset value
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. (NAV) will fluctuate in response to market activity. Because ETFs are traded throughout the day and the price is determined by market forces, the market price you pay for an ETF may be more or less than the NAV. Because ETFs are not actively managed, their value may be affected by a general decline in the U.S. market segments relating to their underlying indexes. Similarly, an imperfect match between an ETF’s holdings and those of its underlying index may cause its performance to not match the performance of its underlying index. Like other concentrated investments, an ETF with concentrated holdings may be more vulnerable to specific economic, political, or regulatory events than an ETF that mirrors the general U.S. market.
Annuities
An annuity is a tax-deferred investment structured to convert a sum of money into a series of payments over time. Annuity contracts have limitations and are not viewed as short-term liquid investments. An insurance company’s fulfillment of a commitment to pay a death or living benefit, a schedule of payments, a fixed investment amount guaranteed by the insurance company, or another form of guarantee depends on the claims-paying ability of the issuing insurance company. Any such guarantee does not affect or apply to the investment return or principal value of the separate account and its subaccount(s). The financial ratings quoted for an insurance company do not apply to the separate account and its subaccount(s). The insurance company offering an annuity will charge several fees to investors, including annual contract charges that compensate the insurance company for the cost of maintaining and administering the annuity contract, mortality and expense risk charges based on a percentage of a subaccount’s assets to cover costs associated with mortality and expense risk, and administration fees that are based on a percentage of a subaccount’s assets to cover the costs involved in offering and administering the subaccount. An annuity investor can also be charged a front-end load by the insurance company on their initial contribution, ongoing fees related to the management of the fund, and surrender charges (which can be substantial) if the investor makes a withdrawal prior to a specified time. If the annuity subaccount is invested in a money-market fund, the money market fund is not FDIC-insured, may lose money, and is not guaranteed by a bank or other financial institution.
Annuities can be complicated, and an investor should carefully read the insurance company’s offering material to understand how a specific annuity’s return will be determined.
Variable Annuities have a rate of return that varies with underlying investment options in the market, and do not include a guarantee from the insurance company that you will earn a return.
Fixed annuities have a predetermined rate of return an investor earns and a fixed income payout that is guaranteed by the issuing investment company and may be immediate or deferred. Payouts may last for a specific period or for the life of the investor. Investments in a deferred fixed annuity grow taxdeferred with income tax incurred upon withdrawal, and do not depend on the stock market. Fixed annuities typically do not have cost-of-living payment adjustments and are regulated by state insurance commissioners.
Fixed indexed annuities, also called equity index annuities, are a combination of the characteristics of both fixed and variable annuities. Fixed indexed annuities offer a predetermined rate of return like a fixed annuity, but they also allow for participation in the stock market, like a variable annuity. Fixed indexed annuities are typically risker and offer the potential for greater return than fixed annuities, but less so than a variable annuity. Investments in a fixed indexed annuity grow tax-deferred with income tax incurred upon withdrawal and are regulated by state insurance commissioners.
Target-Date Funds
An investment in a target date fund is not guaranteed, and investors may experience losses, including losses near, at, or after the target date. There is no guarantee that a target-date fund will provide adequate income at and through an individual’s retirement.
Methodology Updates
Our CMA, asset allocation, and investment committees typically meet on a periodic basis. These committees have oversight for their respective areas of expertise. If any of these committees makes an adjustment, the changes are thoroughly reviewed and tested before being implemented. These changes are manifested in retirement investor portfolios through expected future returns, and asset allocations. CMAs are updated on an annual basis. We also update our methodologies with updated tax limits on an annual basis. Asset allocation and advice methodologies are updated only when there is a regulatory change that requires an update or when research we have completed warrants enhancing our asset allocation process or advice methodology.
Item 9. Disciplinary Information
We are required to disclose all material facts regarding any legal or disciplinary events that would influence a potential client to engage us. We do not have any material legal or disciplinary events to disclose.
Item 10. Other Financial Industry Activities and Affiliations Morningstar Investment Management is a wholly owned subsidiary of Morningstar. Our offerings center on advisory services in our core capabilities of asset allocation, investment selection, and portfolio construction that we offer to individual investors and institutions (including the services described in this brochure.)
Our portfolio managers and their team members who are responsible for the day-to-day management of our portfolios are paid a base salary plus a discretionary bonus. The bonus is fully or partially determined by a combination of the employee’s business unit’s overall revenue and profitability, Morningstar’s overall annual revenue and profitability, and the individual’s contribution to the business unit. For most portfolio managers and their team members that work on Morningstar Wealth’s Portfolios, part of their bonus is also based on select Portfolio investment performance and risk metrics versus both a corresponding benchmark over specified three-, five-, and/or seven-year periods and appropriate peer groups. Benchmarks are used as a measure of investment performance and are chosen by senior personnel and approved by the Regional Investment Committee, which is chaired by the regional Chief Investment Officer. To mitigate the conflict of interest that could arise from partially basing an employee’s bonus on performance of a select Portfolio or Portfolios, all investment decisions made within a Portfolio by an individual portfolio manager must be peer reviewed by the broader regional team of portfolio managers. In addition, the Regional Investment Committee reviews strategy performance on a quarterly basis.
For many of our advisory services, the universe of investment options from which we make our investment selections is defined by our Institutional Client. In some cases, this universe of investment options includes proprietary investment options of the Institutional Client. To mitigate any actual or potential conflict of interests presented by this situation, we subject all investment options to the same quantitative and qualitative investment selection methodology, based on several factors, including performance, risk, and expense so that the proprietary nature of an investment option does not influence our selection.
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc.
We may provide consulting or investment management services to Institutional Clients that offer registered or pooled investment products, such as mutual funds, variable annuities, collective investment trusts, or model portfolios. To mitigate the conflict of interest presented by our role in these investment products, we exclude such investment products from the universe of investment options from which we make our recommendations to other clients.
We receive compensation for our research and analysis activities (e.g., research papers) from a variety of financial institutions including large banks, brokerage firms, insurance companies, and mutual fund companies. In order to mitigate any actual or potential conflicts of interest that may arise from this service, we ensure that our research and analytical activities are nonbiased and objective given our business relationships. Employees who provide research and analysis for clients are separate from our sales and relationship manager staff in order to mitigate the conflict of interest that an employee may feel pressure to present results in such a way as to maintain existing or gain new business. In addition, as noted above, all investment decisions for Morningstar Wealth’s Portfolios service must be peer reviewed by fellow portfolio managers, which mitigates the conflict of interest by providing checks and balances so that no employee can act unilaterally in making recommendation decisions. Methodology updates which impact investment recommendations or decisions for Morningstar Retirement’s services are peer reviewed by the Morningstar Retirement Investment Policy Committee. This serves to mitigate conflicts of interest by providing checks and balances so that no employee can act unilaterally in making recommendation decisions.
Morningstar Investment Management is registered as a Commodity Pool Operator with the Commodity Futures Trading Commission. Some of Morningstar Investment Management’s employees are registered with the National Futures Association as principals or associated persons.
