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Everything You Wanted to Know About Stock Market Investing by evg19143


Everything You Wanted to Know About Stock Market Investing document sample

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									For over 140 years, Standard & Poor’s has been
Wall Street’s leading provider of comprehensive,
unbiased investment information and guidance.
Now, defined contribution plan participants can
      tap into our vast resources as well.
                                                                           Standard & Poor’s Retirement Services

                                                   What You Get
                                                                           Everything You Always
                                                   When You Get the
                                                   Retirement Advisor      Wanted to Know About
                                                   Where Our Advice
                                                                           the Retirement Advisor
                                                   Comes From

                                                   Why We Believe in the
Standard & Poor’s Retirement Planning Services     Interactive Model for
          55 Water Street, 43rd Floor              Investment Advice
             New York, NY 10041
                                                   Ways We Can
     email:            Communicate with
          Internet:                 Plan Sponsors and

                                                   Support and Training

                                                   Our Technology



                                                   Regulatory Compliance
                       There’s a time and a place for everything. Our marketing brochures
                       can’t really tell you what’s going on behind the scenes with the
                       Retirement Advisor, and our installation guide can’t explain why        Where Our Advice
                       the sort of prudent, straightforward advice we offer could protect
                       unsophisticated investors from catastrophic investment decisions.       Comes From
                       But here, in this guide for the interested, we mean to lay everything
                                                                                                 For nearly 140 years, Standard & Poor's has been
                       out on the table. How we come up with our model portfolios, what
                                                                                                 Wall Street’s best-known source of comprehensive,
                       methods we use to calculate risk, how our platform works, why the         independent information and advice. Because we can
                       application is structured the way it is, our approach to security,        tap into S&P’s vast resources, approximately 95% of
                       regulatory compliance — the works.                                        the research information we use is available internally.

                                                                                                 • S&P analyst coverage of thousands of companies
                                                                                                 • S&P Compustat, for financial information on
                       What You Get When You                                                       over 11,000 companies worldwide
                                                                                                 • S&P Micropal, covering more than 10,000
                                                                                                   domestic funds and 10,000 funds worldwide
                       Get the Retirement Planner                                                • S&P Index Services, for market and sector tracking
                                                                                                 • S&P Platts, MMS for specialized markets research
                                                                                                 • S&P Marketscope for real-time news and market analysis
                              The Retirement Advisor is committed to educating,
                                                                                                 • S&P DRI for sophisticated economic forecasting
                              advising and serving plan participants and sponsors.
                              Our product components are all flexible and customizable.
                                                                                                 We also keep up with scholarly research and the major
                                                                                                 trade publications.
                              Education — comprehensive Plan information (i.e.
                              employee vesting and eligibility, investment options,
The Retirement                                                                                   Our investment philosophy
                              customer service, rollover policy, enrollment procedures,
                                                                                                 Long experience in investment analysis has convinced
                              etc.) plus accessible interactive tutorials on critical
                                                                                                 us that computer models and programs can supplement,
Planner is organized          investment concepts and strategies, including risk,
                                                                                                 but never replace, careful personal review and invest-
                              diversification, inflation, dollar-cost averaging, asset
                                                                                                 ment experience. All model portfolios are reviewed by
by modules, which             classes and life expectancy calculations, among others.
                                                                                                 our seven-member Investment Policy Committee.
can be completely             Account Status — online account information, available             We gear our advice to offering investment options with
                              24 hours a day, 7 days a week. Users can obtain account            the highest potential returns consistent with partici-
customized depend-            balances, review account history, make loan or withdrawal          pants’ investment horizon, their stated tolerance for
                              requests, or review personal options (current address,             risk, and the funds or other options available. We also
ing on the level of           beneficiaries, current contributions, etc.) If the plan            believe strongly in dialogue. Our role is to make
                              sponsor wishes, participants can make changes in their             suggestions, while giving investors the tools and
service desired.              investment options online.                                         information they need to make their own decisions.

