The Principal®:

Overview of the 401(k) BusinessChris Bowman

Vice President, Retirement and Investor Services

May 2006 • UBS Teach-In

Forward Looking Statements

Certain statements made by the company which are not historical facts may be considered forward-looking statements, including, without limitation, statements as to sales targets, sales and earnings trends, and management’s beliefs, expectations, goals and opinions. These statements are based on a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Future events and their effects on the company may not be those anticipated, and actual results may differ materially from the results anticipated in these forward-looking statements.

The risks, uncertainties and factors that could cause or contribute to such material differences are discussed in the company’s Annual Report on Form 10-K for the year ended December 31, 2005 and in the company’s quarterly report on Form 10-Q for the quarter ended March 31, 2006, filed by the company with the Securities and Exchange Commission. These risks and uncertainties include, without limitation: competitive factors; volatility of financial markets; decrease in ratings; interest rate changes; inability to attract and retain sales representatives; international business risks; foreign currency exchange rate fluctuations; and investment portfolio risks.

Use of non-GAAP Financial Measures

A non-GAAP financial measure is a numerical measure of our performance, financial position, or cash flows that includes adjustments from a comparable financial measure presented in accordance with U.S. GAAP.

We use a number of non-GAAP financial measures that management believes are useful to investors because they illustrate the performance of our normal, ongoing operations which is important in understanding and evaluating our financial condition and results of operations. While such measures are also consistent with measures utilized by investors to evaluate performance, they are not a substitute for U.S. GAAP financial measures. Therefore, in the back of the handouts, we have provided reconciliations of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measure. We adjust U.S. GAAP financial measures for items not directly related to ongoing operations. However, it is possible that these adjusting items have occurred in the past and could recur in the future. Management also uses non-GAAP financial measures for goal setting, to determine employee and senior management awards and compensation, and to evaluate performance on a basis comparable to that used by investors and securities analysts.  

We also use a variety of other measures that we do not consider to be non-GAAP financial measures. These are operational measures and do not have U.S. GAAP counterparts. Assets under management is an example of an operational measure.

Agenda

Market Overview• Segmentation

• Business models

• Value propositions

Distribution• Models

• Wholesale Model

• Broker/Dealers

Sales Process

• Sales Cycle

• Conversion process

Focus on Participants

• Increasing participation

• Increasing deferrals

• Investment options

• Capturing plan distributions

• Retire SecureSM

Financials• Earnings drivers

• Fees and plan costs

Market Overview

PFG Market Segmentation

Institutional Segment: Over $25 millionTotal Retirement Solution

Dynamic Segment: $5 - $25 millionA more personal approach

Emerging Segment: $750,000 - $5 millionA complete solution made easy

Micro Emerging: Under $750,000A bundled solution with small company affordability

Primary Competitors:Business Model

Bundled

Unbundled

Small Case

LargeCase

TARGET MARKET

BU

SIN

ES

S M

OD

EL

Nationwide

Manulife

Diversified

Merrill Lynch

MetLife

Vanguard

Fidelity

Mass Mutual

Aetna/ING

Prudential

Total Retirement Outsourcing

•Reduce administrative burdens

•Cost savings

•Efficiency and time savings

•Expanded resources to meet fiduciary obligations

•Speeds service to employer and employee

•Easier for employers and employees to plan

Value Propositions

Principal

Emerging: Experience, Service, Investments

Dynamic: Client Service, Investments, Technology

Institutional: Customized solutions, Commitment, Due Diligence Program

ADP

Offers integrated payroll, human resource and benefits services for small, medium and large businesses

BISYS

Ability to operate as a seamless resource, providing an expanding array of solutions, leading edge technology, and expertise in every segment of the converging financial services industry.

Fidelity

Unparalleled name recognition, a reputation for leading edge systems and technology, and a commitment to the marketplace.

ING

Emphasizes local account management. ING has a major presence in the small market where it partners with TPAs and financial advisors; it is building position in the middle market.

John Hancock/

Manulife

Experienced pension field sales and service network, one of the largest in the industry. Highly developed network of TPA relationships, linked by automated data exchange. Investment platform includes name brand mutual funds or sub-advised options.

Value Propositions (cont.)MassMutual Comprehensive retirement plan service provider (DC, DB, NQ).

Has developed a fully integrated product and service capabilities with robust in house investment capabilities.

Nationwide Has the largest and most tightly linked network of Preferred Pension Administrators (PPAs). Defines the PPA as the primary customer and builds an approach that fits the PPAs way of doing business.

Paychex Provides integrated payroll, human resource and benefits services for small to mid size businesses.

Prudential Offers comprehensive array of retirement plan services (DC, DB, NQ).

Putnam The sophisticated buyers alternative to Fidelity and Vanguard. “The intelligent choice.” Positions itself as a top quality, high end provider across the board.

T. Rowe Price Strong retail fund manager. Good relationships with intermediaries.

Vanguard Client service, technology, and the lowest expense ratios in the industry (which equates to low total cost for their retirement plans).