Our investment professionals provide portfolio construction and ongoing monitoring and maintenance for the portfolios within the MorningstarWealth Platform and to third-party Institutional Clients on Morningstar Investment Services’ behalf. While the same or similar portfolios are offered by us to our Institutional Clients, we do not believe these responsibilities create any material conflicts of interest for our clients. In order to mitigate any perceived conflict of interest, when we offer discretionary services for Morningstar Wealth’s Portfolios, transactions for our clients are placed at the same time as transactions for Morningstar Investment Services’ discretionary clients as part of block trades. We have procedures in place to ensure that trades are allocated in such a manner as to not favor one client over another. When we offer Portfolios on a non-discretionary basis to third-party Institutional Clients, our Institutional Clients receive trade recommendations just after trades are placed for discretionary clients, due to our heightened fiduciary responsibilities to our discretionary clients. In addition, all non-discretionary clients are notified of transaction recommendations after the close of the trading day, so that no one such client has an advantage over another.
Institutional Clients using Morningstar Wealth Portfolios are eligible to participate in our Affinity Program in which qualifying financial professionals receive a one-year license for Morningstar® Advisor WorkstationSM, Morningstar FundInvestor and Morningstar ETFInvestor at no cost to the financial professional. Financial professionals with more than $20M of assets invested in accordance with Morningstar Wealth Portfolios each year are eligible for a one-year, no cost subscription.
Upon expiration of the subscription, if the financial professional continues to meet the asset requirements, the subscription will be renewed for an additional year. If the financial professional does not meet the asset requirements, he or she will be given a one-year grace period prior to removal from the Affinity Program. Morningstar Advisor Workstation was chosen for the Affinity Program as we believe they offer financial professional data, tools, and/or reports that can support them in their role. Pricing for Advisor Workstation varies depending on such items as functionality level but is estimated to be valued at up to $4,750 per year. Pricing for Morningstar newsletters ranges from $145 - $165 per year.
When we, along with Morningstar and/or our other affiliates offer services to the same client, we have the option to enter into a bundled agreement with the client that encompasses all or part of those services. Additional fee(s) for such product(s) or service(s), if required, will be set forth in our agreement with the client. In these situations, clients pay a fee directly to us and each such affiliate for its products or services or as part of a joint fee schedule which encompasses all services.
Affiliations – Registered Entities
Morningstar has various subsidiaries across the globe that are each registered with the applicable regulatory body or bodies in that country to provide investment management or other advisory services. As described earlier in this brochure, we share resources with these various subsidiaries.
One subsidiary, Morningstar Investment Services LLC, is our subsidiary and is also an investment adviser registered under the Advisers Act. Morningstar Investment Services is additionally registered with the Securities and Exchange Commissions as a broker-dealer and a member of the Financial Industry Regulatory Authority (FINRA). Morningstar Investment Services offers model portfolios and separately managed accounts through its role as the sponsor of an investment advisory program known as the Wealth Platform and through third-party financial institutions, plan sponsor services, and retirement plan services for institutional and retail clients.
In some cases, our senior management members have management responsibilities to these other affiliated entities. We do not believe that these management responsibilities create any material conflicts of interests for our clients.
Morningstar Wealth and Morningstar Retirement have set up service teams composed of employees of our affiliate and located at our affiliate’s office in Mumbai, India. In addition, Morningstar Retirement has a team composed of employees of our affiliate located at our affiliate’s office in Toronto, Canada.
We compensate our affiliates for services rendered via intercompany charges. The services and compensation will be governed by intercompany agreements. This compensation will likely be lower than compensation negotiated with non-affiliated firms for the same or similar services. To mitigate any conflict of interest between us and our affiliates we have established dual reporting lines for employees on these teams so that such employees report up to employees of Morningstar Investment Management.
We’ve also established information security boundaries and technology separation to protect our non-public information and Morningstar’s compliance department monitors the personal trading activity of these employees.
Morningstar Research Services LLC is also a wholly owned subsidiary of Morningstar and an investment adviser registered under the Advisers Act.
Morningstar Research Services’ offerings center around the production of investment research reports and investment consulting services to financial institutions/institutional investors who themselves are registered with and
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. governed by a regulatory body. Conflicts of interests between us and Morningstar Research Services are mitigated by such things as the maintenance of separate legal entities and dual reporting/organization lines, and the utilization of physical (i.e., separate office “neighborhoods”) and technological separation. Morningstar Research Services also maintains a committee structure so as to limit any unilateral decisions. Morningstar’s compliance department monitors the personal trading activities of Morningstar Research Services’ employees.
In some situations, we engage Morningstar Research Services to perform investment manager due diligence and/or selection services on our behalf as a sub-adviser or consultant. The notification to and authorization by the Institutional Client to our engaging Morningstar Research Services as a subadviser is addressed in our agreement with the Institutional Client. On such occasions, we compensate Morningstar Research Services for services rendered via an intercompany charge. The services and compensation will be governed by an intercompany agreement. This compensation will likely be lower than compensation negotiated with non-affiliated financial institutions/institutional investors for the same or similar services.
Morningstar Research Services’ employees who are engaged to provide manager due diligence and/or selection services are prohibited from using non-public/confidential information obtained because of their engagement in its investment research reports and/or investment consulting services to clients, including us.
Morningstar Research Services provides information to the public about various securities, including managed investments like open-end mutual funds and ETFs, which include written analyses of these investment products in some instances. Although we use certain products, services, or databases that contain this information, we do not participate in or have any input in the written analyses that Morningstar Research Services produces. While we consider the analyses of Morningstar Research Services, our investment recommendations are based on our decisions in regard to the investment product.
Morningstar Research Services may issue investment research reports on securities we hold in our portfolios or recommend to our clients, but they do not share any yet-to-be published views and analysis and/or changes in estimates (i.e., their confidential information) with us on these securities. In making investment decisions or recommendations, we use Morningstar Research Services’ publicly available analysis as part of our review process and do not have access to their analysis prior to its public dissemination. We mitigate any actual or potential conflicts of interest that could arise from the access of their analysis prior to publication through measures such as informational barriers (both physical and technological), maintaining separate or dual organizational reporting lines, and monitoring by the compliance department.
Morningstar Research Services prepares qualitative analysis on separately managed accounts and model portfolios. To mitigate conflicts of interest, Morningstar Research Services does not prepare qualitative analysis on, nor recommend any Morningstar separately managed account or model portfolio we create and manage.
Some of Morningstar Research Services’ clients are sponsors of funds or associated with other securities that we may recommend to our Institutional Clients. We mitigate any actual or potential conflicts of interests resulting from this fact through such measures as informational barriers (both physical and technological), maintaining separate or dual organizational reporting lines, and monitoring by the compliance department. In addition, we do not factor in the relationship between Morningstar Research Services and their clients when analyzing investments or making recommendations.
Morningstar Investment Management serves as an investment adviser to investment companies registered under the Investment Company Act of 1940, as amended, and to other pooled investment products. To mitigate conflicts of interest, Morningstar Research Services does not prepare qualitative analysis on nor recommend as part of their investment consulting services any investment company we are an investment adviser or subadviser to.
Affiliations – Morningstar, Inc.