Some are standard;
                              Planning Tools and Advice — questionnaires designed                How we build and optimize model portfolios
                              to clarify each user’s personal information, stated goals,         Our analysts use mean-variance optimization as the
others are optional.
                              and confidence levels, and suggested plan allocations              starting point to build the portfolios. We also generally
                              based on the results. Along with advice, we also provide           adhere to Standard & Poor's guidelines for total num-
                              sophisticated interactive tools for experimenting with             ber of investments, single investment limits, and other
                              different investment scenarios.                                    diversification issues. Our Investment Policy Committee
                                                                                                 reviews every plan for appropriateness in the short term
                                                                                                 and viability over the long term.
                              News & Quotes — current feeds of market data, includ-
                                                                                                 For most of our clients, we develop anywhere from
                              ing major stock and mutual fund indexes, international
                                                                                                 four to twelve portfolios spread evenly across the risk
                              markets, breaking financial news and market analysis.
                                                                                                 spectrum. The number of portfolios we come up with
                                                                                                 depends primarily on how many investment options
                                                                                                 are available in a given plan. At the low-risk end, we
                              Communication — customer service and technical                     include a portfolio at or near 100% in money market
                              support as well as personalized product and account                funds or similar cash-equivalents.
                              updates for plan participants.                                                                                   continued
Where Our Advice Comes From                         continued

  And at the high end, we typically draw the line at an         Having Confidence
  all-equity portfolio with about one and a half times the
  risk of the S&P 500.                                             The confidence factor is possibly the trickiest thing to
                                                                   understand in this model. But it’s so important — and
  We prefer to work with specific funds and investments,           such a differentiator for the Retirement Advisor — it’s
  but we can also use long-term projections of investment          worth spending time on. In technospeak, the confi-
  returns for specific asset classes. Our model assumes the        dence factor modulates the mean/variance optimization
  long-term future will be consistent with the long-term           results based on each user’s risk-tolerance profile. Our
  past, but the Investment Policy Committee may modify             competitors typically use mean or average investment
  any economic assumptions used by the model based on              returns in developing their recommendations, which
  their analysis of the economy.                                   means that investors following their advice theoretically
                                                                   have a 50-50 shot of achieving the returns described.
  Regarding company stock, we follow guidelines                    We believe investors should be offered options with
  for determining maximum allocations and which                    greater probability of success. As a default, therefore,
  portfolios should include allocations to company stock.          our recommendations are calibrated for at least an 80%
  For stocks that Standard & Poor’s analyzes, we also              chance of achieving the stated goals. The 20% chance of
  factor in that information.                                      falling short does NOT mean we think they will lose all
                                                                   their money.
  How we assess investors’ risk tolerance
                                                                   Investors who use our advanced tools to experiment
  We assess risk tolerance through a questionnaire and
                                                                   with investment scenarios have the flexibility to adjust
  interactive modeling. The questionnaire targets several
                                                                   their confidence factor in addition to their contribution
  key issues:
                                                                   levels, projected rates of return and time horizon.
  • time horizon — how long money can stay invested                                                                            Those who fear loss
                                                                   Benefits of showing plan participants “confident” returns
  • willingness to bear risk — how comfortable the
    idea of risk is                                                                                                            of principal too
                                                                   A curb on lazy investors
  • capacity to bear risk — how much damage a                                                                                  much will see how
                                                                   Anyone who hopes that putting all of their money into
    setback will do
                                                                   growth stocks eliminates the need to save much will
                                                                   see their big payoff side by side with the reduced prob-    they can close in on
  Additional factors may also be considered, such as pro-
                                                                   ability of getting it.
  jected major expenses (e.g., children’s college tuition,                                                                     their goals by taking
  vacation home, elderly parent). We always review the
  questionnaire with plan sponsors to be sure both tone            A spur to the super-cautious
                                                                                                                               on a little more risk.
  and content are appropriate for the demographic                  Those who fear loss of principal too much will see how
  groups involved.                                                 they can close in on their goals by taking on a little
                                                                   more risk.
  Dialogue is essential to understanding risk in relation
  to your own investments. Our unique interactive                  In most cases, we don’t refer to the confidence factor
  modeling applet lets people experiment with different            directly. Instead, we illustrate its effects in layman’s
  combinations of savings rates/risk levels and see retire-        terms, such as: “You could lose x% of your money with
  ment income projections instantly.                               this allocation”, or “With this savings rate and alloca-
                                                                   tion, there is only an x% chance that you will meet or
  The Retirement Advisor recommends the portfolio                  exceed your retirement income goal.”
  with the highest confident return over the user’s time
  horizon. Participants can override the system’s recom-
                                                                   Plan sponsors can set a default for the confidence
  mendations. Overrides will be recorded.
                                                                   factor, as a policy decision or allow plan participants
                                                                   to adjust them. In either case, participants can override
  How we handle outside assets                                     assumptions, such as their required income replace-
  Outside assets are taken into account when calculating           ment ratio.
  projected retirement income. Our advice, though, is
  currently geared to the 401(k) allocation alone.
                         Why We Believe in the
                         Interactive Model for
                         Investment Advice
                           Most working individuals are now responsible for funding       • A self-service focus, designed to help participants get
                           their own retirements. The shift from employer-managed           started in their planning with a minimum cost of time.
                           pension plans to defined contribution plans over the last
                           twenty years has given employees some more options but         • Focus on answers in context. Most products still focus
                           absolutely no guarantees.                                        on intermediate results, such as total savings accumulated
                                                                                            by age 65, which not only cannot be translated to a
                           At least 80% of retirement plan participants are “reluc-         useful concept by most users, but may even sound
                           tant” investors. They frankly would rather not be                prepreposterous or impossible as a goal. We display
                           responsible for planning and implementing their retire-          probable retirement income in constant dollars, so
                           ment savings program. People know that planning for              that the users can relate dollar figures to their
                           retirement is important, but it is not urgent. The plan-         current circumstances.
                           ning process itself creates tremendous anxiety because
At least 80% of            the stakes are so high. Not surprisingly, direct research      • Sensitivity to the emotional component of investing.
                           shows that reluctant investors are very interested in            All investors are subject to emotional reactions to
retirement plan            specific advice about how much to save and how to                changes in the value of their investments. Indeed,
                           invest their savings.                                            studies repeatedly show that active individual investors
participants are                                                                            underperform the assets they invest in, buying at the
                           Happily, federal regulators have provided safe harbors for       exciting tops and selling in panic at the bottom of
“reluctant” investors.     plan sponsors to provide education without shouldering           cycles. We show what to expect from the volatility of
                           fiduciary responsibility. Regulations require that advice        investments, and we recognize that investors need to
They frankly would         be provided by independent parties, whose compensation           be comfortable with the risks they take on.
                           is not biased to any particular investment products.
                                                                                          • Working with the proper time horizon for each user.
rather not be
                           They key to our product design is our understanding of          There’s no need to commit to anything using our
                           the user. The reluctant investor is:                            interactive models, so users are free to experiment,
responsible for
                                                                                           learn, and react. The educational exhibits make clear
                           Anxious — expecting a problem, and often feels that it
                                                                                           the relation of time horizon and risk, and show very
planning and               is somehow better not to know how bad the situation is.
                                                                                           long-term historical market performance.
                           Untrained in Investing — baffled by investment jargon.
implementing their                                                                        We have made a number of innovations in the Retirement
                                                                                          Advisor in terms of addressing different modes of
retirement savings         The Retirement Advisor responds with:
                                                                                          learning, including:

