Retirement and Investment Solutions Newsletter


April 2010 Issue

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Hello and welcome to Insights, where our focus this issue is on retirement readiness.

Retirement income and Roth provisions are hot topics in the news. Our focus on retirement income, which is a complex topic, is from a plan-design perspective. We’re providing insights on Roth provisions, as well.

Have you heard the news about the potential for Roth conversions in employer-sponsored plans? Learn the details in our Legislative and Regulatory Update. We also provide perspective on the pros and cons of adding Roth feature to your plan. Finally, you might be curious about Roth utilization here at J.P. Morgan Retirement Plan Services; we bring you that information, too.

As always, we’re excited to share topical pieces with you, along with our regular features.

Enjoy this issue and let us know your feedback.

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Retirement Income Options

"I am more concerned about the return of my money than the return on my money." (Mark Twain)

During the accumulation phase of their defined contribution (DC) retirement accounts, superior overall investment performance may be paramount in the minds of many participants. As retirement approaches – and to paraphrase Twain – participants are likely to begin shifting their concerns to when they will receive income from their retirement accounts. In the September 2009 Insights, we talked about retirement income market solutions that address managing assets through retirement for participants. The three types of retirement income market solutions available are:

  • plan design features
  • out-of-plan distribution options
  • in-plan investments

Our primary focus here is on solutions that are a function of plan design, which generally need to be incorporated in the written plan document. Plan design options, and some of the considerations for each, are:

  • Annuities/qualified joint and survivor annuity (QJSA) ­– a DC plan option
    • guaranteed retirement income
    • purchased with lump-sum distribution from insurance provider
    • insurance provider selected by plan sponsor
  • In-plan installments ­– a DC plan option
    • payments made from the plan
    • payments made over participant’s expected lifetime or a defined period (i.e., 10 years, 15 years, etc.)
    • no guarantee that payments last for participant’s lifetime
    • payments may be made on a monthly, quarterly, semi-annually or annual basis
  • Partial distributions ­– a DC plan option
    • partial lump-sum distribution from the plan
    • access to participant’s account balance
    • available for ad hoc distributions
    • no guarantee that payments last for participant’s lifetime
    • remaining account balance remains invested in the plan
  • Rollover to defined benefit ­(DB) – an option in the DB plan
    • DB plan allows rollover from another qualified retirement plan (i.e., a DC plan)
    • participant may obtain a larger annuity from the DB plan

Plan sponsors strive to offer options to help ensure their participants receive an income stream throughout retirement. Contact your strategic relationship manager to discuss plan design-based solutions to retirement income.

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Decoding Target Date Fund Design
Defining Your Goals

How do you align target date fund selection with your retirement plan’s goals?

Target date funds, with their emphasis on diversification and active asset allocation in a single fund, have become important retirement planning tools. Yet, fundamental target date fund differences – from asset class decisions and glide path design, to risk budgeting and rebalancing, to name a few – can have significant impact on participant outcomes. Selecting a target date fund for a particular plan starts by defining what the plan is trying to achieve and then analyzing the type of target date fund strategy most closely aligned to these goals.

Questions to consider:

  1. Have the plan’s goals been defined? Realistic goals need to outline how the plan seeks to provide participants with retirement income security. This starts by examining the characteristics such as return expectations, volatility management and risk exposure at retirement.
  2. How can target date fund design differences affect participant outcomes? Analyzing how a target date fund aligns with a plan’s goals requires an understanding of the types of possible participant outcomes different target date funds seek to deliver. Key decisions around asset class diversification, portfolio efficiency and equity exposure must address real-life scenarios to help maximize the number of participants who meet their retirement goals.

Answering these questions can help you begin to compare which type of target date fund makes the most sense for your plan’s investment needs.

During the next several issues, Insights will feature a series of articles on approaches to helping decision-makers evaluate and compare target date funds. The series will focus on a building-block approach to each component of target date fund design.

TARGET DATE FUNDS. Target date funds are funds with the target date being the approximate date when investors plan to start withdrawing their money. Generally, the asset allocation of each fund will change on an annual basis with the asset allocation becoming more conservative as the fund nears the target retirement date. The principal value of the fund(s) is not guaranteed at any time, including at the target date.

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How Well Do You Know Your Investment Manager?

