Tim Dillane

Director, Pension Investments

Merck & Co., Inc.

Dick Davies

Senior Managing Director

AllianceBernstein, L.P.

CASE STUDY: Plan

Sponsor Insights on

Custom Target-Date

and Re-Enrollment

Today’s Discussion

• Overview of Merck’s 401(k) Plan

• Reasons For Going Custom

• Implementation Process

• Portfolio Design Decisions

• Re-Enrollment Case Study

• Potential Plan and Portfolio Enhancements

2

Merck 401(k) Plan Profile

• Assets of $8.8 billion

• 44,500 participants

• 96% participation rate

• 75% match on first 6% of contributions

• Auto-enrollment at 6% rate

• Auto-escalation up to 10%

• Custom TDF: April 2009

• TDF Assets: $3.7 billion

• Recordkeeper: Fidelity

42%

23%

6%

8%

13%

2%

6%

Merck Plan Assets

Target-Date

Large Cap Equities

Small Cap Equities

Int'l Equities

Company Stock

Fixed Income

Money Market

3

Merck Investment Menu

Tier 1“All-in-One” Approach

Target Date Funds (QDIA)

Merck’s “Retirement Portfolios”

Simple, Yet Sophisticated:A Fully Diversified

Portfolio in a Single Fund

Tier 2“Build Your Own”

Approach

Core Options

Active Options Money Market Fund

US Large Cap Equity

US Small Cap Equity

International Equity (2)

Company Stock

Passive Options S&P 500

Russell 2000

MSCI EAFE

Barclays US Agg

Basic “Food Groups”

42%

58%

4

Why Did Merck Go Custom?

• Address unique plan demographics

• Apply established DB principles• Asset class selection

• Blend of Active and Passive

• Leverage combined DB/DC scale

34%

31%

17%

9%

9%

Control Over Managers

CustomGlide Path

More DiverseAsset Allocation

Costs/FeeTransparency

FiduciaryConcerns

Source: Casey Quirk Target-Date Retirement Funds: The New Defined Contribution Background, November 2009

Industry Survey Results

5

Implementation: Three Primary Workstreams

Investments Design Glide Path

Glide path

Asset classes

Components

OperationsDaily Operations/

Develop Asset Transition Strategy

Component transition strategy

Interfaces:

Recordkeeper

Managers

Custodian

CommunicationsAdvise and Consult With Recordkeeper

on Participant Communications Strategy Introduction

Ongoing

6

7

Glide Path Customization Issues

Custom Target-Date Glide Paths Range

AllianceBernstein Clients

Source: AllianceBernstein

0

20

40

60

80

100

20 30 40 50 60 70 80 90 100

% S

tock

Age

Key Customization Considerations

Goals, risk tolerance or other objectives

Typical retirement age and post-retirement behavior

Company stock holdings and defined benefits

Wage level, growth and deferrals

Employment risk or frequency of job changing

Sponsor perspective

7

Asset Class Usage in Custom Portfolios22 Plans – Year-End 2013

Equity Fixed Income Diversifiers

AssetClasses

US

Lar

geC

ap

US

Smal

l/M

id C

ap

US

All

Cap

Int’

l Dev

elo

ped

Int’

l Sm

all C

ap

Emer

gin

g M

arke

ts

Co

reB

on

d

Glo

bal

Bo

nd

Go

v’t

Bo

nd

Hig

h Y

ield

Lon

g D

ura

tio

n

Sho

rt D

ura

tio

n

Emer

gin

g M

arke

ts

TIP

S

Stab

le V

alu

e

Cas

h

REI

TS

Co

mm

od

itie

s

Rea

l Ass

ets

Ris

k Pa

rity

Active 2 5 - 4 - 8 7 2 - 11 1 3 2 6 3 6 7 3 2 1

Blend 5 7 - 8 - - 2 - - - - - - - - - - - - -

Passive 14 9 1 10 1 4 12 - 1 1 - 7 - 15 - 1 7 2 - -

TotalPlans

21 21 1 22 1 12 21 2 1 12 1 10 2 21 3 5 14 5 2 1

Source: AllianceBernsteinActive Bias Passive/Hybrid Bias

8

Stocks

BondsDiversifiers

This chart does not represent any particular target date fund. It is meant to show how the investment mix of any target-date portfolio changes over a lifetime.Numbers may not sum due to rounding.Source: AllianceBernstein