program.                   • Actual advice. Some online “advice” systems provide          • “kinetic learning” — learning by interacting with
                             an interactive investment model, but still leave it to         the computer
                             the user to figure out what it means and what they
                                                                                          • “high-bandwidth” presentations — using multimedia
                             should do. While we also offer interactive investment
                                                                                            capabilities of computers to show and tell
                             modeling, we start with straightforward, unambiguous
                             investment advice.
                                                                                          Both of these techniques are very powerful. Kinetic
                                                                                          learning allows the user to “discover” how important
                           • A simple, effective user interface. No user will become
                                                                                          principles of saving and investing work. This is much
                             an expert; ideally, they will use it once a year, or maybe
                                                                                          more effective and faster than lecturing. When presented
                             only when they have a life event requiring an update of
                                                                                          this way, even very sophisticated mathematical models
                             their plan. We have devoted our design efforts to creating
                                                                                          are generally accessible. The high-bandwidth aspect is
                             a tool that can give prudent advice to a novice in a
                                                                                          much more than ‘playing movies’ on the computer
                             matter of minutes, and that can deliver more depth to
                                                                                          screen, which is what most multimedia has been used
                             interested users.
                                                                                          for so far. With our approach, users not only hear and
                                                                                          see the message, but know how to use our interactive
                                                                                          tools to further investigate and solve their own problems.
  Why We Believe                   continued                                           Ways We can Communicate
                                                                                       with Plan Sponsors and
       Sane People, Crazy Investing
       Behavioral finance is the study of the ways that people
       behave in regard to investing. It turns out that a number
       of common intuitions are “wired into our brains” and
       make some fundamental aspects of financial planning                               What we need to say
       and investing very difficult. Numerate people can multiply                        At minimum, we provide quarterly commentary to
       in their heads, but almost no one can exponentiate.                               participants, including recommendations on rebalancing
       Therefore, we can’t intuitively appreciate the magic of                           based on current events or market activity. Beyond that,
       compounding as much as we should.                                                 we work with plan sponsors to come up with a unified
                                                                                         participant communication strategy that may include:
       Some of the key findings from behavioral finance
                                                                                         • Product introduction and launch
       studies include:
                                                                                         • Reminders to visit the web site or talk with a
People do not plan       Retirement funds are on average “twenty five year”                plan representative
for the right time       money, but many people will invest with a time horizon
horizon                  as short as the reporting period (quarterly). This behavior
                         is not confined to non-professional investors.                  • Notices of significant application upgrades or
                                                                                           market events
People will pattern      When they don’t know what to do, investors will ask their
                                                                                         • Targeted messages to employees who are not
their behaviors after    officemates what they’re doing. The coffee machine may
inappropriate role       be a more usual source of advice than the brochures or            participating or are contributing very low percentages
models                   seminars provided with a retirement plan.                         of income