Our parent company, Morningstar, Inc., is publicly traded (Ticker Symbol:
MORN). We may recommend an investment product that holds a position in publicly traded shares of Morningstar’s stock. Such an investment in Morningstar’s stock is solely the decision of the investment product’s portfolio manager. We have no input into a portfolio manager’s investment decision nor do we require that the investment products we recommend own shares of Morningstar. An investment product’s position in Morningstar has no direct bearing on our investment selection process. We mitigate any actual or potential conflicts of interest by not factoring Morningstar’s publicly traded stock into our qualitative or quantitative analysis nor in our recommendations.
Morningstar offers various products and services to the public. Some of Morningstar’s clients are service providers (e.g., portfolio managers, advisers, or distributors) affiliated with a mutual fund or other investment option. We may have a contractual relationship to provide consulting or advisory services to these same service providers or we may recommend the products of these service providers to our advisory clients. To mitigate any actual or potential conflicts of interest, we do not consider the relationship between Morningstar and these service providers when making recommendations. We are not paid to recommend one investment option over another, including products of service providers with which Morningstar has a relationship.
Morningstar provides information to the public about various investment products, including managed investments like open-end mutual funds and ETFs. In some cases, this information includes written analyses of these investment products. Although we use certain products, services, or databases of Morningstar, we do not have any decision-making input in the written analyses that Morningstar provides its licensees. While we consider the analyses of Morningstar, our investment recommendations are oriented to the mandates of the investment products in question.
Morningstar hosts educational events and conferences and, in some instances, provides us with the opportunity to suggest invitees or offer (proactively or upon request) discounted or waived registration fees. We mitigate any actual or potential conflicts of interest this introduces by using pre-defined criteria to select Institutional Clients for these opportunities.
Morningstar offers various products and services to retail and institutional investors. In certain situations, we recommend an investment product that tracks an index created and maintained by Morningstar. In such cases, the investment product sponsor has entered into a licensing agreement with Morningstar to use such index. To mitigate any conflicts of interest arising from our selection of such investment products, we use solely quantitative criteria established by our advisory client to make such selection, or, in the alternative, Morningstar’s compensation from the investment product sponsor will not be based on nor will it include assets that are a result of our recommendation to our advisory client to invest in those investment products.
In other cases, some of Morningstar’s clients are sponsors of funds that we
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. recommend to our clients. Morningstar does not and will not have any input into our investment decisions, including what investment products will be recommended for our recommended portfolios. We mitigate any actual or potential conflicts of interest by imposing informational barriers (both physical and technological), maintaining separate organizational reporting lines, and monitoring by the compliance department. In addition, we do not factor in the relationship between Morningstar when analyzing investments or making recommendations. We mitigate any actual or potential conflicts of interests resulting from that by not producing qualitative analysis on any such exchange-traded fund as well as imposing informational barriers (both physical and technological), maintaining separate organizational reporting lines between, and monitoring by the compliance department.
In some instances, we create portfolios that track an index created and maintained by Morningstar. Morningstar does not and will not have any input into our investment decisions, including what investment products will be included in our portfolios. We mitigate any actual or potential conflicts of interest by imposing informational barriers (both physical and technological), maintaining separate organizational reporting lines, and monitoring by the compliance department.
Morningstar has and maintains accounts which they invest in accordance with investment strategies created and maintained by us. Those investment strategies are deployed using equity securities. As we have discretion over these accounts, Morningstar’s accounts are traded at the same time as our and Morningstar Investment Services’ other discretionary client accounts in order to ensure that Morningstar’s accounts are not treated more favorably than our client accounts. Some of Morningstar’s accounts are used as the subject of newsletters offered by Morningstar. In order to ensure that Morningstar’s newsletter subscribers are not treated more favorably than our clients, which would result in a breach of our fiduciary duty, we do not report trades in Morningstar’s accounts invested in our strategies to newsletter subscribers until after our client accounts have been traded or our nondiscretionary clients have been notified.
As a wholly owned subsidiary, we use the resources, infrastructure, and employees of Morningstar and its affiliates to provide certain support services in such areas as technology, procurement, human resources, accounting, legal, compliance, information security, and marketing. We do not believe this arrangement presents a conflict of interests to us in terms of our advisory services. Employees of Morningstar that provide support services to us have the option to maintain their Financial Industry Regulatory Authority (“FINRA”) security licenses under Morningstar Investment Services’ limited broker/dealer registration, if appropriate for their current job responsibilities.
We believe no conflict of interest exists due to the maintenance of these security licenses.
We have the option to make our clients aware of various products and services offered by Morningstar or its affiliates. We do not receive compensation for that introduction. Morningstar and its affiliates also have the option to make their clients aware of various products and services offered by us. Morningstar and its affiliates do not receive any compensation from us for that introduction, unless it falls under a solicitation arrangement, as described in Item 14 below.
Morningstar Wealth, through Morningstar and its subsidiaries, make available products such as: (i) the Morningstar Wealth Platform; (ii) Morningstar Funds Trust, (iii) Morningstar Office℠, Morningstar’s RIA portfolio software service; (iv) Morningstar® ByAllAccounts®, Morningstar’s investment data aggregation service; and (v) Morningstar.com®, Morningstar’s individual investor site offering. Daniel Needham, our co-president, has management responsibilities for Morningstar Wealth. We do not believe that these management responsibilities create any material conflicts of interests for our clients, but we mitigate any actual or potential conflicts of interests resulting from that by imposing informational barriers where appropriate and undertaking compliance monitoring.
Affiliations – Morningstar, Inc. Subsidiaries
Equity and manager research analysts based outside the United States are employed by various wholly owned subsidiaries of Morningstar. These analysts follow the same investment methodologies and process as Morningstar Research Services, as well as being held to the same conduct standards. As a result, we do not believe this structure causes actual or a potential for a conflict of interest.
Affiliations – Credit Rating Agency
We are affiliated with the Morningstar DBRS group of companies, which include DBRS, Inc., DBRS Limited, DBRS Ratings GmbH, and DBRS Ratings Limited. DBRS, Inc. is registered with the Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). Morningstar DBRS’ companies are also registered with and governed by applicable regulatory body or bodies in other countries around the globe. In our analysis of certain securities, we use the publicly available credit rating and analysis issued by Morningstar DBRS. Because of our use of Morningstar DBRS’ ratings and analysis is limited to that which is publicly available, we do not believe there is an actual or potential conflict of interest that arises from such use.
Item 11. Code of Ethics, Participation or Interest in Client Transactions and Personal Trading
Code Of Ethics
We have in place a Code of Ethics pursuant to Rule 204A-1 under the Advisers Act (“Code of Ethics”). Our Code of Ethics strives to uphold the highest standards of moral and ethical conduct, including placing our clients’ interest ahead of our own. Our Code of Ethics covers all our officers and employees as well as other persons who have access to our non-public information (collectively “Access Persons”). Our Code of Ethics addresses such topics as professional and ethical responsibilities, compliance with securities laws, our fiduciary duty, and personal trading practices. Our Code of Ethics also addresses receipt and/or permissible use of material non-public information and other confidential information our Access Persons may be exposed and/or have access to given their position. The Code of Ethics is provided upon hire and at least annually thereafter and at each time, the Access Person must certify in writing that she or he has received, read, and understands the Code of Ethics and that they agree to or have complied with its contents.