Distribution

Distribution Models• Direct (Fidelity, ADP)

• Semi-Direct (Merrill Lynch, Citigroup)

• Wholesale through Advisors (Fidelity, MassMutual, Prudential)

• Wholesale through TPA’s with or without Brokers (Hancock, Nationwide)

Role of the Wholesaler

VP of Sales or Director of Sales Emerging Market Rep

Dedicated to driving sales throughout the USFocus on larger clients Broker Network

Focus on smaller clients Broker Network

Distribution Models

PFG Wholesaler SupportRIS Distribution

Directors of Business Development

Alliance Partner Development

Producer Support Team for Emerging

Market Reps

Independent Small

Plan Brokers Market Specialists: RIA, TPA, Payroll, Consultants, Non

Profit, DB

PFG Local Service Model

RIS Distribution and Service

Relationship Managers

Account Executives

EducationSpecialists

Emerging (<$5m) andDynamic ($5-$25m)

Clients

ParticipantsInstitutional Clients ($25m+)

Unique & Enhanced Distribution Networks Local presence matters

8 service centers nationwideOver 45 retirement offices

Scored 18% above market average for having knowledgeable and

professional qualified plan sales reps or wholesalers. Brightwork Partners 2004

Typical Sales Cycle

1 2 40 3Level 5

Week 1 Week 32

 Sales Milestones

 Level 0 = Suspect/Initial Contact

 Level 1 = RFP

 Level 2 = Preliminary Presentation

 Level 3 = Presentation to Key Decision Maker

 Level 4 = Finalist Presentation

 Level 5 = Committed

 

Conversion Process (PFG)Blackout is the time of participant inactivity from prior record

keeper cutoff date to live date at new record keeper.

Participant activity stopped

Live date

Asset TransferData

received

Prior recordkeeper new recordkeeper

Blackout Start ……………………………………………………. Blackout Stop

• Industry average blackout period is 8 calendar days

• Principal offers 24-hour conversions

• Principal’s conversion project manager has 8-14 years of experience vs. Industry average of 6 years

Source: 2004 Deloitte

Focus On Participants

Increasing Participation

Automatic Deferral Once employees are eligible, they are encouraged to enroll and

select their elective deferral percentage of pay. If they do not proactively enroll, they are automatically enrolled

at a pre-determined percentage (often 1-5 percent). This pay is withheld from each paycheck and deposited into the retirement plan.

Once enrolled, few opt out.

Increasing Participation with Principal

Smart Start • Smart Start: Simplifies the deferral decision for participants – Client

determines the starting deferral rate and asset allocation (Principal Lifetime).

• Simplifies Selection– Since the plan sponsor determines the starting deferral amount and asset allocation, the participant is already on the right track

• Maximize Match Opportunity – Plan sponsors typically choose a deferral amount that guarantees the maximum match contribution

• Participant Choices – The participant remains in control and can choose a different contribution and asset allocation.

Increasing Deferrals

Principal Step Ahead Retirement OptionSM: Participant deferral rates are automatically increased each year on a set date.

•Allows the participant to save more for retirement automatically.

•Helps the participant stay on track when saving for retirement.

Investment OptionsRetirement plan participants fall into two basic profiles when it

comes to how they prefer to invest1

Do-it-For-MeInvestors

Do-it-MyselfInvestors

• May not have time to regularly rebalance retirement accounts

• May not feel comfortable with concepts of investing

• May not want to be very involved in retirement planning

• May take time to regularly check investment options and rebalance accounts

• May feel comfortable with concepts of investing

• May want to be very involved in retirement planning

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

Investment Options that support a simple, flexible approach

Do-it-For-MeInvestors

Do-it-MyselfInvestors

• Principal LifeTime Portfolios

• Russell LifePoints

• Principal Managed Account ProgramSM

• Choose your own investment options

• Brokerage Account

• Retirement Saving Worksheet

• Investor Profile Quiz

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

On-Site Enrollment and Guidance Principal Retire SecureSM

A Next-Generation Retirement Program

That Helps Employees Achieve Financial Security

• Provides a Retire Secure team for professional financial assistance at

the workplace for all participants.

• Delivers enrollment in person, face-to-face

• Offers deeper professional resources that help with other financial

needs at any stage of life.

Capturing Plan Distributions

•Sophisticated “benefit event” processing

•Call Center with access to licensed transition professionals

•Automatic rollovers for Small Amount Force Outs

•Encourage retention of vested deferred accounts inside the plan

•Easy transition from employer to individual products (IRA, annuity, etc.)

Financials

Promises Made, Promises Kept:

Retirement Services*

’01 ‘02 ‘03 ’04 ’05 CAGR

Account Values ($B) $42.9 $42.9 $55.9 $68.9 $77.3 16%

Deposits ($B) 8.5 11.2 12.6 13.3 15.4 16%

Organic Sales ($B) 3.3 4.6 5.6 5.2 6.1 17%

Net Cash Flow 1.9 2.9 4.9 3.8 3.3 15%

Member Asset Retention 49% 51% 54% 54% 52%

*Pension full service accumulation

Principal’s 2005 Retention Rates

Employer Plan Assets

94%

Participant Assets

52%

Retention Leader; average 401(k) client tenure 35%

above industry norm – Boston Research Group

Average Fees Charged in the Industry

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

25 Ptps, $1Min assets

50 Ptps, $2Min assets

100 Ptps,$4M in assets

200 Ptps,$8M in assets

500 Ptps,$20M inassets

1000 Ptps,$40M inassets

2000 Ptps,$80M inassets

Investment Recordkeeping Administration Trustee

1.40%1.31%

1.26% 1.20% 1.17% 1.17%

1.55%

The Most Common Commissions We See at the Principal

• Emerging Market – Typically see 1% finders fee and annual trail of 0.25% on assets

• Dynamic Market – Typically see 0.50% finders fee and annual trail of 0.25% or flat trail amounts starting at 0.40% and grading down.

• Institutional Segment – Typically flat trail amount starting at 0.20% or consultants charge at one-time consulting fee.

Fees and the Market

• The market is highly competitive

• Total costs are important

• Retirement services are not a commodity!

• Still a big opportunity to offer an above-the-rest value proposition

• The market demands Transparency and Full Disclosure

Thank you!