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Insigts

April Issue

• Welcome to Retirement Insights
• Plan Reviews Crucial in Fiduciary Oversight
• Selection Approach for Target Date Solutions
• Ready to Engage the Autopilot?
• Top Five Reasons for Participant Calls
• Pointing The Way Forward
• Fiduciary Standards of Conduct
• Save the Dates - Upcoming Webcasts
• Legislative and Regulatory Update
• Economic Update
• In the News
• Contact Us
  

Thank you for joining us for our third issue of Retirement Insights. To print a copy of the newsletter, please press the "Print" button above. Highlights from this issue include:

• defining "what's winning" with respect to long-term, satisfied clients
• insight into what sort of legislation may take priority in the 111th Congress this year
• "The Way Forward," a new communications program to reach participants more frequently using several mediums
• criteria that may be considered when evaluating investments – specifically target date strategies

Thank you for allowing us to continue to share our insights. Now listen to a message from David Embry, our Head of Sales and Sponsor Services. We look forward to your feedback!

To speak directly with David, call him at 816-673-7279 or e-mail him at David.W.Embry@JPMorgan.com.

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Plan Reviews Crucial in Fiduciary Oversight

Are you regularly scrutinizing your retirement plan to ensure your employees view it as a valuable benefit? How do you examine the function, structure and procedures of your retirement plan committee? Are you confident you are effectively managing your fiduciary liability as a plan sponsor?

We know these are just a few of the top-of-mind questions for plan sponsors and can provide information to help you answer these and other critical fiduciary questions.

A plan review is essentially a customized snapshot of a company’s retirement plan, enabling a plan sponsor to understand where the plan has been, where it is now and opportunities for enhancement going forward. It provides valuable insights into how the retirement plan benefit compares to other similar companies’ plans. This consolidation of plan data provides sponsors with a valuable tool to develop strategies for the upcoming plan year and ultimately coincides with the annual business planning process.

“Periodic plan reviews provide your organization with a valuable opportunity to review all areas of your plan to make sure that each area is operating effectively,” said Anna van Ophem, head of Sponsor Services. “The purpose of the review process is to provide you with all the information needed to review and evaluate your plan in a clear, concise manner.”

As a plan fiduciary it is critical you review your plan and participant statistics on a regular basis. Plan fiduciaries have a wide range of retirement plan responsibilities for which they can be held personally liable. This fiduciary responsibility is the basis for how we design and deliver each plan and participant statistical review. Following are some of the plan sponsor tools we developed to help you gain a precise understanding of how well you are addressing these responsibilities and requirements to your participants and the organization.

Plan Review – This tool serves as the backbone of your overall plan review and can be used to regularly monitor the “health” of the plan, assessing numerous facets of plan administration. The review includes a look at:

• plan and participant statistics
• legislative/regulatory update
• §404(c) protection overview
• fiduciary standards
• plan design overview
• observations and next-step recommendations

Investment Review – This is a periodic review that objectively evaluates each fund’s performance (nominal, relative and risk-adjusted), style consistency, relative fee competitiveness and professional stability. The investment review process is designed to assist the plan sponsor with overall due diligence.

Value Benchmark – This report provides an update of the current fees charged and services being used by the client and goes a step further to benchmark these fees and services against other clients and the industry. It facilitates a dialogue between the client and the strategic relationship manager on fees and where the plan is now versus additional services that may be added in the future.

We understand that your fiduciary obligation cannot be taken lightly. We have designed tools to help you meet this important responsibility. We recommend periodic plan reviews to help ensure you are fulfilling this critical step in the fiduciary oversight process. If you have questions about any of these tools, contact your strategic relationship manager.

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Selection Approach for Target Date Solutions

Target Date Funds Are Not All Created Equal

In the last few years, plan sponsors have made investment menu design decisions to utilize target date funds. Recent market volatility has caused plan sponsors and consultants to assess the strategy they selected.

