Retirement and Investment Solutions Newsletter
August 2009 Issue
Thank you for allowing us to continue to share our insights. This issue includes:
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Letter From the Editor
This is our 7th issue of Insights. Since the inception of our monthly newsletter, we have focused on the retirement issues that affect you as a plan sponsor, fiduciary and employer. I hope that these topics are relevant, have provided value and continue to plant the seeds to continue to help you build the best retirement plans in America.
It is a tight rope to walk, when making the right decisions for your participants and ensuring that the decisions made now, will positively affect each and everyone one of your participants and their families for a long time to come.
This month, our investment article entitled, “Is High Yield an Appropriate Fund Option in a 401(k) Plan?”, raises some important issues regarding adding high yield to your plan.
We also have an article on integrating your total wealth programs. Have you ever considered the idea of integrating your Defined Benefit and Defined Contribution plans with one provider?
Finally, over 35,000 participants have visited The Way Forward site. Many plan sponsors are recognizing the benefits of the campaign and are getting involved by promoting it directly to their employees. Learn about ways you can promote the campaign for your participants.
Thank you for partnering with J.P. Morgan. We look forward to continuing to build our relationship with you.
J.P. Morgan Retirement Plan Services
Head of Marketing
Is High Yield an Appropriate Fund Option in a 401(k) Plan?
High yield securities are issued by companies and have ratings that fall below investment grade, or more simply, include those rated below BBB. In general, these companies have lower ratings due to such factors as being financially distressed, overleveraged or deemed to be less creditworthy. Some high yield issuers may be companies that have not been in existence for a long period of time or those that were once of investment grade quality but have seen their credit rating reduced. In addition, high yield securities offer higher interest rates than Treasuries or investment grade bonds due to their greater risk of default.
It is important for plan sponsors and employees to be aware of high yield securities that might already be in their investment line-ups. Many core-plus fixed-income funds will invest in high yield securities and it is not unusual to see allocations of four to five percent dedicated to high yield issues. In addition, many age and risk-based funds will also have allocations to high yield. For age-based funds, these percentages are typically the greatest in the shortest dated funds. Out of 32 well-known age-based fund companies, nine have no allocation to high yield securities. For those that do, the typical range for high yield in the shorter dated funds is four to seven percent of assets.
Another challenge for plan sponsors is helping their participants recognize the greater expected volatility of high yield bond funds. Some years these funds may track very closely to the overall fixed-income markets while during other time periods, they may produce equity like returns. High yield bonds do appear to offer a diversification benefit as they exhibit relatively low correlation with other asset classes including investment grade bonds. In fact, high yield bonds actually have a closer correlation to equity securities than they do to other fixed-income sectors.
Currently, less than 10% of JPMorgan Retirement Plan Services clients have a high yield fund as a stand alone option in their core line-up; a few more are considering adding it as an option for their participants. Plan sponsors who are considering adding a high yield fund would find that not all funds are the same. Some fund managers gravitate to the higher-rated end of the spectrum (those rated BB) while others may focus on B and lower-rated issues. A thorough due diligence review of specific fund alternatives will help to clarify the differing strategies followed by high yield fund managers.
So while high yield securities can provide some diversification benefits, plan sponsors and participants should be mindful of the exposure that they may already have in their plan line-up and individual asset allocations. A dedicated communication plan that specifically outlines the potential risks and rewards of investing in high yield securities is important. High yield securities certainly have their risks so a careful review of the appropriateness of offering and investing in this asset class should be considered. Speak with your J.P. Morgan representative to learn more about high yield investments.
Fiduciary duty with respect to employee contributions
During any recession, many plan sponsors face pressures that impact their business’ ability to survive. Drastic steps and difficult decisions are often required to stay afloat. One thing that a fiduciary must avoid at all times is the failure to deposit employee contributions to a retirement plan or a health and welfare plan on a timely basis. This article provides a quick review of the rules set forth in the Employee Retirement Income Security Act (ERISA) related to employee contributions. It is a rule that is often misunderstood.
Employees, who choose to contribute to their 401(k) plan or medical plan, have elected to convert wages into plan contributions. If it were not for this election, such amounts would be received by the employees on their applicable pay dates. By electing to make plan contributions with a portion of their wages, employees expect (and the law requires) that the contributions be deposited into the plan or trust in a timely manner.
What is timely?
The Department of Labor (DoL) addresses this question in its plan asset regulations. The key question is when contributions withheld from pay become plan assets? As our previous articles have noted, fiduciaries have strict responsibilities with respect to plan assets. While it may be tempting for a struggling business to delay the deposit of these contributions in order to help the company’s cash flow situation, doing so is a serious breach of fiduciary duty.
According to the regulations, contributions become plan assets “as of the earliest date on which such contributions can reasonably be segregated from the employer's general assets.” This date for a pension benefit plan can in no event be later than the 15th business day of the month following the date the amounts would have been paid to the participants in cash (for amounts withheld from wages). This is where the misunderstanding often occurs. This 15th business day rule is not a safe harbor. Plan sponsors need to satisfy the standard “as soon as the amounts can reasonably be segregated from the employer’s general assets.” This is what the Department of Labor will focus on during an audit, and will generally be much sooner than the 15th business day of the following month.