Since early 2008, plan sponsors and participants may have experienced a bumpier ride in the markets than anticipated – providing many with a practical understanding of their risk tolerance. As markets emerge from this particularly volatile period, we think it is a good time for plan sponsors to pause, exhale and take a step back to revisit the investment processes of the managers in their defined contribution plans.

In previous issues of Insights, we discussed criteria around evaluating an investment manager and offered many factors to consider during the initial due diligence process. With these as the foundation, in this article we dig a bit deeper into a specific component of investment manager assessment: understanding the manager’s investment philosophy and process.

Factors to consider
A wide range of factors within a manager’s investment process can contribute to or detract from performance. These include the use of cash, level of concentration by security or sector, degree to which the strategy tracks the benchmark and style. All funds within a peer group are not managed in the same fashion, and there are styles within a style which can account for performance disparities. For example, within value peer groups there are deep-value managers who purchase out-of-favor companies and relative value managers who focus on relative valuation metrics within an industry. In growth peer groups, some managers employ a GARP (growth at a reasonable price) philosophy and others may be aggressive-growth managers.

An additional consideration when evaluating international managers is the degree to which they allocate to emerging markets, with some allocating none and others allocating up to 30%. There is also a range of styles within the fixed income space. In defined contribution plans, we typically see a core or core plus option (which allocate to extended sectors), although there are more narrowly focused funds such as treasury-only, high-yield and corporate-bond funds.

Understand the process
How does understanding an investment process assist in evaluating a manager’s results? For example, when value is out of favor, deep-value managers may experience greater underperformance than relative-value managers. Understanding the approach can help the plan sponsor determine if performance is the result of a style being in or out of favor in the current market. The absence of this level of understanding can result in a plan sponsor electing to replace a fund whose style is currently out of favor, while its performance is consistent with the investment approach.

These style variations can be important when determining what fits best within a plan’s lineup. Identifying the style and approach can assist the plan sponsor in the evaluation of a manager’s performance, whether the style is appropriate and if it compliments other options in the plan. Markets are cyclical in nature, and a style that was in favor at one point in time is likely to be out of favor during another. Understanding the style of your investment managers can explain performance in both up and down markets and help minimize surprises.

Investing has its risks, but those taken by the investment manager should be of a nature with which the plan sponsor is comfortable. At J.P. Morgan, your strategic relationship manager can help address these questions and provide insight on the plan’s investment managers to help you fulfill your fiduciary role.

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Audience of One® – Revisited

J.P. Morgan recognizes that many participants are “accidental investors” who take advantage of employer-sponsored benefits as a means of saving for retirement. Meanwhile, they continue to live their lives without expending a lot of energy on planning for retirement.

It’s with this understanding that we developed our Audience of One philosophy for communicating with participants. Audience of One gives your employees the information they need – the right message at the right time and in the right medium – which can help them know if they’re on track to having enough savings to live comfortably through retirement.

For almost two decades, Audience of One has guided us in building one-on-one, actionable, results-oriented participant communications. From plan-wide promotional campaigns to personalized messaging, from Retirement Dream Machine to one-on-one attention from our Retirement Service Center, J.P. Morgan offers a suite of tools to reach each participant at any level within an organization.

Tenets stand the test of time
In today’s information-packed world, we are required to sift through clutter to focus on things that are meaningful to us. For participants – whether they delegate plan decisions or own them – our personalized communications are designed to inform and influence behavior. Using our Audience of One tenets, we craft messages to connect with each individual participant. The following tenets are designed to speak to each individual no matter where he or she is in the process of saving for retirement:

  • Make it personal.
  • Make it simple.
  • Connect the money to the emotion.
  • Diagnose before you prescribe.
  • Cultivate a long-term relationship.

Effective communications encompass an audience focus – and that’s the hallmark of Audience of One. Audience of One is about marrying data with messages to generate changes in participant behavior. It’s the central part of our participant experience.

Your J.P. Morgan representative can answer any questions you may have about how we use Audience of One with your participants. We will continue to provide additional information on Audience of One tools and resources in future issues of Insights.

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What's New: The Way Forward

The Way Forward recently received first-place honors at the Pensions & Investments 2010 Eddy Awards and a Gold Quill from the International Association of Business Communicators. Both awards recognize excellence in employee education.