With a growing number of target date providers entering the marketplace and enormous differences among funds, third-party providers such as Morningstar, Lipper and Dow Jones, developed classification systems and benchmarking solutions to help fiduciaries group, compare, evaluate and monitor similar investment strategies. However, capturing the glaring structural differences among providers still remains a challenge. For example, one 2010 fund may allocate 65% to equities, while another 2010 fund may allocate 13% to equities (source: Morningstar as of December 31, 2008), resulting in two completely different strategies with varying degrees of outcomes.

Some emerging techniques introduce the concept of grouping managers based on similar underlying characteristics, such as percent invested in equities and level of diversification. J.P. Morgan’s Target Date Evaluation Framework, for example, offers a process for narrowing down types of managers according to their investment composition and glidepath strategy, which may help plan sponsors identify lifestyle providers that fit the goals of the plan and their workforce.

Beyond Performance - Understanding Your Manager

Once you narrow down the list of potential candidates, whether by using our Target Date Evaluation Framework or a different tool, consider the following due diligence criteria to help you differentiate among selected target date solutions. By assessing aspects beyond performance, such as organization, team and process (glidepath approach), you may be able to determine which strategy is more closely aligned with the goals of your plan. Some factors for consideration:

Organization

• At a firm level, consider the stability of the organization, as well as the commitment and resources devoted to the target date product.
• Does the firm offer an array of asset classes, and are the assets under management fairly diversified?
• Are the underlying strategies run off of the same research platform or via a variety of investment approaches (e.g., fundamental, quantitative, research driven, passive, behavioral, etc.)? 
• What is the company's history and experience in managing asset allocation portfolios for institutional clients?

Team

• At a product team level, consider the experience, background and tenure of the individuals responsible for managing the funds, as well as their resources. 
• Evaluate team dynamics, specific roles and responsibilities and identify the final decision makers. 
• Does the management team have full control over the investments selected within the portfolios, as well as over implementing any changes? 
• Does the team provide access to the portfolio managers should you need it?

Process 

During the process review, consider the philosophy behind the glidepath proposition, as well as the mechanics of day-to-day management of the funds, including tactical and strategic decision-making practices. This is where strategies vary significantly from one another – for example, some target date funds assume that the investor will want a high degree of safety and liquidity, because he or she might use the funds to purchase an annuity at retirement. Other target date funds assume that the investor will hold onto the funds and will, therefore, include more equities in the asset mix.

Given that different philosophies dictate different portfolio characteristics, this is a good place to assess the fund composition. Things to consider:

• Review diversification of asset classes and investment approaches to determine whether the funds use proprietary products or open architecture, an active or passive investment approach or a combination of the two. 
• Determine if the goal of the funds is clear and measurable (e.g., “target sufficient funds to purchase lifetime annuity replacing approximately 40% of working income”).
• Inquire about how the firm measures its progress toward the goal and what unique steps in the process are applied to achieving the fund’s objective. 
• Ensure that you understand the sources and are comfortable with the risk and volatility characteristics of the funds.
• Identify if risk is coming from the overall asset allocation, perhaps the lack of asset classes incorporated in the mix or from the roll-down approach (i.e., re-allocating for age/risk). 
• Inquire about when funds begin reducing portfolio risk and how they are managed post-maturity date, as some providers begin the roll-down process more than 20 years before retirement and have a static allocation in retirement, while others begin the roll-down in retirement and continue for 20 years thereafter.

Make An Educated Decision

Whether you are considering re-evaluating your existing target date strategy or choosing one for the first time, we encourage you to make sure you understand the philosophy and strategy of the investment manager and how the overall objective of the plan compares to the design of each target date offering.

Look beyond peer rankings and performance vs. benchmark to assess if the manager is delivering what is expected. Is the manager staying the course or deviating from its premises to capitalize on the current market environment?

We offer tools and resources to help you with this process. For more information, contact your J.P. Morgan representative.

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Ready to Engage the Autopilot?

"The times they are a-changin...”