0

25

50

75

100

25 30 35 40 45 50 55 60 65 70 75 80 85+

Exp

osu

re

(%)

AgeYoung Saver Midlife Saver New Retiree Senior Retiree

25 30 35 40 45 50 55 60 65 70 75 80 85+

US Large Cap Stocks 43.5 43.5 43.5 43.5 43.4 41.6 38.0 35.0 32.6 27.7 22.1 16.5 16.5

US Small Cap Stocks 15.0 15.0 15.0 15.0 14.5 13.3 12.5 10.8 8.7 6.4 4.7 3.0 3.0

International Stocks 26.8 26.8 26.8 26.8 26.5 25.1 23.1 21.0 18.9 15.6 12.3 8.9 8.9

Emerging Markets Stocks 4.7 4.7 4.7 4.7 4.7 4.4 4.1 3.7 3.3 2.8 2.2 1.6 1.6

Core Fixed Income 10.0 10.0 10.0 10.0 11.0 15.5 16.1 16.9 21.5 21.8 23.6 25.4 25.4

TIPS 0.0 0.0 0.0 0.0 0.0 0.0 6.4 12.6 15.0 15.0 15.0 15.0 15.0

Cash 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 10.7 20.1 29.6 29.6

Total Stock Allocation 90.0 90.0 90.0 90.0 89.0 84.5 77.5 70.5 63.5 47.5 41.3 30.0 30.0

Total Diversifier/Bond Allocation 10.0 10.0 10.0 10.0 11.0 15.5 22.5 29.5 36.5 52.5 58.7 70.0 70.0

Stocks

Bonds

Merck Portfolio Construction

9

Re-Enrollment Case Study

Date

November 2009 Merck merged with Schering-Plough (S-P)

November 2010 Merck’s Investment Committee approved a harmonized investment lineup for domestic DC plans

August/September 2011

Legacy S-P plan participants were given a 6-week window to make investment elections from the new lineup

• Participants who did not make an active election are defaulted, per his/her age, into a custom target-date fund

October 2011 Participant balances were re-allocated per election window results

10

33% of Legacy Plan Participants Made Elections

20%

9%

24%

8% 7%

12%

21%

7% 7% 8%6%

4%

6%

61%

0%

10%

20%

30%

40%

50%

60%

70%

Money Market Bonds US Large Cap

Equity

US Small/Mid

Cap Equity

Global/Int'l

Equity

Company Stock Asset Allocation

% o

f Pla

n A

sset

s

Pre Re-Allocation - Sep 2011

Post Re-Allocation - Oct 2011

11

Target-Date Defaults: More Systematic Outcomes

Representative DC data for the example client reflect stock allocations for excluding self-directed brokerage investments as of 1Q:09 for 29,483 participants with over $5,000 in account value.

401(k) plan average stock allocations exclude investments in target-date funds and treat allocations to balanced funds as 50% stock.

Source: AllianceBernstein

Percent of Assets Invested in Equities By Age – Client Example

AllianceBernstein Implemented Target-Date Glide Path Equities by Participant

0

20

40

60

80

100

25 30 35 40 45 50 55 60 65

12

Re-Enrollment Growing, But Still Misconceptions

12.2%

76.8%

8.5%

0 1 2 3 4 5 6 7

Too Costly

Mgmt Objections

Admin Complexities

Communication Difficult

Fiduciary Liabilities

Not Necessary

Participant Objections

10 = Most Important

YesNext Year

No

?

Have You Re-Enrolled? Why Not Re-Enroll?

Source: Callan 2014 Defined Contribution Trends

13

What’s Next For Merck?

• Continue to streamline core investment menu

• Pursue “investment re-allocation” for primary US Savings Plan

• Revisit glide path methodology in response to DB plan design changes

• Evaluate portfolio construction under various AUM scenarios

14