My mother made me do it
May brings The Way Forward’s second Webcast of the year. “My mother made me do it” focuses on how emotions can shape investing decisions and ways to make more strategic choices. The Webcast also focuses on helping your participants gain an understanding of investing principles and practices and ways to apply them to their retirement accounts. Log-on and call-in information for the May 5 Webcast are the same as for the log-in information for the March Webcast. All information is currently on The Way Forward. Additionally, you’ll receive details on how to help promote this educational session to your employees.

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Pretax or After-Tax – a Question for Plan Sponsors

Plan sponsors are faced with several choices when it comes to what types of plans to offer their employees. Should you stick with the traditional 401(k) plan, or should you add Roth contributions? What is best for your employees? As the plan sponsor, there are several elements to consider in the decision-making process, including current plan provisions and how they’re utilized, your employees’ needs and how to educate them on Roth provisions.

Choosing between the two
Since 2006, plan sponsors have had the option to allow employees to make Roth contributions to their 401(k) plans. Roth contributions, unlike pretax elections, are excludible from income when paid out of the plan, as long as the payment is a qualified distribution. By offering both pretax and after-tax contributions, the plan sponsor provides employees with the ability to choose how they manage their income taxes. Participants in a lower tax bracket may find the Roth 401(k) plan desirable, while the traditional pretax 401(k) might be more appealing to other employees.

In comparing the two options:

  • Pretax contributions provide employees with a tax benefit now. When employees retire, their contributions and earnings will be taxed, based on their tax bracket at retirement.
  • Roth contributions are taxed now. When employees retire, they can withdraw their Roth contributions and earnings tax-free once they meet the pre-established qualifying criteria.

Below is a side-by-side comparison of the traditional 401(k) plan and Roth 401(k) plan.

Traditional 401(k) plan

Roth 401(k) plan

Contributions are made with pretax dollars.

Contributions are made with after-tax dollars.

Growth on investments is without tax consequences.

Growth on investments is without tax consequences.

No income limitation.

No income limitation.

Contributions and withdrawals are subject to taxation.

Contributions have already been taxed. Earnings are not taxed at distribution if the employee is:

  • at least 59½
  • disabled
  • deceased
  • and, contributions are held in the account for at least five years

What does this mean to the plan sponsor?
Adding a Roth 401(k) feature to your 401(k) plan is easy. Typically, there are no operational burdens associated with adding a Roth provision, as long as your payroll provider can account for this type of contribution. The most important thing to consider is employee education and tools, so your employees can make educated decisions on contribution type.

If you are interested in implementing a Roth feature, contact your strategic relationship manager.

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Legislative and Regulatory Update
Conversions of Pretax Balances to Designated Roth Accounts

On March 10, 2010, the Senate passed the American Worker, State and Business Relief Act of 2010 (as a substitute amendment to H.R. 4213). The legislation, which is primarily aimed at extending certain expiring tax provisions, also includes some much-needed pension funding relief and a provision allowing Roth conversions within employer-sponsored 401(k) and 403(b) plans. The bill also allows eligible governmental 457(b) plans to add a Roth contribution feature for the first time.

Expanded eligibility in the news
Hardly a week goes by without an article appearing in some financial publication, newspaper or retirement newsletter about converting a traditional IRA to a Roth IRA. While this conversion opportunity is not new, it is getting much attention this year due to expanded eligibility for such conversions. Starting in 2010, the $100,000 income limit has been eliminated, allowing wealthier individuals a choice to convert. Participants in employer-sponsored plans can take an available distribution and roll it over to a Roth IRA to accomplish a conversion. However, this requires amounts be withdrawn from the employer’s plan.

If H.R. 4213 becomes law, participants would not have to withdraw funds from their employer plan to make the Roth conversion. A plan that provides a designated Roth 401(k), 403(b) or 457(b) provision could allow participants to convert within the plan. However, as currently written, the bill only allows amounts that are available for distribution or an in-service withdrawal to be converted.

Taxes payable in 2010 or in 2011/2012
Conversions to Roth status are taxable to the participant (to the extent of pretax amounts in the account). If the conversion takes place in 2010, the taxpayer has the choice to pay applicable taxes in 2010 or spread them over 2011 and 2012. There are many factors to be considered by individuals when deciding whether or not to convert. Much has been written about the pluses and minuses of such a conversion, which will not be addressed here.

