KP Funds

The Funds file their complete schedules of investments with the Securities and Exchange Commission (the “Commission”) for the first and third quarters of each fiscal year on Form N-Q within sixty days after period end. The Funds’ Forms N-Q are available on the Commission’s website at http://www.sec.gov, and may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.

A description of the policies and procedures that the Funds use to determine how to vote proxies relating to portfolio securities, as well as information relating to how the Funds voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, is available (i) without charge, upon request, by calling 855-457-3637 (855-4KPFNDS); and (ii) on the Commission’s website at http://www.sec.gov.

Fiscal Year 2014 was characterized by a recovering economy in the US, continuing weakness across Europe and Asia, declining global interest rates, and a precipitous drop in oil prices. The top performing major asset class for the year was large capitalization US stocks with the Russell 1000 Index returning over 13%. US bonds also performed surprisingly well with the Barclays US Aggregate Index returning almost 6% for the year. Non-US equity markets did not fare as well with the MSCI EAFE Index losing over 4% for the year and the MSCI Emerging Markets Equity Index losing just over 1.8%. Returns for inflation sensitive (or real) assets were mixed with US REITs (as measured by the FTSE NAREIT Composite Index) returning over 27% for the year and commodities (as measured by the Bloomberg Commodity Total Return Index) posting a loss of over 17%.

The KP Retirement Path Funds (the “Funds”) were launched during the early part of January 2014 to provide participants in KP sponsored defined contribution plans with diversified exposure to all of these asset classes, as well as a number of others including small cap US equity, natural resource equity, global listed infrastructure, Treasury Inflation Protected Securities, floating rate notes, emerging market debt, and short term bonds. The Funds were open to investment by participants in KP sponsored defined contribution plans on January 31^st, and over that first weekend in February, more than $3.4 billion in assets was mapped into the Funds. These assets were subsequently invested into a broad array of investment strategies and asset classes to provide the Funds’ shareholders with efficient and diversified exposure to a full spectrum of investment opportunities across the global capital markets.

Each of the 10 KP Retirement Path Funds is designed with a specific retirement date in mind. Participants are expected to choose the Fund that best aligns with the year that they turn 65 and then contribute to the Fund appropriately over the course of their career. The Funds are designed to take care of the rest by investing in a diversified mix of strategies and asset classes which automatically adjusts to become increasingly conservative over time. By gradually changing its asset allocation in this way, each Fund is designed to help shareholders achieve the appropriate balance between long-term capital growth, inflation protection, and current income for each stage of their savings and investing career.

Over the course of the first year for the Funds we have been quite satisfied with their design. We have also been satisfied with the performance of the operational infrastructure that was assembled to coordinate the activities of the 16 different investment management organizations responsible for the management of the Funds’ assets. From an overall investment performance standpoint, however, we were somewhat disappointed with the first year. We will discuss this in greater detail in the performance section of the report, but all of the Funds lagged their strategic performance benchmarks during the period from inception (January 10, 2014), through December 31, 2014. The relative underperformance ranged from the 2035 Fund lagging its benchmark by -1.08%, to the 2050 Fund lagging by -2.19%.

While we regret the relative underperformance in our first fiscal year, we must acknowledge the fact that it was generally a difficult year for active management across most major markets. We continue to believe that we have assembled a highly capable team of sub-advisors, and that the Funds are well positioned to achieve their objectives going into 2015 and beyond.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth less than their original cost and current performance may be lower than the performance quoted. Returns greater than one year are average annual total returns. For performance data current to the most recent month end, please call 855-4-KPFNDS.

Performance for the KP Retirement Path Funds for Fiscal Year ended December 31, 2014 was positive on an absolute basis but was disappointing on a relative basis compared to the Funds’ strategic benchmarks. In order to better understand the sources of underperformance for the year it is helpful to review the design of the Funds.

Each of the KP Retirement Path Funds is itself a “fund-of-funds”. This means that each of the Funds is composed of a collection of sub-funds, each with a specific purpose that contributes to the overall design. At the highest level these sub-funds can be grouped into six major categories which include: large cap US equities, small cap US equities, international equities, broad fixed income, real (or inflation sensitive) assets, and short term fixed income. Each of the KP Retirement Path Funds varies its exposure to these asset categories over time to ensure that it is achieving the appropriate balance of capital appreciation, current income, inflation protection, and capital preservation. The 2060 Fund, for example, is primarily invested in large cap US equity, small cap US equity, and international equity. The 2015 Fund, on the other hand, has a much greater emphasis on broad fixed income, real assets, and short term fixed income.