A copy of our Code of Ethics is available to existing and prospective clients by sending written request to [email protected].
Interest In Client Transactions
Our Access Persons have the option to maintain personal investment accounts and purchase or sell investments in those accounts that are the same as or different from the investments we recommend to clients. Our Code of Ethics is designed to ensure that Access Persons’ personal trading activities should not conflict with our advisory activities or the timing of our recommendations and will not interfere with our clients’ interests, while allowing our Access Persons to invest in their own accounts.
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc.
We do not engage in principal transactions (transactions where we, acting in our own account or in an affiliated account, buy a security from or sell a security to a client’s account) nor do we engage in agency cross transactions (transactions where we or our affiliate executes a transaction while acting as a broker for both our client and the other party in the transaction).
Interest In Securities That We May Recommend
Morningstar Investment Management has and maintains a number of seed accounts (accounts used to establish a strategy we offer or track), many of which follow strategies we offer to clients. We place block trades for our accounts, therefore trade requests for our seed accounts are placed at the same time as trades are placed for those client accounts invested in the same strategy and for which we have discretion. Block trades are allocated in such a manner as to ensure that our seed accounts do not receive more favorable trades than our clients’ accounts. Client accounts that we manage on a discretionary basis and thus, our seed accounts, are traded before we provide model portfolio trade recommendations to other clients using our model portfolios. However, our model portfolio clients receive trade recommendation after the close of the trading day, so that no one model portfolio client is favored over another.
Personal Trading By Access Persons
Our Code of Ethics is designed to ensure that Access Persons’ personal trading activities does not interfere with our clients’ interests. While our Access Persons have the option to maintain personal investment accounts, they are subject to certain restrictions. Our Code of Ethics includes policies designed to prevent Access Persons from trading based on material nonpublic information. Access Persons in possession of material non-public information are prohibited from trading in securities which are the subject of such information and tipping such information to others. In certain instances, we employ information blocking devices such as restricted lists to prevent illegal insider trading. Morningstar’s compliance department monitors the activities in the personal accounts of our Access Persons (and any accounts in which they have beneficial ownership) upon hire and thereafter. Access Persons are required to pre-clear IPO, initial digital coin offerings, and private placement transactions with Morningstar’s compliance department.
Item 12. Brokerage Practices
Where we exercise investment discretion, we will generate trade instructions for each portfolio that requires investment, reallocation or rebalancing and forward those instructions to the appropriate institution as designated by the client. As a result, we do not have the ability to make decisions regarding which broker is used to execute the transactions nor the timing of when the trade is executed. This could result in different pricing of client trades. We do not participate in any soft dollar practices.
To generate additional income or to earn credits that offset expenses, the Morningstar Funds reserves the right to lend its portfolio securities to unaffiliated broker/dealers, financial institutions or other institutional investors pursuant to agreements requiring that the loans be secured continuously by collateral, marked-to-market daily and maintained in an amount at least equal in value to the current market value of the securities loaned. The aggregate market value of securities lent by a Morningstar Fund will not at any time exceed 33 1/3% of the total assets of the Morningstar Fund. All relevant facts and circumstances, including the creditworthiness of the broker-dealer or institution, will be considered in making decisions with respect to the lending of securities subject to review by the Morningstar Funds Trust’s Board of Trustees. Currently, six of the nine Morningstar Funds participate in a securities lending program.
The cash collateral received from a borrower as a result of a Morningstar Fund’s securities lending activities will be invested in cash or high quality, short-term debt obligations, such as securities of the U.S. government, its agencies or instrumentalities, irrevocable letters of credit issued by a bank that meets the Morningstar Fund’s investment standards, bank guarantees or money market mutual funds or any combination thereof.
Securities lending involves two primary risks: “investment risk” and “borrower default risk.” Investment risk is the risk that a fund will lose money from the investment of the cash collateral received from the borrower. Borrower default risk is the risk that a fund will lose money due to the failure of a borrower to return a borrowed security in a timely manner. There also may be risks of delay in receiving additional collateral, in recovering the securities loaned, or a loss of rights in the collateral should the borrower of the securities fail financially. In the event a Morningstar Fund is unsuccessful in seeking to enforce the contractual obligation to deliver additional collateral, then the Morningstar Fund could suffer a loss.
Item 13. Review of Accounts
If included in our contract with the Institutional Client, we will provide ongoing monitoring of the underlying holdings in investment portfolios and reallocation or rebalancing of investment portfolios. The frequency and nature of our reviews and rebalancing is governed by our contract with each Institutional Client.
In instances where we act as a discretionary investment manager for Morningstar Wealth Portfolios, financial advisors of the Institutional Client or financial advisors using the Institutional Client’s platform are typically responsible for periodically reviewing client accounts.
We do not provide periodic reviews or ongoing monitoring of retirement accounts where we solely provide our Guidance or Advice services. We recommend such retirement investors return to our site every six months to receive an updated strategy, or sooner if they have had any significant changes in their personal or financial situation. We also recommend they return to our site whenever there has been a chance in the available investment options in their plan lineup.
Retirement accounts enrolled in our Managed Accounts service are typically rebalanced to the asset allocation target or reallocated on a quarterly basis as necessary, and portfolio allocations will be adjusted on an annual or asneeded basis to account for changes in age and any other significant personal or financial changes that we have been informed about. Our methodology has a built-in mechanism to help prevent unnecessary trading, and therefore will not propose any changes to investment strategies if the adjustments are relatively small. Retirement investors are responsible for notifying us of changes in their personal and financial information, investment objectives, and investment restrictions so that we can make the necessary adjustments to their investment strategy.
We may provide periodic reports to our Institutional Clients on the investment portfolios and the underlying holdings or retirement plan or product lineup if included in our contract with the Institutional Client. We do not prepare periodic reports as part of Advice or Guidance.
Our model portfolios and valuation models are reviewed on at least an annual basis. Investment-specific model portfolios for a retirement plan or product are reviewed on at least an annual basis.
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc.
Item 14. Client Referrals and Other Compensation
We may make direct or indirect cash or non-cash payments to our affiliates or to unaffiliated third parties for recommending our services. If such payments occur, they will be done pursuant to Rule 206(4)-1 of the Advisers Act. Clients referred by third party solicitors may in some cases pay a higher fee than clients who contract with us directly. Through disclosures, which are spoken or given in writing to Clients at the time of the solicitation, Clients solicited by an unaffiliated person are made aware of the arrangement between the solicitor and us (and therefore that the solicitor has a financial interest in recommending us to Client), any other material conflicts of interest, and the terms of any compensation paid directly or indirectly to the solicitor as a result of their referral.
Item 15. Custody
We do not serve as a custodian of client assets. However, in cases where we have the ability to debit fees directly from client accounts, we are deemed to have custody of client assets under Rule 206(4)-2 of the Advisers Act, even if we do not act as a custodian. The Institutional Client is responsible for selecting the custodian for assets.