                                                                                         • Active research with users to determine satisfaction
Many people are          We tend to worry a lot about downside risk, without giv-
loss averse              ing equivalent value to upside potential. By asking the           and identify enhancements
                         question “Which of these investment choices will never go
                         down?” one gets a correct but inappropriate answer, and         • Educational messages focusing on the benefits of
                         invests in cash equivalents. But diversified, higher-return
                                                                                           investing early, dollar-cost averaging, etc.
                         portfolios can be constructed that would still be comfort-
                         able for this investor’s risk intolerance.
                                                                                         • Chat sessions with our investment advisors, both on
                                                                                           the phone and on-line
Some take too            These days, the typical 401(k) participant has been invest-
much risk                ing four years, and may believe that markets typically go
                         up 20-30% a year. Some investors also think that by taking      Internet and e-mail
                         maximum risk, they are signing up for maximum returns.
                                                                                         The Internet is our native territory, so we are fully set
                                                                                         up to provide e-mail messaging and support. Because
Whatever happened        This behavior exists even among professional managers,          e-mail is difficult to secure without special software on
recently will continue   as shown by momentum traders. For individuals, it is also       the client side, we never include users’ financial informa-
to happen                a lack of knowledge of the long history of the markets.
                                                                                         tion. But we can and do send messages inviting users to
                                                                                         log back on to the Retirement Advisor for information.
Mental accounts          We treat money differently depending on its source or
                         intended use, even if one dollar is objectively as valuable
                         as another.                                                     Paper-based materials
                                                                                         Printed investor questionnaires and advice reports are
                                                                                         fully integrated with our online Retirement Planner
There is a status        Even when they know they need to change their rate
quo bias                 of savings or their allocation of investments, reluctant        platform. Users who don’t have computer access (or
                         investors tend to avoid taking action.                          prefer not to use one) can simply fill out forms with
                                                                                         their financial information, attitudes, needs, etc. and
                                                                                         submit them to us by mail, fax or VRU. Within 10
                                                                                         business days, we generate and mail a paper report.
                      Ways We Can Communicate                        continued       Support and Training

                       Other optional paper-based education and advice                 End user support
                       materials include:                                              Training includes a thorough explanation of the site,
                                                                                       frequently asked questions, and behind-the-scenes
                       • 4-Step Guides — self-scoring asset allocation                 information on the educational and advice components.
                         questionnaires                                                Our support desk staff trains yours in a half-day session.
                                                                                       And any questions that your staff can’t answer can be
                       • Retirement Planner print reports — sent to participants       referred to our representatives, who will guarantee an
                         in response to completed questionnaires                       answer within 24 hours.

                       • Model portfolio descriptions                                  The system is not hard to learn. That’s the point.
                       olio descriptions                                               We provide complete documentation at implementa-
                       • Reviews of plan investments                                   tion, and assign an implementation team that can
                                                                                       answer questions. We offer a half-day training for
                       • Standard & Poor’s stock & fund reports — over 6,000           the your 1st-tier customer support on how to triage
                         stock reports and over 8,600 mutual fund reports              and route questions.

