Insights | Retirement and Investment Solutions Newsletter
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With the new year, we bring you a new monthly retirement solutions newsletter, Retirement Insights. We think you'll find it to be a timely and informative look at what's impacting our industry today.
Retirement Insights is just one way we seek to deliver our vision: To be the best provider of retirement and investment solutions, for every client and each individual. We welcome your feedback on our first issue.
Turn up your volume and listen to a message from Pam Popp, our CEO of J.P. Morgan Retirement Plan Services.
We are excited to share with you recent enhancements to our strategic consulting framework, Building the Best Plans in America. The framework has evolved as a consultative engagement, where our team members focus on your objectives and needs first and then discuss the plan design, funding, administration and participant communication elements to address any issues.
To provide superior service, your J.P. Morgan team starts with a deep and comprehensive understanding of your business, culture and unique needs. One tool we use to do this is the business planning process, typically done at the beginning of the year. Throughout the year, we monitor, update and evolve the business plan by delivering progress reports, statistical plan analysis, legislative updates, investment reviews and fee benchmarking information. We believe this information will help you meet your fiduciary obligations.
In addition to the business planning process, we also define “what’s winning” as follows:
- Gaining tangible benefits from the J.P. Morgan service team’s industry experience, needs analysis and solutions consultation.
- Translating our best investment, plan design and program analysis into practical solutions
- Engaging your participants’ knowledge about what they need to retire, how to get there and how to manage the retirement income process.
- Sharing a transparent relationship with respect to fees and services received associated with the retirement plan.
Our vision of being the best provider of retirement services and investment solutions is for every client and each individual. That’s why satisfaction for every client is our primary goal. Similarly, we put a priority on helping each individual reach his or her retirement goals. Our strategic consulting framework guides our conversation with you to help move the needle on the things you are focused on, understand the value of your partnership with us and help you be the best fiduciary possible.
No doubt, these are challenging times. Our plan sponsors follow a process that weighs the advantages and considerations in the design and administration their retirement plan provides. We have dedicated significant resources to design our suite of products to meet the expanding requirements of the marketplace. Your J.P. Morgan strategic relationship manager will share more with you about our strategic consulting framework, Building the Best Plans in America, in the weeks to come.
Thoughts on the Rumors of the Death of the 401(k), from Robert Holcomb, Head of Legislative Affairs, J.P. Morgan Retirement Plan Services
"The reports of my death have been greatly exaggerated.” – Mark Twain
At the end of last year and carrying over into this year, there have been a number of articles regarding the future of the 401(k) plan – many of them predicting its imminent demise. The Wall Street Journal, New York Times and USA Today all carried stories saying that these retirement savings vehicles were under assault by members of Congress. And the cover of the December issue of PLANSPONSOR magazine featured “The Plot to Kill the 401(k).”
The source for these reports appears to be a series of public hearings the House Committee on Education and Labor (HEL) held in October 2008. The subject of these hearings was “The Impact of the Financial Crisis on Workers’ Retirement Security.”
In particular, the media focused on the testimony of Dr. Teresa Ghilarducci, the Irene and Bernard L. Schwarz Professor of Economic Policy Analysis at the New School for Social Research. In her statement, Ghilarducci did not specifically call for the elimination of the 401(k), but she did propose an alternative – the Guaranteed Retirement Account (GRA). Provisions of the GRA would include:
- Allowing participants to “trade” their 401(k) balance, perhaps valued at mid-August values for a GRA (the testimony took place on October 7, 2008).The GRA would be invested in government bonds paying a guaranteed 3% return.
- The federal government would make an annual $600 contribution (inflation indexed) to every worker's GRA.Every worker not in an “equivalent” defined benefit plan would save 5% of their pay to the GRA.
After the hearings, George Miller (D-CA), Chairman of HEL, expressed some interest in Ghilarducci’s arguments. This comment seems to have sparked the series of articles saying that 401(k)s are under attack. Miller responded to these articles in a November 17 letter to The Wall Street Journal: “I do not support abolishing 401(k)s, forcing them into government programs, or changing their tax status. We must preserve and strengthen 401(k)s, not end them.” Miller also criticized the media coverage at his House Website: “The Wall Street Journal is needlessly creating fear among Americans rightly worried about their retirement security by misrepresenting my efforts to strengthen worker’s retirement security – attacks that have no basis in fact.”
While Miller has stated that he has no desire to abolish the 401(k), there can be no question that Congress will be taking a hard look at these plans. The recent market declines have fueled participant anxiety and aroused Congress’s attention. In addition, the tax breaks on contributions and income earned while monies are in qualified plans represents a significant deferral of tax revenues. Questions have been raised by members on whether the benefits of 401(k)s justify the cost in current tax revenue. I believe we will see significant structural changes to 401(k)s in the next few years, which may include:
- mandatory automatic enrollment and acceleration with opt-out provisions
- mandates on certain types of investment options that must be included in plans that allow participants to direct their investments
- new emphasis on how distributions are made and what form they take, particularly a move to encourage or perhaps even mandate some level annuitization
- increased scrutiny of fiduciary duties
- an examination of the current deferral of taxation of participant contributions and consideration of replacing it with some form of partial tax credit
We will be carefully monitoring the situation and any proposed legislation as it is being discussed. Look for updates in future issues of Insights.