Item 16. Investment Discretion
In some cases, we have complete investment discretion in managing investment portfolios, retirement plans, or registered funds for our Institutional Clients and Morningstar Funds Trust. In other cases, we provide information or make investment recommendations to an investment committee, board, plan sponsor, or other person(s) within an institution designed to help them make investment choices, but the institution has the discretion to accept, reject, or modify our recommendations.
As described in our Retirement Services for Individuals firm brochure, we typically have investment discretion in managing retirement accounts through Morningstar Retirement’s Managed Accounts and the Personal Target-Date Fund Service. In other cases, we make investment recommendations to retirement investors through our Advice or Guidance programs, but the retirement investor has the discretion to accept, reject, or modify our recommendations.
The extent of our investment discretion is set forth in our contract with the Institutional Client or retirement investors using our Managed Account, Advice, or Guidance services.
Item 17. Voting Client Securities
For the majority of our institutional advisory service arrangements, we do not have the authority to and will not vote proxies. In such situations, proxies or other solicitations will be sent directly to the Institutional Client and we will not provide information or advice in regard to questions an Institutional Client has about a particular solicitation.
We do not advise or act for Institutional Clients in legal proceedings, including class actions or bankruptcies, involving recommended securities.
The Morningstar Funds have authorized us to vote proxies on their behalf. In turn, in accordance with the sub-advisory agreement entered into between us and each sub-adviser, we have delegated proxy voting authority to the sub-adviser. We have implemented policies and procedures with respect to the portion of the Morningstar Funds that are not managed by a sub-adviser.
Proxy Voting Policy and Procedures
Rule 206(4)-6 of the Investment Advisers Act of 1940, as amended, places a number of requirements on investment advisers with proxy voting authority.
These requirements are:
• Adopt and implement written policies and procedures that are reasonably designed to ensure that proxies are voted in the best interest of clients.
Such procedures must include how to address material conflicts that may arise between our interests and those of our clients;
• Disclose how clients may obtain information about how proxies were voted with respect to their securities; and
• Describe to clients our proxy voting policies and procedures and, upon request, furnish a copy of the policies and procedures.
Proxy Voting Committee
In efforts to mitigate conflicts of interest, we have in place a Proxy Voting Committee (“Committee”). This Committee consists of both non-voting and voting members (collectively, “Committee Members”). Committee Members include members of the investment team serving in a voting role and member(s) of compliance and operations team serving in non-voting roles.
The Committee is responsible for tasks such as:
• Developing, implementing and updating policy and procedures intended to ensure voting of proxies is conducted in a manner that is in the best interests of Morningstar Funds investors;
• Assessing whether proxy voting should be done internally, externally by a third-party vendor, or a combination of the two;
• Oversight of a third-party vendor, when applicable;
• Making voting decisions (including whether or not to abstain from voting) and ensuring votes are cast on time;
• Maintaining documents material to the voting decision; and • Implementing appropriate proxy voting disclosures and maintaining records of communications received from Morningstar Funds investors requesting information on how proxies were voted and our responses.
Proxy Voting Process
Proxy statement notifications are received by an independent third-party vendor when a proxy statement has been issued on a security that currently underlies a portion of a Morningstar Fund managed by us. This third-party vendor provides additional services such as facilitating vote submissions on our behalf and provides access to e-ballot and meeting information.
We identify, on an annual basis, certain categories of proxy votes to be reviewed by our proxy committee. In these instances, the vote will be determined on a case-by-case basis based on the Investment Management group’s global proxy voting principles. Upon receipt of a proxy statement, the investment team member with the primary oversight responsibility for the security will review the proxy statement and any additional soliciting materials it is aware of that the issuer has filed and will communicate their recommendation, support for the recommendation, and other pertinent information to the Committee.
The voting Committee Members will review the proxy issue and the recommendation and will cast their vote as to whether they agree or disagree with the recommendation. If the other voting Committee Members agree with the recommendation, the proxy will be voted in that manner. If there is not a super-majority, the Committee will hold a meeting to discuss the proxy and reach a resolution.
There may be instances where we will refrain from voting a specific proxy when we believe it is in the best interests of our Morningstar Fund investors.
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc.
How you can Obtain Proxy Voting Information
At any time, you may request information on how we voted proxies and/or request a copy of our proxy voting policies and procedures. Requests can be submitted by calling 877-626-3227, sending an e-mail to [email protected], or writing to Morningstar Investment Management LLC at 22 West Washington Street, Chicago, IL 60602 ATTN:
Compliance.
Item 18. Financial Information
We are required to provide you with certain financial information or disclosures about our financial condition. We do not have any financial commitment that impairs our ability to meet our contractual and fiduciary commitments to clients, have we been the subject of any bankruptcy proceeding.
©2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc.
Morningstar Investment Management LLC Form ADV Part 2B: Brochure Supplement Institutional Advisory Services
22 West Washington Street, Chicago, IL 60602
Phone: 312.696.6000
www.corporate.morningstar.com
June 7, 2024
This Brochure Supplement provides information about key members of the investment team for Morningstar Investment Management LLC’s institutional advisory services. This Brochure Supplement provides information on the members of the investment team with the most significant responsibility for day-to-day investment advice and is not a complete list of all the members of the investment advisory team.
Please contact the Compliance Department at 312.696.6000 or compliancemail@ morningstar.com if you did not receive a copy of our firm brochure or if you have questions about the content of this Brochure Supplement. In your request, please indicate the name of the company (Morningstar Investment Management) and the type of service (Institutional Advisory Services.)
Key Members of the Morningstar Wealth Investment Team
Paul Arnold, CFA
Educational Background and Business Experience: Paul Head of Investments, Multiasset for Morningstar Investment Management. Prior to joining Morningstar Investment Management in 2007, he was an analyst of the Bank of America Capital Corporation. Born in 1983, Paul has a bachelor’s degree in finance and international business from the Kelley School of Business at Indiana University, a MBA, with honors, in analytical finance and economics from the Booth School of Business at the University of Chicago and is a CFA* charterholder.
Disciplinary Information, Other Business Activities, and Additional Compensation: Paul does not have any disciplinary information, other business activities or additional compensation to disclose.
Supervisor: Philip Straehl, Chief Investment Officer, Americas Michael Corty, CFA
Educational Background and Business Experience: Michael is Head of Investments, Select Equities. He joined Morningstar, Inc. in 2004 as a senior equity analyst before joining Morningstar Investment Services LLC as a portfolio manager in 2013. Michael moved to Morningstar Investment Management in 2016 as part of the investment management group’s re-organization. Before joining Morningstar, Michael spent two years as a senior loan analyst for Bank of America and three years as an auditor at Arthur Andersen. Born in 1973, Michael has a bachelor’s degree from Loyola Marymount University, a MBA from the Johnson Graduate School of Management at Cornell University and is a CFA* charterholder.
Disciplinary Information, Other Business Activities, and Additional Compensation:
Michael does not have any disciplinary information, other business activities or additional compensation to disclose.