– Robert Zimmerman

In late February, President Obama unveiled his budget plan for 2010. While the full details of the President’s budget are not expected until later this year, the 140-page blueprint provides insight on a number of issues raised during the campaign, including support for some form of mandatory automatic enrollment.

The section of the document devoted to the Department of Labor states:

“The President’s 2010 Budget lays the groundwork for future establishment of a system of automatic workplace pensions, to operate along side Social Security, that is expected to dramatically increase both the number of Americans who save for retirement and the overall amount of personal savings for individuals. Under this proposal, employees will be automatically enrolled in workplace pension plans. Employers who do not currently offer a retirement plan will be required to enroll their employees in a direct-deposit IRA account that is compatible with existing direct-deposit payroll systems.”

President Obama is not the only one showing interest in some form of automatic enrollment arrangement. In the last Congress, we saw bills introduced in both the House and Senate that would have established mandatory workplace IRAs. The proposed legislation would have required employees to be automatically enrolled in a direct deposit IRA, with the opportunity to opt out. There was some variance as to the extent the program would have applied to employers who were currently sponsoring a qualified retirement plan. One approach would have exempted those employers while another would have required covering certain employees who might not be eligible to participate in a plan, such as part-time and seasonal workers. Current indications are that Senator Jeff Bingaman (D-NM) and Representative Richard Neal (D-MA) are working on new legislation, and we expect to see something introduced in the near future.

2009 promises to be a busy year from a legislative standpoint. The President has laid out an aggressive agenda, and Congress will have its hands full. In the February issue of Insights, we touched on some areas where we might expect to see change in the form of future pension reform. With all that Congress has on its plate, it is beginning to look less likely that reform will be enacted in 2009 (although we could see the structure of that reform taking shape this year). The exception may be in the area of automatic enrollment. Automatic IRAs have a great deal of support, and any automatic IRA legislation is expected to easily clear the House. While the Senate is less comfortable with mandates, there is support for these proposals there as well, and we would not be surprised to see something pass this year. Mandatory enrollment in 401(k) plans, on the other hand, would likely be addressed separately from automatic IRAs and be considered as part of a broader pension reform package, most likely in 2010.

Of course, legislative calendars are influenced by current events. New foreign or domestic priorities may distract from any pension initiatives. Similarly, any new event that focuses attention on retirement security could accelerate reform. One thing appears certain, however, both automatic IRAs and mandatory automatic enrollment will be considered by the 111^th congress. As always, we will be keeping a close watch and will keep you apprised.

Please join us for an update during our Legislative Webcast on April 29 at 1 p.m. Central time.

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Top Five Reasons for Participant Calls

Our participant call volume was up approximately 38% between February 2008 and February 2009. Market volatility is the primary reason for the increase, as participants received their year-end statements and reacted to that information. Participant call drivers remained fairly consistent between February 2008 and February 2009, with one difference being an increase in calls about tax forms this year. Some participants have called with questions about getting their taxes filed early, and others were planning to calculate the amount of taxes owed.

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Pointing The Way Forward

A journey of a thousand miles begins with a single step.
- Lao-tzu, Chinese philosopher (604 BC - 531 BC)

While the troubled economy controls the headlines, millions of retirement plan participants are left wondering, “What in the world happened, and what do I do now?” These American workers saw years of asset accumulation dwindle in a matter of months, and now they’re looking for help in rebuilding their savings. We need to point the way for your participants to get back on track.

JPMorgan Chase & Co. has launched The Way Forward, an informational series to highlight programs we are doing to harness our resources to help the customers and the communities we serve. For J.P. Morgan Retirement Plan Services specifically, The Way Forward encompasses our efforts to help participants navigate the waters of this unprecedented time. The series highlights what your participants can do to stay on track for retirement given today’s challenging market environment. Retirement plan participants have questions surrounding their retirement and how to plan for it going forward. Our goal is to provide up-to-date information to help address the unique issues your participants face today.