                       Our Published Image subsidiary can develop marketing            We also train plan providers’ sales staff, so they can
                       materials exclusively for plan sponsors such as brochures,      present the Retirement Advisor accurately
                       newsletters and educational guides.                             to plan sponsors.

                       IVR materials                                                   Technical support                                            Technical training is
                       Our telephone advice service gives plan participants access     Technical training is available for clients who want
                       during business hours EST/EDT to trained professionals          to do their own application development on the               available for clients
                       who can offer specific advice on 401(k) situations.             Retirement Planner platform.
                                                                                                                                                    who want to do their
                                                                                       Software problems are assigned to one of three categories:
                                                                                                                                                    own application
                                                                                       Critical issues prevent people from using the service;
Our Published                                                                          and there are no workarounds. Such problems are              development on
                                                                                       obviously the highest priority, and take precedence
Image subsidiary                                                                       over all other development and maintenance issues.           the Retirement
                                                                                       Critical problems are addressed in first-in-first-out
can develop mar-                                                                       order. Within 24 hours of being alerted, Standard &
                                                                                                                                                    Planner platform.
                                                                                       Poor’s will provide a solution or a date by which the
keting materials                                                                       problem will be solved.

                                                                                       Serious issues can be resolved with a workaround, but
exclusively for
                                                                                       they seriously disrupt the user experience. Serious soft-
                                                                                       ware issues are typically fixed by the next maintenance
plan sponsors
                                                                                       release (or sooner).
such as brochures,                                                                     All other software issues that can be resolved with
                                                                                       relatively convenient workarounds are typically fixed
newsletters and                                                                        in the next minor release.

educational guides.
Our Technology
  Hardware specifications                                                   Typically, Layers 1-3 execute on an end-user computer,
  A desktop Pentium II system with 128MB of memory                          but we use these same components for server-side tasks
  and 2GB of disk space can serve plans with a total                        (for Java-less web) and for paper generation. Multiple
  of more than 100,000 participants. Indeed, the only                       protocol bridges (layer 4) and data gateways (layer 5),
  limit to capacity is the amount of hardware the provider                  can be distributed across multiple servers and locations
  dedicates to the application. The Client Java version of                  (all working in parallel) for fantastic scalability.
  the Planner does most of the work on the users’ com-
  puters, so the computing power of the server is not                       From the technical standpoint, all of the applets are embed-
  usually an issue. The server will need adequate network                   ded in HTML and readily adaptable. Of course, they are our
  bandwidth, of course; an average session can require                      intellectual property, and that limits your options somewhat.
  the download of 1-1.5 megabytes of HTML, images,
  and Java classes to the user’s computer.                                   Web Browser                                Presentation Layer
                                                                                                              Calculators and Client-side Database

                                                                                                             Data Access Layer (propriety or JDBC)
  Client software specifications
                                                                                                                                          Protocol 1
  4.0 browser or higher (Microsoft, Netscape etc.)
                                                                              Web Server
                                                                                                                                Protocol Bridge
  Server software specifications
  • Relational database compatible with ODBC                                                           Firewall (Optional)

    version 2 and higher                                                                                           Protocol 2

  • One of the following operating systems                                                                                        Data Server

        • Windows NT 4                                                                                                 Policy Layer and Data Junction
        • Solaris                                                                                                      Data Adapters (ODBC, CORBA)
        • Java Virtual Machine 1.2 or 2.0                                     Account Access/Middleware                 Participant Profile Database
  • One of the following web servers installed:                                 Recordkeeping System                                 Journal
        • Netscape 3.0x or higher
        • Microsoft IIS 4.0 or higher                                                                                              Provider Systems
  • Established security (e.g., SSL, password protection)                                                                    Retirement Investor Software