Supervisor: Philip Straehl, Chief Investment Officer, Americas and Daniel Rohr, Head of Global Equity Research for Morningstar Research Services LLC Dominic Pappalardo
Educational Background and Business Experience: Dominic is Senior Portfolio Manager, Institutional Solutions for Morningstar Investment Management. Prior to joining Morningstar Investment Management in 2020, he was a Director and Portfolio Manager for McDonnell Investment Management. Born in 1979, Dominic has a bachelor’s degree in finance from Benedictine University and a MBA from the Mendoza College of Business at the University of Notre Dame.
Disciplinary Information, Other Business Activities, and Additional Compensation:
Dominic does not have any disciplinary information, other business activities or additional compensation to disclose.
Supervisor: Philip Straehl, Chief Investment Officer, Americas Philip Straehl
Educational Background and Business Experience: Philip is Chief Investment Officer, Americas for Morningstar Investment Management and is responsible for leading Morningstar Investment Management’s investment strategies and teams throughout the United States and contributing to the global investment committees, policies, capabilities, and thought leadership. Since joining Morningstar Investment Management in 2007, he has been a portfolio manager and senior research consultant responsible for managing asset allocation portfolios and Chief Investment Officer, Quantitative Strategies. Born in 1984, Philip has a bachelor’s degree in business administration from the University of St. Gallen (HSG), Switzerland and a master’s degree in business administration from the University of Chicago Booth School of Business with concentrations in analytic finance and economics.
Disciplinary Information, Other Business Activities, and Additional Compensation:
Philip does not have any disciplinary information, other business activities or additional compensation to disclose.
Supervisor: Dan Kemp, Chief Research and Investment Officer Richard Williamson, CFA, CIPM®
Educational Background and Business Experience: Richard is head of investments, mutual funds for Morningstar Investment Management. . He joined Morningstar Investment Management in 2013. Before joining Morningstar Investment Management, he was a consultant and analyst with Cardinal Investment Advisors, LLC, where he built asset allocation models for defined benefit plans, performed manager due diligence, and worked on capital market research. Born in 1984, Richard has a bachelor’s degree in economics and government from the University of Virginia, holds a Certificate in Investment Performance Measurement**, and is a CFA* charterholder.
Disciplinary Information, Other Business Activities, and Additional Compensation:
Richard does not have any disciplinary information, other business activities, or additional compensation to disclose.
Supervisor: Philip Straehl, Chief Investment Officer, Americas
Key Members of the Morningstar Retirement Investment Team Tao Guo, CFA, CFP®, CIPM®
Educational Background and Business Experience: Tao is director, retirement research for Morningstar Investment Management. Tao is a member of the Morningstar Retirement Investment Policy Committee. Prior to joining Morningstar Investment Management in 2022, he served as an associate professor for William Paterson University of New Jersey from 2015 – 2021. Born in 1984, Tao has a Ph.D. in Financial Planning and a master’s degree in Finance from Texas Tech University, a Master of Business Administration from Michigan Tech University, a bachelor’s degree from Northeastern University, China, holds a Certificate in Investment Management Performance**, and is a CFA* charterholder and CFP*** professional.
Disciplinary Information, Other Business Activities, and Additional Compensation: Tao does not have any disciplinary information, other business activities or additional compensation to disclose.
Supervisor: Rajneesh Motay, Head of Advice and Financial Planning Thomas Idzorek, CFA
Educational Background and Business Experience: Tom is the chief investment officer, retirement for Morningstar Investment Management. Tom is a member of the Morningstar Retirement Investment Policy Committee and Morningstar’s Global Investment Policy Committee. He currently serves as a member of Morningstar, Inc.’s 401(k) committee and on the editorial board of Morningstar magazine. From 2012 to 2015, Tom served as president of Morningstar’s Investment Management group.
Additionally, he has served as president of Ibbotson Associates, president of
© 2024 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc.
Morningstar Associates, board member/responsible officer for a number of the Investment Management group’s subsidiaries, global chief investment officer for the Investment Management group, chief investment officer & director of research and product development for Ibbotson, and head of investment methodology and economic research for Morningstar, Inc. Before joining Ibbotson Associates (which Morningstar, Inc. acquired in 2006), Tom was a senior quantitative researcher for Zephyr Associates. Born in 1970, Tom holds a bachelor’s degree from Arizona State University and a master’s degree in business administration from Thunderbird School of Global Management. He also is a CFA* charterholder.
Disciplinary Information, Other Business Activities, and Additional Compensation:
Tom does not have any disciplinary information, other business activities or additional compensation to disclose.
Supervisor: Brock Johnson, President, Morningstar Retirement Services and Michael Holt, Chief Strategy Officer and President of Research for Morningstar Lucian Marinescu, CFA
Educational Background and Business Experience: Lucian is a senior portfolio manager and head of investments, retirement for Morningstar Investment Management. Lucian is a member of the Morningstar Retirement Investment Policy Committee as well as the Morningstar Portfolios Americas Investment Committee.
He served as a project manager for Morningstar, Inc. beginning in 2002 before joining Morningstar Investment Management in 2007. Born in 1979, Lucian has a bachelor’s degree in economics and business administration from Monmouth College, a MBA from University of Chicago Booth School of Business and is a CFA* charterholder.
Disciplinary Information, Other Business Activities, and Additional Compensation:
Lucian does not have any disciplinary information, other business activities or additional compensation to disclose.
Supervisor: Philip Straehl, Chief Investment Officer, Americas Harold (Hal) Ratner, CFA
Educational Background and Business Experience: Hal is dead of research, investment management for Morningstar Investment Management and has been with the firm since 2003. Hal is a member of the Morningstar Retirement Investment Policy Committee. Born in 1965, Hal has a bachelor’s degree in Communications from Antioch College and is a member of the CFA Society of Chicago. Previously, Ratner served as chief investment officer of Morningstar Investment Management Europe and prior to that as portfolio manager and senior research consultant, comanaging mutual fund and variable insurance product assets for U.S.-based clients. Before rejoining Morningstar in 2003, Ratner served as vice president of investments for San Francisco based mPower—one of the first robo-advisers.
Prior to that, he was an assistant vice president of global manager research for Callan Associates and an analyst at ING Barings’ Private Asset Management group. Ratner began his career at Morningstar as a mutual fund and variable annuities analyst.
Disciplinary Information, Other Business Activities, and Additional Compensation: Hal does not have any disciplinary information, other business activities or additional compensation to disclose.
Supervisor: Rajneesh Motay, Head of Advice and Financial Planning Michael Sawula, CFA
Educational Background and Business Experience: Michael is senior director of automated portfolio solutions for Morningstar Investment Management. Michael is a member of the Morningstar Retirement Investment Policy Committee. He leads a team that is responsible for constructing, refining, and rebalancing managed accounts portfolios for retirement plan participants. He joined Morningstar, Inc. in 2012 and served as a product consultant, data analyst and operations analyst prior to joining Morningstar Investment Management in 2015 as an investment analyst. Born in 1990, Michael has a bachelor’s degree from Grinnell College, a master’s degree in business administration and a master of science in computer science from the University of Chicago. He is also a CFA* charterholder.