If You Build It, They Will Come: Plan Design Decisions Demand Successful Communication Campaigns
Let’s apply the age-old riddle, “What comes first — the chicken or the egg?” to your retirement program. What comes first — plan design or participant communications? We think the answer is clear: plan features should drive the communication strategy.
When an employee-centric plan change is designed and paired with a thoughtful, targeted communication campaign, it can drive better results for plan participants. And with certain plan changes, sponsors can take advantage of inertia – considered to be one of the strongest forces impacting plan participants – to positively impact behavior.
Here’s how three sponsors successfully implemented plan design changes using targeted communication campaigns that took advantage of employee inertia:
Case Study #1
Forest Laboratories, Inc., a 5,000-employee pharmaceutical company, decided to replace its risk-based asset allocation funds with target date funds and name the target date funds as defaults. Forest Laboratories saw that 9% of its participants were invested in more than one risk-based fund. When it came time to announce the new target date funds, we worked with the sponsor to develop a creative electronic and direct mail campaign emphasizing the ease and convenience of target date funds and that choosing just one of these funds provides a diversified option.
The outcome? Forest Laboratories’ plan design, mapping strategy and communication campaign were successful in addressing plan-wide asset allocation. The communication campaign resulted in 21% of the targeted population making a proactive decision to change their investments.
Case Study #2
After a series of mergers and acquisitions and a search for a new plan provider, Lee Enterprises, a publisher of local newspapers, decided to re-enroll its entire population during the conversion process. The sponsor elected to default participants into age-based target date funds to simplify the re-enrollment process.
After the conversion, the campaign results were analyzed and we found the communication program resulted in 23% of Lee Enterprise’s employees actively re-enrolling. Target date fund assets more than doubled expectations.
Case Study #3
Finally, a manufacturing company with locations across the country introduced J.P. Morgan Personal Asset Manager, a managed account program, in 2007. Although 32.4%1 of plan sponsors across the country now provide a managed account to plan participants, this plan sponsor took the additional step of instituting passive choice in which participants were defaulted into the program and were forced to opt out if they did not want to participate. The communication program lauded the value, ease and convenience of professional account management, as well as the default deadline.
As a result, some 60% of its employees enrolled in J.P. Morgan Personal Asset Manager.
In these examples, sponsors made strategic plan design and implementation decisions coupled with targeted communication campaigns. In the end, plan-wide asset allocation improved with many participants moving into investment choices that increased diversification which may benefit their long-term retirement goals.
Contact your J.P. Morgan representative for information about communication tactics for upcoming plan design changes.
Fiduciary Basics
Industry-wide, plan sponsors are reporting heightened concerns about fiduciary responsibilities. As concerns have grown, so has the information and tools we provide you.
At J.P. Morgan, we believe a sound fiduciary foundation includes:
- understanding what it means to be a fiduciary and how to operate within the provisions of the law and your plan document
- establishing guidelines and procedures to meet fiduciary obligations, including due diligence and monitoring plan reporting
- documenting how you demonstrate the established guidelines are followed
To help sponsors understand fiduciary obligations, we provide resources, tools and insight on how to monitor plan costs, comply with the written plan document and review administrative statistics. We also provide commentary on pending legislation and final regulations.
In addition, we offer the following to help you establish guidelines and procedures to meet your fiduciary obligations:
-
prototype plan document
- QDRO guidelines
- loan procedures
- trade control policy
- investment policy statement
- administrative procedures manual
We also recommend you establish best practices for documenting how you demonstrate you are following the established guidelines. Our suggestions include you document:
-
investment committee meeting schedule (including documenting meeting minutes)
- process for investment and service provider reviews
- any fiduciary training you undertake
- ERISA bond and fiduciary insurance review (if applicable)
If you have questions about fiduciary fundamentals or the tools and resources we can provide you, contact your J.P. Morgan strategic relationship manager.
Top Five Reasons for Participants Calling J.P. Morgan Retirement Plan Services1
Participant call drivers remained consistent between December 2007 and December 2008. In 2007, the main reason behind requests was to spend extra money during the holidays. In 2008 and continuing through today, we hear more people with serious financial needs as their main reason for a request. We continue to educate participants about the consequences of removing money from their retirement plan and the long-term effects it may have on their retirement goals. This education is designed to help participants make more informed decisions about their retirement plans.
|
Category |
Call Volume, December 2008 |
% of Total Calls, December 2008 |
Call Volume, December 2007 |
% of Total Calls, December 2007 |
|
Distributions |
28,008 |
23.35% |
27,654 |
26.78% |
|
Loans |
16,444 |
13.71% |
16,540 |
16.02% |
|
Password/Account Access |
12,653 |
10.55% |
13,621 |
13.19% |
|
Hardship |
11,383 |
9.49% |
8,479 |
8.21% |
|
Contributions |
10,397 |
8.67% |
10,428 |
10.10% |
112/1/07 through12/31/07 and 12/1/08 through 12/31/08.