                                                                            We use an API to get from client-side scripts (propri-
  Platform architecture overview
                                                                            etary/disclosed) to the calculators on Layer 2. The data
  The Retirement Advisor platform is modular in design,
                                                                            transmission protocol (Layers 3-5) can be open standard
  as described below:
                                                                            (e.g., JDBC) or proprietary/disclosed (based on
  Layer 1 Applets                                                           HTTP/SSL). Because we use SQL-92 with only the
                                                                            most common extension, the Participant Database can
  Layer 2 Calculators, Client-side database
                                                                            be created using any standard RDBMS. Layers 4 and 5
  Layer 3 Client-side data access layer                                     are delivered including source code, which is 3,000 lines
                                                                            of portable C. We disclose our protocols and database
  Layer 4 Data Protocol Bridge
                                                                            schema so that they can be used in other applications.
  Layer 5 Data Gateway
      Layer 5.1 Message Listener                              Client configuration:
      Layer 5.2 Data Requester/Broker                              Applet             Applet              Applet
                (coordinates requests across
                multiple data sources)                                                         Calculator Modules
      Layer 5.3 Data Source Adapter Manager
                                                                                           Client-Side Database Layer
                  Layer 5.3.1 SQL Translator ODBC
                  adapter DBMS-specific adapter
                  (e.g., Oracle, SQL Server)                               Database Connection Module (LDBC, middleware, or other)

      Layer 5.3.2     SunGard Omni DDMS Adapter
                                                              Client-side applets provide the interactivity in the user interface.
      Layer 5.3.3     Adapters for other record-keeping
                      systems, middleware, TP monitors,                                                                                  continued
                      or proprietary record-keeping systems
      Layer 5.4      Participant Database, Journaling
                            Our Technology                continued
                                                                                                                The Data Gateway multiplexes a single user connection to
                                                                                                                the database(s), greatly reducing connect/disconnect
                                 Calculators: Beneath the applets lie a set of calculators                      overhead. This generally means you won’t need as many
                                 common to all (e.g., Social Security estimator, retire-                        (expensive) simultaneous user licenses for your database.
                                 ment savings goal calculator). These calculators monitor
                                 the database variables for changes. Because the calcula-                       The Data Gateway provides other services to help
                                 tors are independent, applets can rely on them to                              integrate with your systems, including:
                                 ensure that calculated data items are always consistent.
                                 With this design, an applet programmer can concentrate                         • table-driven field name translation, as an alternative
                                 on the user experience.                                                          to creating SQL views
                                 Client-side Database: For the duration of each user
                                                                                                                • table-driven field-level access policies,
                                 session, the client keeps a local copy of the database
                                                                                                                  for added security
                                 containing the user’s record alone. By default, the
                                 central database record for a user (housed on the server)
                                                                                                                • table-driven table-access policies, including
                                 is read only once, at the beginning of session. As users
                                                                                                                  journaling, timestamping and record modification
                                 move from page to page, only data changes are written
                                                                                                                  flags, etc., to make it easier to implement transactions
                                 back to the server. This makes the application excep-
                                 tionally economical with bandwidth.
                                                                                                                • table-driven redirection, so that requests (or portions
                                                                                                                  of requests) can be directed to other databases,
                                 Ordinarily, Java can only communicate with the web
                                                                                                                  business rules logic, or TP monitor systems, or use
                                 server from which the client loaded the applets.
                                                                                                                  a protocol such as OFX
                                 However, JDBC “gateways” will allow database
                                 requests to be routed to your database server even
                                                                                                                The Retirement Advisor platform base product includes
                                 if you are using different machines.
                                                                                                                customization of the Data Gateway to fit your environ-
                                                                                                                ment. However, if your system includes unusual or
                                 Database Connection module: We generally prefer
                                                                                                                proprietary interfaces, it may be best for you to provide
                                 HTTP to JDBC for data transport because:                                                                                                    Since most record-
                                                                                                                the adapter, with our consultation and support.
For the duration of              • HTTP automatically works on top of SSL for security                                                                                       keeping systems are
                                                                                                                Retirement Advisor Participant Database. The Retirement
                                                                                                                Advisor Platform Database is designed to be as simple
each user session,               • HTTP can go through network firewalls that might                                                                                          batch-oriented,
                                                                                                                and portable as possible. It can be implemented in any
                                   block JDBC or other connections
                                                                                                                modern relational database system, including Oracle,
the client keeps a                                                                                              Sybase, or even Microsoft Access.                            many plan providers
                                 Database Server Configuration:
local copy of the                Data Gateway. The Data Gateway, coded in portable C,                           Journaling. The Data Gateway records queries and             perform daily
                                 generates SQL 92 requests and forwards them to the                             updates of the Retirement Advisor Participant Database.
database and con-                appropriate database. The Data Gateway can collect                             It also records special entries from the client applets,     extracts of current
                                 record-keeping data in any of three ways, as described                         such as errors or “advice events.”
taining the user’s               in the table below:                                                                                                                         allocation and
                                                                                                                The Retirement Advisor Participant Database and
                      Access Method            Pros                     Cons                                    Journal specifications can be provided in DDL state-
record alone.                                                                                                                                                                account balance
                      Direct database          Quick to implement       Business rules that are kept outside
                                                                                                                ments, or as reference databases that can be copied or
                      access through           Quick to execute         the database need to be duplicated      exported to your database system.                            information for VRU
                      ODBC or similar tool                              in the Retirement Advisor. This
                                                                        increases the chance of errors in the
                                                                        original duplication and in updating.   Record-keeping System Interfacing:                           and web account
                                                                                                                Batch or Real-Time?
                      Interface with record    Quick to execute         Can be difficult to implement,                                                                       access systems.
                                                                                                                Since most record-keeping systems are batch-oriented,
                      keeping “black box”      Ensures that all         depending on the APIs for your
                                               business rules are       particular system                       many plan providers perform daily extracts of current
                                               carried through to the                                           allocation and account balance information for VRU
                                               Retirement Advisor                                               and web account access systems. Change requests are
                                                                                                                accumulated over the course of the day, and then batch
                      Web scraping             Quick to implement       Noticeably slow to execute
                                               Bypasses some data       Can aggravate load on web servers       processed overnight. The Data Gateway can work with
                                               security issues                                                  a batch system or feed changes directly to/from the
                                                                                                                Retirement Advisor participant database.