Using our Audience of One^® philosophy, our experience with changing participant behavior and our interactions with your participants over the last year, our Participant Communications and Education Team has developed a comprehensive multimedia program to address this very unique situation.

The Way Forward is being released to participants online and features podcasts, webcasts and videos, as well as articles and tools. The program also includes face-to-face education programs that will be held in Dallas, Chicago, Phoenix and New York. The content is specifically divided into two categories: One category is geared toward Generation X and Y participants (participants between the ages of 25 and 40), and the other focuses on participants age 50 and older who are facing special circumstances given their time to retirement.

To keep participants focused on their goals or to help them to refocus, the content returns to fundamentals around objectives, time horizon and risk tolerance. Also, the program affirms the benefits of defined contribution plans: They still have tax advantages, are convenient and easy and, particularly in these markets, they afford the benefit of dollar-cost averaging. The content will be updated periodically, and the key messages in The Way Forward include:

• keep it in perspective
• let it grow
• opportunities in any economy
• saving strategies for life events
• the effects of market movements
• thinking long-term
• searching for stability
• planning tools including online resources and using an advisor
• withdrawal and distribution strategies
• looking forward

The recession presents a unique opportunity for those of us in this industry to rethink how we communicate with our participants and how we help them make the best choices given their circumstances. As a J.P. Morgan client, your participants will automatically have access to this new service, and you will receive tools to promote its availability. Stay tuned for more information on the release of The Way Forward to your participants, or contact your J.P. Morgan representative to learn more.

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Fiduciary Standards of Conduct

In last month’s Insights, we explored the factors that make a person, committee or entity a fiduciary. This month, we discuss how fiduciaries are required to act and conduct themselves. Section 404(a) of the Employee Retirement Income Security Act (ERISA) explains the four guiding principles of fiduciary responsibility:

Exclusive benefit rule – This requires that a fiduciary act solely in the interest of plan participants and beneficiaries, for the exclusive purpose of providing retirement benefits and defraying reasonable expenses of administering the plan. The Department of Labor (DOL) takes the position that a retirement plan is not an extension of the corporation; it is a separate entity and must be managed in the interest of plan participants and beneficiaries only. A fiduciary must avoid conflicts of interest, self-dealing or favoring the interests of a third party over those of participants. For example, if a non-ESOP plan makes a loan to the company, the plan fiduciaries have violated their fiduciary duty (self-dealing) and engaged in a prohibited transaction.

The use of plan assets to pay unreasonable fees is another violation of the exclusive benefit rule. The fiduciary must ensure that the expenses charged to the plan for its operation and administration are fair and reasonable. “Fair and reasonable” is a relative standard that necessitates comparison with industry benchmarks or through competitive bidding, and it requires weighing the expertise and value added by a particular service provider. A fiduciary must know who is getting paid, and how much, in order to make the determination that fees and expenses are reasonable for the services provided.

Prudence standard – This requires a fiduciary to conduct plan activities in the manner of a prudent person, using the same care, skill and diligence that a reasonable person who has similar responsibilities and is familiar with such matters would use. For example, a fiduciary who is responsible for making investment decisions is subject to a standard of prudence that would apply to a person who is familiar with making such decisions.

The duty to act prudently is one of a fiduciary’s core responsibilities under ERISA, and it governs all aspects of plan administration. “Prudence” depends on the facts and circumstances of a situation, but it is a much stricter standard than a basic good-faith effort. Fiduciaries are subject to this much higher standard of conduct because they are acting on behalf of plan participants. The DOL and courts have interpreted this standard as the Prudent Expert Rule. Not all fiduciaries have the skills needed in the finance, benefits and investment areas of their plan’s administration to satisfy these high standards. If lacking expertise, a fiduciary is obligated to seek the advice of qualified, independent experts and to carefully evaluate the advice given.