Action on this bill is still needed by the House of Representatives, and it is not clear if the Roth conversion feature will remain. Generally, it is seen as a good thing by plan sponsors and participants. If the bill is passed, it would allow participants a tax-planning opportunity without requiring them to take monies out of their employer-sponsored plan. We will watch this legislation closely and keep you informed.

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Participant Behavior Snapshot:
Roth Utilization

The Roth feature gives participants the opportunity to pay today’s taxes on their 401(k) contributions, as opposed to paying taxes during retirement. Roth contribution accounts may be suitable for varying populations. Examples include moderate-income participants who are consistent savers and have generous retirement benefits, as well as high-income participants who expect to be in a higher tax bracket during retirement.

Nearly half (43%)* of our plan sponsors offer the Roth option to their defined contribution plan participants. Inside those plans, approximately 8% of participants utilize the feature. Participants employ the option to different degrees. Slightly more than half of contributing participants divide their contributions between pretax and Roth accounts, and approximately 40% of participants are concentrating their contributions solely in Roth accounts.

*J.P. Morgan data as of December 31, 2009.

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Holiday Schedule for 2010

J.P. Morgan Retirement Plan Services observes several holidays throughout the calendar year. These holidays correspond with the closing of the New York Stock Exchange.

For 2010, the firm will be closed the following days:

  • New Year’s Day – Friday, January 1
  • Martin Luther King, Jr. Day – Monday, January 18
  • Presidents’ Day – Monday, February 15
  • Good Friday – Friday, April 2
  • Memorial Day – Monday, May 31
  • Independence Day – Monday, July 5 (observed)
  • Labor Day – Monday, September 6
  • Thanksgiving Day – Thursday, November 25
  • Christmas Day – Friday, December 24 (observed)

The markets will close early at 1 p.m. Eastern time on Friday, November 26. Because of this, our Retirement Service Center will also close early.

The automated information line and participant Web site will still be available to participants who want to access plan and account information when we are closed for the holidays. 

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Sponsor Webcasts Calendar for 2010

2010 RPS Insights March Webcast Calendar

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Market Pulse

Weekly Market Update, a weekly outlook on the markets and the global economy.

MacroMinute Weekly, a short two- to three-minute audio commentary summarizing insights and outlook on the global economy, financial markets and asset allocation. MacroMinute Weekly can be delivered to your voice mail box on Monday mornings before the start of the business day. To subscribe, e-mail and include your name, firm name and phone number.

Guide to the Markets is our quarterly publication featuring the latest economic, market and demographic information across a wide range of asset classes including Equity, Fixed Income, International, Real Estate, retirement, and alternatives. Guide to the Markets comes in a compact-sized booklet and includes more than 40 pages of charts and graphs.

Market Video Replays. Making sound investment decisions in today’s complex markets requires clear and informed insights. In this timely series of videos, Dr. David Kelly, J.P. Morgan Funds’ Chief Market Strategist, and our portfolio managers and market specialists present their views and analysis of key market and economic trends.

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In the News

Information about JPMorgan Chase & Co. in the news is available at

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For questions regarding your personal 401(k) plan, contact your 401(k) plan provider.

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Contact us at:

For questions regarding your personal 401(k) plan, contact your 401(k) plan provider.

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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.

Certain underlying Funds of the Target Date Funds may have unique risks associated with investments in foreign/emerging market securities, and/or fixed income instruments.  International investing involves increased risk and volatility due to currency exchange rate changes, political, social or economic instability, and accounting or other financial standards differences.  Fixed income securities generally decline in price when interest rates rise.  Real estate funds may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector, including but not limited to, declines in the value of real estate, risk related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by the borrower.  The fund may invest in futures contracts and other derivatives.  This may make the Fund more volatile.  The gross expense ratio of the fund includes the estimated fees and expenses of the underlying funds.  A fund of funds is normally best suited for long-term investors.

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, nor 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. ©2005-2010 Financial Engines, Inc.  All rights reserved.  Used with permission.  J. P. Morgan Retirement Plan Services provides plan recordkeeping and administrative services.

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.

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.

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