          The Retirement Advisor works inside your existing               • Privacy is usually the prime consideration. We must
          security infrastructure. Assuming that you already                ensure that no unauthorized party can reach a
          have some web-based security in place, we use the same            participant’s account data or gain control over an
          scheme. If you have no web access to accounts, we can             account. The usual ID/password supported by HTTP
          work with you to develop a secure infrastructure for an           for web sites is passed as clear text, and is therefore
          additional charge.                                                vulnerable to interception. Here are solutions:

          All transmissions between client and server use the                   1. Gather ID and password in an HTML
          SSL encryption scheme.There is also a protocol break                     form and send over an SSL (Secure Sockets
          between the client and the Gateway. The Data/                            Layer) connection to a web server application
          Protocol Bridge (and web server) can be protected                        for processing. SSL is a good idea anyway,
          by a firewall, and the Bridge to Gateway can also pass                   because the browser visibly assures users
          through a firewall. Thus, the Gateway, which acts as a                   that their data is safeguarded during transit.
          trusted agent, is doubly protected, and there is no
          “straight shot” at it from the Internet.                              2.Gather ID and password in Java, and send
                                                                                  using encryption or a protocol like challenge-
          Only data between the client and server is transmitted                  response so that the password does not have
          outside your firewall, and that is protected using SSL                  to go over the wire.This has the additional
          and the Protocol Break.                                                 potential advantage of removing management
                                                                                  of user IDs from the web server.
          Security issues arise in a number of areas.
                                                                          Proprietary data security is important to protect
Security Issue         Meaning                   Where Addressed          your market advantages.
                                                                                                                                       Fraud is similar to
                                                                          Tampering has not been much of a problem on the
Privacy                prevent unauthorized      Database, Web server,
                       access to personal        Communications
                                                                          Internet yet, but it is also one of the easier issues to
                                                                          address. Using digital signatures for Java classes appears   tampering, but is
                       account data
                                                                          to be a cheap but reliable way to guarantee the integrity
                                                                          of the code, both while stored on the server and in          something that we
Proprietary data       prevent unauthorized      Web server
                       access to the product
                                                                          transit to a user.
                                                                                                                                       have never heard
                       or sponsor-specific
                       data from competitors                              Fraud is similar to tampering, but is something that we
                                                                          have never heard discussed elsewhere. Because web            discussed elsewhere..
Tampering              prevent modification      Web server, Signing
                                                                          pages are easily forged, we include a tool for generating
                       of web pages or                                    quality marks — essentially a digital signature — on
                       Java code                                          pages. It is possible, if a bit tedious, to determine from
                                                                          the printed content of a page with a quality mark
Fraud                  prevent fabrication of    HTML, Java, Web server
                       erroneous advice
                                                                          whether the content is forged or altered.
Implementation                                                      We update the Data Gateway and application server by
                                                                    taking the application off-line briefly. The client is always
                                                                    transmitted to the user’s browser as HTML or Java, so it
  The implementation process starts off with an introduc-           can be upgraded without interrupting data or application
  tory planning meeting between the Standard & Poor’s               service to any participant. The Advisor platform relies
  implementation team and your group. Requirements                  heavily on published APIs to communicate between vari-
  are negotiated, including:                                        ous parts of the system, so it is wise to take the entire
                                                                    application off-line for every upgrade. The process of
  •   Business rule customizations                                  taking the application off-line, installing the upgrade,
  •   Risk questionnaire changes                                    and restarting the system usually takes less than an hour.
  •   Report customizations
  •   GUI changes                                                   Releases are divided into three categories:
  •   Record-keeping interface requirements                         • Patches are issued on an as-needed basis to fix
  •   Security and authorization schemes                              “critical” software issues.
                                                                    • Minor releases are issued roughly every three months,
  We need access to the IS system, to the record-keeping              and typically contain all the patch fixes rolled into a
  system, and resources for on-site testing. We also ask              release and some small enhancements.
  that you complete the paperwork we need to review                 • Major releases contain major new functionality and
  your fund selection, dovetail with your customer                    “rolled-up” patch fixes.We typically notify providers
  support, and provide marketing & sales training.                    of new releases by e-mail or telephone.