Disciplinary Information, Other Business Activities, and Additional Compensation:
Michael does not have any disciplinary information, other business activities or additional compensation to disclose.
Supervisor: Rajneesh Motay, Head of Advice and Financial Planning Supervision
Each supervisor named above oversees their direct report(s). Supervisors can be contacted at the number listed at the top of this document.
The investment activities of the Morningstar Wealth group are guided by global and regional investment and product committees who are responsible for employing and overseeing the investment methodologies offered through Morningstar Wealth.
The investment activities of Morningstar Retirement are guided by the Morningstar Retirement Investment Policy Committee, which is responsible for oversight of the investment methodologies and governs material changes to Morningstar Retirement advisory services.
Minimum Professional Designation Qualifications
*The Chartered Financial Analyst (CFA) designation is an international professional certification offered by the CFA Institute. To become a CFA professional, candidates must pass three six-hour exams, possess a bachelor's degree, and have 48 months of qualified, professional work experience. CFA professionals are also obligated to adhere to a strict Code of Ethics and Standards governing their professional conduct.
The CFA is a qualification for finance and investment professionals, particularly in the fields of investment management and financial analysis of stocks, bonds and their derivative assets. The program focuses on portfolio management and financial analysis and provides a general knowledge of other areas of finance. ** The Certificate in Investment Performance Measurement (CIPM®) program is an international professional certificate offered by the CFA Institute. To earn the CIPM certificate, candidates must pass two three-hour exams, have four years of qualified, professional work experience, become a CFA Institute member, and complete 15 hours of qualifying continuing professional development annually. The CIPM is an advanced specialist program for finance and investment professionals, particularly in the areas of performance evaluation, portfolio management, risk and compliance, and manager selection. The program focuses on practice-based investment performance measurement, attribution, appraisal, and presentation along with investment manager due diligence.
***The Certified Financial PlannerTM (CFP®) designation is offered by the Certified Financial Planner Board of Standards, Inc. To obtain the CFP designation, candidates must have a bachelor’s degree or higher from an accredited college or university and three years of full-time personal financial planning experience of the equivalent parttime experience. Candidates must complete a CFP-board registered program or hold an approved designation, attorney’s license, PhD in business or economics, or doctor of business administration degree, and pass a final exam. CFP professionals must complete 30 hours of continuing education every two years and adhere to CFP Board’s ethical standards that require them to put their clients’ interest first. The CFP is a qualification for finance and investment professional, and focuses on the delivery of professional, component, and ethical financial planning services.
Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. Affiliates are separately responsible for their own financial and contractual obligations.
Choose one 1
Lincoln SelectSolution IRA® Agreement
by and between
Lincoln Financial Group Trust Company, Inc.
and
City of Yuba City
YUBA-001
2 Lincoln SelectSolution IRA® Agreement
WHEREAS, City of Yuba City (Employer) maintains the following tax qualified or tax favored retirement plan(s):
• City of Yuba City Deferred Compensation Plan
•
WHEREAS, the plan is a governmental plan within the meaning of section 414(d) of the Internal Revenue Code of 1986, as amended (Code) and exempt from Title I of the Employee Retirement Income Security Act of 1974, as amendment (Act) in accordance with section 4(b)(1) of the Act; and, WHEREAS, the plan(s) provides that if a distribution is made to a participant and the participant does not make a rollover election pursuant to section 401(a)(31)(A) of the Code and does not elect to receive the distribution directly, the Employer shall transfer the distribution to an individual retirement plan of a designated trustee or issuer and shall notify the participant in writing that the distribution may be transferred to another individual retirement plan or distributed to the participant; and WHEREAS, Lincoln Financial Group Trust Company, Inc. (Custodian) is the trustee within the meaning of sections 408(a) and 408(h) of the Code of the Lincoln SelectSolution IRA®, an individual retirement account (IRA) program designed to receive automatic rollovers of distributions from tax qualified and tax favored retirement plans; and
WHEREAS, the Employer desires to designate the Lincoln SelectSolution IRA® to receive automatic rollover distributions from the Employer’s plan(s) and appoint the Custodian to provide custodial and IRA services with respect to automatic rollover distributions from the Employer’s plan(s); and WHEREAS, the Custodian desires to make the Lincoln SelectSolution IRA® available to the Employer to receive automatic rollover distributions from the Employer’s plan(s) and to furnish certain custodial and IRA services to the Employer with respect to automatic rollover distributions from the Employer’s plan(s); NOW, THEREFORE, BE IT RESOLVED, Lincoln Financial Group Trust Company, Inc. and City of Yuba City hereby agree, effective as of November 5, 2024, to the following:
Section 1 – Definitions
1.01 “Code” means the Internal Revenue Code of 1986, as amended.
1.02 “Custodial Account” means a custodial account within the meaning of section 408(h) of the Code.
1.03 “Custodian” means Lincoln Financial Group Trust Company, Inc.
1.04 “Employer” means City of Yuba City.
1.05 “Fixed Annuity Contract” means the Unallocated Group Fixed Annuity Contract offered by The Lincoln National Life Insurance Company as the sole investment in the Lincoln SelectSolution IRA® for each Plan.
1.06 “IRA” means an individual retirement account within the meaning of section 408(a) of the Code.
1.07 “Plan” or “Plans” mean the City of Yuba City Deferred Compensation Plan.
1.08 “Trustee” means a trustee within the meaning of sections 408(a)(2) and 408(h) of the Code.
3 Section 2 – Employer Status and Selections
2.01 Employer Selection of Custodian. The Employer designates the Custodian as the IRA provider of certain custodial services with respect to automatic rollover distributions from the Plan(s).
2.02 Employer Selection of Lincoln SelectSolution IRA®. The Employer designates Lincoln SelectSolution IRA® as the IRA to which automatic rollover distributions from the Plan(s) will be made.
2.03 Employer Selection of the Fixed Annuity Contract. The Employer designates the Fixed Annuity Contract as the sole investment option in the Lincoln SelectSolution IRA® for the investment of automatic rollover distributions from the Plan(s).
Section 3 – Employer Responsibilities and Acknowledgements
3.01 Employer Responsibilities and Acknowledgements. Subject to the Custodian certifications and acknowledgements contained in this Agreement, the Employer is solely responsible for determining if selection of the Custodian, Lincoln SelectSolution IRA® and the Fixed Annuity Contract satisfies the requirements of section 401(a)(31)(B) of the Code and any applicable federal, state and/or local legal requirements of the Employer as sponsor of the Plan(s) in connection with automatic rollovers of certain mandatory distributions to an IRA.
In making this determination, the Employer acknowledges:
a) The present value of the nonforfeitable accrued benefit automatically rolled over, as determined under section 411(a)(11) of the Code, generally may not exceed the maximum amount under section 401(a)(31)(B) of the Code;
b) The IRA receiving the automatic rollover distribution must be an individual retirement plan as defined in section 7701(a)(37) of the Code and either (1) a trust or custodial IRA under section 408(a) of the Code or (2) an individual retirement annuity under section 408(b) of the Code.