The performance of each Fund is compared to its own strategic benchmark. The strategic benchmarks are designed to reflect the target asset allocation for each Fund, while also assuming that each of the underlying asset classes is implemented using a passive index. While Management makes extensive use of passive strategies in the Funds’ implementation to keep costs low, we also employ a number of active strategies in our attempt to add value relative to the strategic benchmarks. Management does not attempt to add value by trying to time markets using tactical asset allocation. Instead we have designed a sophisticated rebalancing algorithm that keeps the Funds very close to their strategic asset allocation targets over time. As a result, virtually all of the relative performance of the Funds versus their strategic benchmarks can be explained by the relative performance of the strategies within each of the six underlying asset classes. Given this understanding, we can now put the relative performance of the KP Retirement Path Funds into perspective by examining the relative performance of each of the underlying asset classes.

Throughout the performance discussion, unless otherwise noted, the performance period will be from the Funds’ inception on January 10, 2014, through December 31, 2014 (“the performance period”).

The KP Retirement Path Funds achieve their large cap US equity exposure through the use of the KP Large Cap Equity Fund. This Fund is benchmarked to the Russell 1000 Index. The Fund employs three strategies including a passive S&P 500 index strategy, an active large cap growth strategy, and an active large cap value strategy. The Fund returned 11.21% over the performance period versus 13.41% for the benchmark. This underperformance of -2.20% was largely explained by the large cap growth strategy which significantly underperformed its benchmark during the first half of the year. This was an extremely difficult period for active growth strategies relative to the benchmark with over 80% of active strategies underperforming the Russell 1000 Growth index. During this time in particular, the large cap growth strategy was hurt by poor stock selection in the Information Technology and Consumer Discretionary sectors. Notable securities in these sectors included an underweight to Apple, which performed well over the period, and an overweight to Amazon.com which performed poorly. Because large cap is a significant part of the asset allocation for all of the KP Retirement Path Funds, this was the greatest source of relative underperformance across the entire family.

The KP Retirement Path Funds achieve their small cap US equity exposure through the use of the KP Small Cap Equity Fund. This Fund is benchmarked to the Russell 2000 Index. The Fund employs five strategies including a passive Russell 2000 strategy, two active small cap growth strategies, and two active small cap value strategies. The Fund returned 4.06% over the performance period versus 4.80% for the benchmark. This underperformance of -0.74% was the result of a very difficult fourth quarter during which over 75% of actively-managed small cap strategies underperformed the Russell 2000 index. Because small cap is a relatively small part of the asset allocation for the KP Retirement Path Funds, this was not a significant source of relative underperformance.

The KP Retirement Path Funds achieve their international equity exposure through the use of the KP International Equity Fund. This Fund is benchmarked to the MSCI ACWI ex-US Index. The Fund employs four strategies including a passive MSCI EAFE strategy, two active ACWI ex-US strategies, and a dedicated active emerging markets strategy. The Fund returned -3.83% over the performance period versus -3.18% for the benchmark. This underperformance of -0.65% was primarily attributable to the first quarter with the Fund steadily gaining ground over the rest of the year. Because international equity is a large part of the asset allocation for the KP Retirement Path Funds, this was a significant source of relative underperformance.

The KP Retirement Path Funds achieve their broad fixed income exposure through the use of the KP Fixed Income Fund. This Fund is benchmarked to the Barclays US Aggregate Index. The Fund employs four strategies including a passive Barclays Intermediate Government/Credit Index strategy, an active core bond strategy, an active emerging markets debt strategy, and an active bank loans strategy. The Fund returned 2.68% over the performance period versus 5.21% for the benchmark. This underperformance of -2.53% came primarily from two sources. Roughly -1.46% (almost 3/5 of the total) of the underperformance was achieved during the period between January 13, 2014 and January 31, 2014, before KP participants were invested in the Fund. During this period Management elected to pre-fund the emerging markets and bank loans strategies in order to facilitate the transition of participant assets into the fund and to save them significant transactions costs. Over this period the Fund was almost entirely invested in those two strategies, both of which underperformed the index. The remaining roughly 1.07% of underperformance was largely explained by the shorter duration of the Fund relative to the Barclays Aggregate Index during a period of falling interest rates. The underperformance of the Fixed Income allocation had a greater impact on the 2025, 2020, and 2015 Funds than on the rest of the series.

