ProVal’s Efficient Frontier command lets you find asset mixes that optimize “excess returns” rather than optimize solely asset returns. Generally, excess return efficient frontiers produce better asset allocation options if:

• the plan sponsor’s idea of risk is related to surplus, contributions, or expense and

• the associated liability moves with interest rates.

Asset returns are generated by the capital market simulation.

Liability returns are defined as = { / ( + )} 1 where is the value of the liability at time n, and is the liability’s normal cost minus experience benefit payments discounted to the beginning of the year. Liabilities, normal costs, and benefit payments are generated by the underlying core projections. It is useful to observe that the algorithm is parallel to the way one would calculate an asset return for a pool of assets.

Excess returns are defined as the excess of the nominal asset return over the liability return or as . ProVal calculates the excess return for each asset class for each year and trial, and then determines the empirical mean, standard deviation and correlations for input into the efficient frontier.

Thus, the excess return reflects the actual particularities of the plan over the referenced time period, not a generic assumption about liability duration.