The Lincoln SelectSolution IRA® is a custodial IRA under section 408(a) of the Code; c) The Employer is entering into a written agreement with the IRA provider that provides in part, the participant on whose behalf the Employer makes an automatic rollover shall have the right to enforce the terms of the contractual agreement establishing the individual retirement plan, with regard to his or her rolled over funds, against the individual retirement plan provider; and d) The Custodian is a wholly owned subsidiary of Lincoln Retirement Services Company, LLC (LRSC). LRSC is a wholly owned subsidiary of The Lincoln National Life Insurance Company. e) Where a Lincoln SelectSolution IRA owner consents to be presented with third-party products including by electronic consent via lfg.com; as part of WellnessPATH and Lincoln’s marketplace, they may be presented with third-party products. Where that owner chooses to purchase a product introduced to them by Lincoln, Lincoln may receive a marketing distribution fee for that product purchased. Depending on the arrangement this may be a flat dollar fee, or a percentage of fees received by the third-party vendor.
3.02 Review and Acceptance of Lincoln SelectSolution IRA® Terms and Conditions. The Employer acknowledges review and acceptance of the terms and conditions of the Lincoln SelectSolution IRA®, including, but not limited to, the Fixed Annuity Contract.
4 3.03 Participant Notification. The Employer acknowledges that it is solely responsible for furnishing participants with a notice stating that an automatic rollover distribution may be transferred to another eligible retirement plan in accordance with section 401(a)(31)(B) of the Code.
Section 4 – Custodian Certifications and Acknowledgements
4.01 Custodian’s Status. The Custodian acknowledges that it is the Trustee to the Lincoln SelectSolution IRA® and is responsible for administration of the Lincoln SelectSolution IRA® in compliance with the applicable provisions of section 408 of the Code and the Treasury Regulations thereunder, including, but not limited to, the reporting requirements of section 408(i) of the Code.
4.02 Lincoln SelectSolution IRA®.
a) The Custodian certifies that the Lincoln SelectSolution IRA® is an individual retirement plan as defined in section 7701(a)(37) of the Code and a Custodial Account. b) The Custodian certifies that the Fixed Annuity Contract is an unallocated fixed annuity contract issued by The Lincoln National Life Insurance Company and purchased and held by the Custodian in Lincoln SelectSolution IRA® Custodial Account. The Fixed Annuity Contract is designed to preserve principal and provide a reasonable rate of return with a guaranteed minimum interest rate, subject to the claims paying ability of The Lincoln National Life Insurance Company, that is consistent with liquidity. Notwithstanding the foregoing, fees and expenses attendant to the Lincoln SelectSolution IRA® can reduce principal.
c) The Custodian certifies that the Fixed Annuity Contract selected for the rolled-over funds shall seek to maintain, over the term of the investment, the dollar value that is equal to the amount invested in the contract by the Lincoln SelectSolution IRA®. Notwithstanding the foregoing, fees and expenses attendant to the Lincoln SelectSolution IRA® can reduce principal.
d) The Custodian certifies that the Fixed Annuity Contract selected for the rolled-over funds is offered by The Lincoln National Life Insurance Company, a state regulated financial institution, which is an insurance company, the products of which are protected by state guaranty associations.
e) The Custodian certifies that all fees and expenses attendant to the Lincoln SelectSolution IRA®, including investments of such plan, (e.g., establishment charges, maintenance fees, investment expenses, termination costs and surrender charges) shall not exceed the fees and expenses charged by the Custodian for comparable individual retirement plans established for reasons other than the receipt of a rollover distribution subject to the provisions of section 401(a)(31)(B) of the Code. For this purpose, the Custodian makes the following disclosure: The Lincoln National Life Insurance Company is in the process of phasing out the Lincoln Small Accounts IRA and substituting in its place, the Lincoln SelectSolution IRA®.
f) The Custodian certifies that the participant on whose behalf the Employer makes an automatic rollover shall have the right to enforce the terms of the contractual agreement establishing the Lincoln SelectSolution IRA®, with regard to his or her rolled over funds, against the Custodian.
5 Section 5 – Indemnity
5.01 Employer Indemnification. The Employer will indemnify the Custodian and The Lincoln National Life Insurance Company, their officers, employees and agents from and against any and all damages, losses, costs, judgments, fines and expenses (including attorneys’ fees and disbursements) of any kind or nature (hereinafter in the aggregate the “Losses”) imposed on or incurred by the Custodian, The Lincoln National Life Insurance Company, their officers, employees and agents by reason of their participation in this Agreement, including any Losses arising out of any threatened, pending, or completed claim, action, suit, or proceeding, whether civil, criminal, administrative, or investigative, to the extent such Losses are the result of Employer or its Plan’s intentional wrongdoing or its negligent actions or omissions.
As a condition of indemnification, (i) the Custodian and The Lincoln National Life Insurance Company shall give the Employer timely notice in writing of any potential Losses promptly after they becomes aware of them; (ii) the Employer shall, at its option, have sole control of the defense of such Losses; and (iii) the Custodian and The Lincoln National Life Insurance Company shall cooperate with the Employer in the defense of such Losses. The Employer shall not be responsible for the settlement of any claim, demand or lawsuit related to the Losses without the Employer’s written consent.
5.02 Custodian and The Lincoln National Life Insurance Company Indemnification. The Custodian and The Lincoln National Life Insurance Company will indemnify the Employer, its officers, employees and agents from and against any Losses imposed on or incurred by Employer, its officers, employees and agents by reason of its or their participation in this Agreement, including any Losses arising out of any threatened, pending, or completed claim, action, suit, or proceeding, whether civil, criminal, administrative, or investigative, to the extent such Losses are the result of the Custodian or The Lincoln National Life Insurance Company’s intentional wrongdoing or their negligent actions or omissions. The Custodian and The Lincoln National Life Insurance Company will have no liability with respect to claims of breach of duties owed to participants by the Employer as Plan sponsor for selection of the Custodian, Lincoln SelectSolution IRA® or the Fixed Annuity Contract in connection with automatic rollovers of certain mandatory distributions from the Plans to the Lincoln SelectSolution IRA®.
As a condition of indemnification, (i) the Employer shall give the Custodian and The Lincoln National Life Insurance Company timely notice in writing of any potential Losses promptly after the Employer becomes aware of them; (ii) the Custodian and The Lincoln National Life Insurance Company shall, at their option, have sole control of the defense of such Losses; and (iii) the Employer shall cooperate with the Custodian and The Lincoln National Life Insurance Company in the defense of such Losses. The Custodian and The Lincoln National Life Insurance Company shall not be responsible for the settlement of any claim, demand or lawsuit related to the Losses without the Custodian and The Lincoln National Life Insurance Company’s written consent.
5.03 Indemnification Survival of Termination of Agreement. The provisions of Section 5 shall survive termination of this Agreement.
Section 6 – Miscellaneous
6.01 Governing Law. This Agreement will be governed by and interpreted under the laws of the State of Indiana without regard to its conflicts of law provisions.
6.02 Entire Agreement. This Agreement, including any attachments hereto, represent the entire agreement between the Employer and the Custodian and is not intended as an agreement between, or to reflect the rights and responsibilities of, any other parties, other than the Employer and the Custodian.