                                                                    In most cases, our update automatically detects cus-
  Retirement Advisor Implementation Team:
                                                                    tomized files and leaves the customizations in place when
  The Usual Suspects
                                                                    updating. For complex customizations (typically at the
  • Business Lead, to sign off on UI design and
                                                                    firewall and the Data Gateway), we ask you to keep us
    product functionality
                                                                    current with your source code so that we can keep our
  • Technical Lead, to coordinate the product installation
                                                                    own source code control system in synch.We test each
    and the record-keeping interface
                                                                    new release against all of your customizations, and
  • S&P Project Manager , to manage all project deliverables
                                                                    release them back to you as part of the product release.
  • S&P Technical Lead, responsible for all development work
  • Joint Testing and Certification, to ensure that all
    customizations work properly on your systems
                                                                  Regulatory Compliance
  How much time and effort your team members devote to
  the implementation depends on how much customization              Standard & Poor’s Investment Advisory Services, Inc.
  you want, and how much of it you want to do yourselves.           is registered with the SEC, and hence is licensed in
                                                                    all 50 states, District of Columbia and Puerto Rico.
  Together, we develop a schedule for four simultaneous tracks:     Standard & Poor’s maintains industry standard errors and
  • software implementation                                         omissions insurance, as well as fiduciary and fidelity bonding.
  • advice delivery
  • administrative tasks (e.g. contracts signed,                    All employees of Standard & Poor’s are subject to an
    legal approvals, sponsor paperwork, etc.)                       Employees’ Securities Trading Policy and The McGraw-
  • customer support integration and training                       Hill Companies’ Code of Business Ethics. These two
                                                                    policies contain general guidelines as to how Standard
  The implementation goes through an alpha test phase on            & Poor’s’ employees are expected to perform their jobs.
  the provider’s site, with members of the implementation           While they do not contain any express references
  team from both Standard & Poor’s and the provider.                to ERISA, they do mandate that employees comply with
  Beta testing consists of a phased roll-out to other employ-       applicable laws, that they abide by the highest ethical
  ees of the provider, and eventually out to the first sponsor.     standards, and that they act with complete integrity and
                                                                    in the best interest of our clients.
  Product updates
  All product enhancements go through a rigorous inter-             Prohibited transactions
  nal review by system architects, product management,              Because S&P is an independent third party, bundling
  and Investment Policy Committee members. Regression               our services should not involve any prohibited transac-
  testing is performed by the software developers, who              tions for the provider (based on past rulings by the
  run a series of transactions on each module. All calcula-         Department of Labor). However, to assure that there
  tions and recommendations are analyzed for system                 are no issues related to prohibited transactions, we
  integrity and consistency.                                        applied for a blanket PTE exemption in Q498, and the
                                                                    application is currently in process with the DOL.

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