The prudence standard focuses on the process of making a fiduciary decision rather than the actual decision and its outcome. Last year for example, participants in a California 401(k) plan claimed that their investment fees were excessive, and they filed a lawsuit against the plan’s fiduciaries. While there was evidence that some of the funds underperformed their benchmarks, the federal court focused on the fiduciaries’ procedural prudence, and essentially ruled in favor of the fiduciaries because they engaged in a prudent process when choosing the underlying investment funds. As noted by the court, “…the test of prudence is one of conduct and not performance...” This decision provided guidelines for procedural prudence when the court noted that the fiduciaries:

• met regularly to discuss the plan’s investments
• sought the advice of disinterested outside consultants
• regularly reviewed the funds’ performance and considered alternatives
• offered a variety of fund options that were competitive with the industry standard, and
• documented the important components of their process

Investment diversification – This requires fiduciaries to diversify plan investments to help minimize the risk of large losses, unless it is clearly prudent not to do so.

If participants can direct their own investments, compliance with ERISA §404(c) may mitigate some potential fiduciary liability. Among its many requirements, §404(c) requires that participants have access to a broad range of investment alternatives, in part to satisfy the diversification requirement. There are certain exceptions (which come with conditions) for investments in employer securities. Irrespective of compliance with §404(c), fiduciaries are still subject to the prudence standard for choosing and monitoring all plan investments, taking into account the purposes of the plan, the financial conditions, the types of investments offered and the risk/return profile of the plan and its participants.

Diversification has become more important due to a significant number of ERISA class action lawsuits that have been filed by employees whose retirement plans were heavily invested in their companies’ stock when the price dropped.

Compliance with the terms of the documents which govern the plan – In addition to the formal plan document, governing documents include the summary plan description (SPD), the trust agreement, board resolutions, the statement of investment policy and any plan policies or procedures. The fiduciaries must determine whether the governing instruments conflict with ERISA; therefore, fiduciaries must know and understand the terms of their plan. When a conflict arises, fiduciaries have a duty to follow ERISA.

Conclusion

The law is clear in defining the duties a fiduciary must follow, and in spelling out that those duties must be solely in the interest of participants and beneficiaries. If at all possible, conflicted parties should not take on fiduciary duties. Next month, we will describe the consequences that result when a fiduciary breaches his or her duties.

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Save the Dates

• Legislative Update Webcast - Please save the date for our Legislative Update Webcast on Wednesday, April 29 at 2 p.m.Eastern time, where we will discuss the latest pension reform initiative and regulatory developments making the rounds in Congress. More to come.
• SmartRetirement Target Date Fund Webcast - Please save the date for our SmartRetirement Mutual Fund Quarterly Review Webcast on Tuesday, May 12 at 11 a.m. Eastern time, where we will review the past quarter and look at investment opportunities and positioning in the future. More to come.

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Legislative and Regulatory Update

This month, we want to provide you with a summary of legislative and regulatory developments that will be debated or may be coming out of Washington this year related to retirement plans. An issue that garnered much attention last year is related to fees charged by 401(k) and similar defined contribution plans. As we reported last month, the development of regulations dealing with plan-level and participant-level fees has been delayed by the Obama administration so that a more thorough review can be conducted.

From a legislative perspective, the fee issue seems to be broadening in scope. Due to the impact the recession is having on retirement account balances in defined contribution plans and the difficulties companies face in properly funding their defined benefit plans Congress has already indicated a desire to look at improving the effectiveness of the retirement system. The House of Representatives Committee on Education and Labor, chaired by Rep. George Miller (D-CA), conducted the first in a series of hearings in February to address retirement security.

Richard Neal (D-MA), chair of the House Ways and Means Subcommittee on Select Revenue Measures, also plans to set up a series of hearings to address perceived flaws in the U.S. retirement system as it exists today. Neal stated at the Investment Company Institute’s (ICI) Retirement Savings Summit on March 5 in Washington D.C. that he feels the Ways and Means Committee has responsibility for this effort, not Miller’s committee.