The KP Retirement Path Funds achieve their real assets exposure through the use of a diversified collection of non-affiliated sub-funds each specializing in a different inflation-sensitive strategy. Collectively these strategies returned 6.69% over the measurement period versus 5.08% for their composite benchmark. Six of the seven underlying real assets funds met or exceeded the performance of their respective benchmarks over the measurement period. The international real estate, global infrastructure, and commodities strategies did particularly well outperforming by 6.94%, 3.83% and 2.43% respectively. Because real assets are a relatively small part of the asset allocation for the KP Retirement Path Funds, they did not contribute significantly to relative performance across the series.

The KP Retirement Path Funds achieve their short term fixed income exposure through the use of a low-cost index strategy. This sub-fund outperformed its benchmark by 1.14%. This outperformance primarily impacted the 2025, 2020 and 2015 Funds, as the rest of the Funds in the series have little to no exposure to this asset class.

The following tables show the performance of each of the KP Retirement Path Funds since inception through December 31, 2014.

To determine if one of these funds is an appropriate investment for you, carefully consider the fund’s investment objectives, risk factors, charges, and expenses before investing. This and other information may be found in the fund’s summary and full prospectuses, which may be obtained by calling (855)4-KPFNDS or by visiting the website at www.kp-funds.com. Please read the prospectus carefully before investing.

The KP Retirement Path Funds and the KP Core Funds are mutual funds. They are part of The KP Funds Series Trust, an open-end management investment company that offers shares of diversified portfolios. The funds are advised by Callan Associates Inc., a registered investment advisor. They are administered by SEI Investments Global Funds Services and distributed by SEI investments Distribution Co., which are not affiliated with Callan Associates.

Only participants in the Kaiser Permanente defined contribution plans and 403(b) plans can invest in the funds.

There can be no assurance that a Fund will achieve its stated objectives. An investor may experience losses, at any time, including near, at or after the Fund’s target year. In addition, there is no guarantee that an investor’s investment in the fund will provide any income at or through the years following the Fund’s target year in amounts adequate to meet the investor’s goals or retirement needs.

Investing involves risk including loss of principal. Bond and bond funds are subject to interest rate risk and will decline in value as interest rates rise. Mortgage-backed securities are subject to pre-payment and extension risk and therefore react differently to changes in interest rates than other bonds. Small movements in interest rates may quickly and significantly reduce the value of certain mortgage-backed securities. Non-investment grade bonds involve greater risks of default and are more volatile than investment grade securities, due to the speculative nature of the investment. International investments involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from social, economic or political instability in other nations. These risks are heightened when investing in emerging markets or in a single state.

Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in the Underlying Fund would be adversely affected. The use of leverage by the fund managers may accelerate the velocity of potential losses. Furthermore, the use of derivatives are often more volatile than other investments and magnify the Fund’s gains or losses. Diversification does not protect against market loss.

The S&P Target Date^® Series comprises eleven multi-asset class indices, each corresponding to a particular target retirement date. Each index provides varying levels of exposure to equities and fixed income. Each target date allocation is created and retired according to a pre-determined schedule related to the respective target date.

The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000^® Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the Russell 3000 Index.

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000^® Index representing approximately 8% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.

The MSCI ACWI ex-US Index captures large, mid and small cap representation across 22 of 23 Developed Markets countries (excluding the United States) and 23 Emerging Markets countries. With 6,092 constituents, the index covers approximately 99% of the global equity opportunity set outside the US.

The MSCI EAFE Index captures large, mid, small and micro cap representation across 21 Developed Markets countries (excluding Canada and the United States).

The MSCI Emerging Markets Equity Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

The Barclays US Aggregate Index is a broad-based and measures the performance of the U.S. investment grade bond market. It invests in a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States – including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year.

The FTSE NAREIT Composite Index is a headline index that consists of all REITs included in the FTSE NAREIT All REITs Index that also meet the minimum size and liquidity criteria. The FTSE NAREIT Composite Index is free float adjusted.

The Bloomberg Commodity Total Return Index is composed of futures contracts and reflects the returns on a fully collateralized investment in the Bloomberg Commodity Index (“BCOM”). This combines the returns of the BCOM with the returns on cash collateral invested in 13 week (3 Month) US Treasury Bills.