Replay now available
Listen to a playback of our February 11, 2009, Retirement Insight Webcast, featuring Pam Popp, CEO, with an update on the retirement industry landscape. The Webcast also includes a roundtable discussion with Kirk Isenhour, Anna van Ophem, Hal Bjornson and Diane Gallagher on:
- benefits of conducting a strategic review of your plan
- tips on choosing investments in an environment of increased scrutiny
- impact of plan design changes on participant behavior
- why company retirement plans are still viable solutions for employees
Click here to watch the replay
Recording ID: TownHall
Attendee Key: 306228
Legislative Update
WRERA, signed by the President on December 23, 2008, contains technical corrections to the Pension Protection Act (PPA) and provides special relief due to the economic crisis. One aspect of special relief granted to defined contribution plans and IRAs is the elimination of required minimum distributions due for the 2009 calendar year. This relief applies to both participants and beneficiaries who would otherwise be required to take a distribution in 2009. (Note: Distributions due for 2008 that were deferred to 2009, [up to April 1] are still required to be taken.)
In general, WRERA suspends the RMD requirement for the 2009 calendar year. It is not clear if this means that plans which do not offer another form of distribution (e.g., partial withdrawals) will need an amendment to allow participants otherwise subject to the RMD rules to take a distribution if one is desired. While the Internal Revenue Service (IRS) has issued preliminary guidance in Notice 2009-9, this guidance focuses on how IRA providers should code Box 11 on the 2008 Form 5498, which is an indicator as to whether or not an RMD is due in 2009.
Many in the industry are taking the position that plans can allow RMD-eligible participants the choice of whether or not to take the 2009 RMD payment irrespective of plan language or provisions. We understand the IRS will be issuing further guidance on 2009 RMDs, but, as of this writing, no timeframe for issuance has been announced. Ultimately, if an amendment is required, current IRS rules would allow it to be adopted later in the year and made effective back to January 1, 2009.
Generally, RMDs are not eligible for rollover. However, participants who take a distribution that would otherwise be applied to their 2009 RMD may roll this distribution over to an IRA or another qualified plan. Normally, distributions eligible for rollover are subject to 20% mandatory federal income tax withholding. Under the new act, these distributions will be subject to elective tax withholding instead of the mandatory withholding. This means affected participants who take such distributions in 2009 have 60 days after receipt to roll them over. To roll over their entire distribution, participants may want to elect 0% tax withholding.
When a participant dies prior to his or her required beginning date for the RMD, the death benefit payable to a designated beneficiary must be paid out over the lifetime of the beneficiary or by the end of the fifth year following the year of death. (The plan specifies which rule applies.) The law provides that 2009 is disregarded in determining RMD payments. This means that under the five-year rule, the payout period extends to the end of the sixth year following the year of death.
This RMD relief is only temporary. Required distributions will again be due for calendar year 2010. Those payments will be based on the appropriate life expectancy factor under normal rules. This means that a participant’s factor will be based on his or her birthday in 2010, and the required amount based on the December 31, 2009, account balance.
Some participants take their RMD payments early in the year. Those who received 2009 payments will receive information from JPMorgan Retirement Plan services informing them of their right to roll over such distributions. As further guidance becomes available, we will keep you informed.
Economic Update
Weekly Market Update by J.P. Morgan's Global Market Strategist Stu Schweitzer
For questions regarding your personal 401(k) plan, contact your 401(k) plan provider.
Availability of products and services featured in Insights vary by plan. For details, contact your J.P. Morgan representative.
All case studies are shown for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation. They are based on market conditions at time of the analysis and are subject to change. Results shown are not meant to be representative of actual investment results. Past performance is not a guarantee of and may not be indicative of future results.
J.P. Morgan Institutional Investments Inc. (JPMII) has hired Financial Engines Advisors L.L.C. (“FEA”) to provide sub-advisory services. JPMII is a federally registered investment advisor. FEA, a federally registered investment advisor and wholly owned subsidiary of Financial Engines Inc., is an independent company that is not affiliated with J.P. Morgan Retirement Plan Services LLC or JPMII.
Neither JPMII, FEA, or its affiliates guarantee future results. Financial Engines® is a registered trademark of Financial Engines, Inc. All other marks are the exclusive property of their respective owners. ©2005-2008 Financial Engines, Inc. All rights reserved. Used with permission. J. P. Morgan Retirement Plan Services provides plan recordkeeping and administrative services.
Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. References to financial markets are for illustrative purposes only. Indices do not include fees or operating expenses and are not available for actual investment.
This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for investment, accounting, legal or tax advice.
Publications referenced in this material are presented for general educational purposes only. JPMorgan and its affiliates did not receive any compensation or consideration for referencing these titles. The opinions and information presented in these titles do not necessarily reflect the opinions of JPMorgan Chase & Co. and its affiliates.
Recordkeeping and administrative services are provided by J.P. Morgan Retirement Plan Services LLC (JPMRPS); securities transactions for the plan may be introduced by J.P. Morgan Institutional Investments Inc. (JPMII). Member FINRA/SIPC. JPMRPS and JPMII are affiliates of JPMorgan Chase & Co.
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