Also heard at the ICI Retirement Summit – Tom Reeder, benefits tax counsel for the Department of Treasury, said that agency guidance should be issued in the next several days on how asset smoothing in defined benefit plans should work. The Worker, Retiree, and Employer Recovery Act of 2008 signed into law on December 23, 2008, allows a pension plan to smooth the value of assets over a 24-month period, provided the resulting value is within 10% of the fair market value of assets (a corridor of 90%-110%). While such guidance will be helpful, the narrow corridor is generally more problematic for plan sponsors – a problem that cannot be fixed with regulations. Additional guidance on the suspension of 2009 required minimum distributions is expected, but Reeder indicated that it would likely be issued after March.

This year is not anticipated to be a big one for pension or retirement reform due to the current administration’s other initiatives. However, reports requested by Congress from the Government Accountability Office (GAO) can serve as an indicator of things to watch for. GAO reports currently pending include:

Rep. George Miller (chairman House Education and Labor Committee)

• comparison of domestic retirement plans to international plans
• types of fees that are charged to plan participants
• comparison of defined benefit plan features and defined contribution plan features, the risk associated with the features and who bears those risks
• investment advice and education, how it's used and its effectiveness
• 5500 disclosures and their usefulness

Rep. Charles Rangel (chairman House Ways and Means Committee)

• types of pension fees
• characteristics of workers covered by pension plans compared to those not covered
• tax expenditures related to retirement plans and the benefits received
• overview of the state of retirement plans

Senator Herbert Kohl (chairman Select Committee on Aging)

• leakage of assets from retirement plans (Are participants tapping into their retirement savings early?)

And finally, a reminder that large¹ PBGC-covered defined benefit plans with a 2008 calendar plan year need to issue an annual funding notice by April 30, 2009. Small² plans generally have until the date Form 5500 is filed to provide the notice. This notice takes the place of the summary annual report (SAR) that has historically been provided to participants within two months after the 5500 filing. The new annual funding notice is due earlier and contains more information than the SAR.

¹Plans that cover 100 or more participants at the beginning of the plan year.

²Plans that cover less than 100 participants at the beginning of the plan year; a small plan that increases its participant count to more than 99 but not more than 120 participants has the option to file as a small plan.

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Economic Update

Weekly Market Update by J.P. Morgan's Global Market Strategist Stu Schweitzer

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In the News

J.P. Morgan Takes Home Eight Eddy Awards

J.P. Morgan Retirement Plan Services took home more awards than any other nominee¹ at this year’s Eddy Awards, presented February 9, 2009, at the 17^th annual Pensions & Investments Defined Contribution Conference in Miami Beach, Florida. The Eddy Awards recognize defined contribution plan sponsors and service providers for excellence in participant investment education programs.

2009 Pensions & Investments Eddy Awards for J.P. Morgan Retirement Plan Services

Provider Category

• Initial Education - 3rd Place for American Airlines’ “$uper $aver” promotion
• Ongoing Education - 1st place for Hospira’s “Back to School” campaign
• Special Projects - 3rd place for International Truck and Engine’s “Start Your Engines” program
• Other media -1st place for the “Plan the Life You Want” video for Coca-Cola Enterprises

Plan Sponsor Category (in which our clients were recognized for work we created on their behalf):

• Initial Education - 3rd place for American Airlines’ “Super $aver” promotion
• Ongoing Education - 1st place for Bemis Co.’s “Game, Set, Match” campaign and 2nd place for El Paso Corporation’s “Decision 401(k)” campaign
• Other Media - 1st place for Coca-Cola Enterprises’ “Plan the Life You Want” video

Additional information about the Pensions & Investments Eddy Awards, as well as a list of the winners, is available at www.pionline.com. Follow the “2009 Eddy Awards” link on the left of the page. For more information on how J.P. Morgan Retirement Plan Services can put this experience into action for your plan, contact your strategic relationship manager.

¹J.P. Morgan Retirement Plan Services and our clients received a total of eight awards.

JPMorgan Chase & Co. Named One of World’s “Most Admired” Companies

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.

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.

IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.