What is reasonable will often be different from one company to another. Our experience has been that the DoL will allow for some administrative lag between the withholding of contributions and their deposit into the plan. We have seen the DoL actually review payroll procedures for a plan (considering whether there is an outside payroll provider or internal payroll processing), and the process for the plan sponsor and the plan’s custodian or recordkeeper to process and reconcile the contribution files. From this analysis, a reasonable date for the contributions to be deposited to the plan is established by the plan sponsor. It could be one business day, three business days, or something different. Anything after the established date is considered late, and is a violation of ERISA.
A special rule allows an extension of 10 additional business days, but most plan sponsors do not like the conditions tied to the extension. Such conditions include notification to participants and the Secretary of Labor as to why the contributions are late, and the need to secure a performance bond or irrevocable line-of-credit for the late contributions.
Violations of this rule must be reported on Form 5500, Schedule H, which could invite an audit. If a plan fails to comply with the requirement, the voluntary fiduciary correction program of the DoL can be used to correct the violation. Information on this program can be found in an earlier article of Insights.
A serious issue
The DoL started a national enforcement program with respect to the timely deposit of employee contributions even before the recession started. One can expect that the current economic climate will keep this initiative going, and even strengthen it. According to the Kansas City regional office of the DoL’s Employee Benefits Security Administration, this was the number one ERISA violation based on civil cases closed by that office in 2006 and 2007. The important lesson here is not to succumb to the temptation to use employee contributions for business needs, even if for a few days after they would normally be deposited.
J.P. Morgan Retirement Plan Services is pleased to announce the completion of a 401(k) participant study that was concluded in May among 1,000 respondents. This research was conducted in an effort to better understand how individuals that are currently contributing to 401(k) plans have reacted to the market downturn. The research findings will be compiled into a report and released in August.
Key findings include:
Participants have not over-reacted to the market contractions. Less than a quarter of individuals made changes to the investments in their 401(k) plans during the previous 12 months. Of those that made changes to their investments, a third said that they moved some assets into bonds or cash and only 13% stated that they moved all their assets into bonds or cash.
When asked about the most recent change individuals made to their 401(k) during the past 12 months, only 10% of people reported that they lowered their individual contributions and even less fully stopped their contributions. Three out of four participants did not make changes to the amount they are contributing.
Employees understand that their retirement future is dependent upon themselves. 86% stated they are responsible for ensuring they have enough saved for retirement.
Nearly 60% are concerned they will outlive their retirement savings.
Participants value their 401(k). Over 90% view their 401(k) as a valuable benefit that their company offers and an effective way to save.
To obtain an electronic copy of the study upon release, please email us with your contact information and it will be delivered to your inbox upon availability.
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Defined Benefit and Defined Contribution Integration – Total Retirement Solutions - the power of ONE
When it comes to your total wealth programs, have you ever considered the idea of integrating your Defined Benefit and Defined Contribution plans with one provider? What are the benefits of total retirement solutions for you and your participants?
As part of our vision to be the best provider of retirement services and investment solutions, J.P. Morgan serves every client and each individual through our Building the Best Plans in America consulting framework and Audience of One philosophy.
For every client there are multiple benefits to integrating your wealth programs with one provider.
- One relationship manager
- One sign-on
- One data feed
- One service contract
- Total retirement benefits view
Using the Building the Best Plans in America framework, your relationship manager will collaborate with you to deliver comprehensive consultative analysis on statistical reporting, fee transparency and benchmarking, value services and business planning.
For each individual the benefit of our Audience of One approach includes:
- Total retirement benefits view
- Total benefits advice
- Total benefits events processing
- Total benefits communications
- One sign-on
- One contact center
Additionally, each individual will be able to answer the question “Am I on track to live comfortably through retirement?”
J.P. Morgan has comprehensive services for total retirement solutions outsourcing. Total retirement solutions include data integration, managing life events and communicating to participants as an Audience of One.
Through delivery of our services we are prepared to provide you with tools to fulfill your fiduciary obligations, understand the value you are receiving and help your participants set and reach their retirement goals. Contact your J.P. Morgan representative for more detailed information.
The value of personalized communication
Personalizing communication through the use of variable data can yield impressive results when it comes to influencing participant behavior. Case in point? The Back to School campaign, an award-winning campaign J.P. Morgan developed for a global specialty pharmaceutical company.
The Back to School campaign delivered a personalized communication experience for each employee, as well as an introduction to 401(k) plan features and various financial educational tools. By incorporating variable data into and reiterating our firm’s Personalized Messaging philosophy throughout the print elements of this campaign, we were able to drive positive participant behavior change.
The Back to School campaign included many school-themed components, such as two 7 Tips Progress Reports and a 7 Tips Notebook.
Similar to a report card, each 7 Tips Progress Report was personalized to each individual and that person’s investing behavior by using merged variable data. Because the progress report was sent at both the onset and conclusion of the campaign (and updated in between), participants received timely, relevant feedback about whether they were exhibiting the investing behaviors widely believed to contribute to the ability to retire when desired with the amount needed.
The 7 Tips Notebook was mailed within weeks of the initial progress report. This piece was specifically designed to address the plan sponsor’s request to educate participants about personal budgeting and general retirement issues. The notebook linked the 7 Tips to interactive exercises, including an investor quiz, and online tools designed to reveal participant behavior and encourage change.
The campaign included additional quirky features such as an introductory letter signed by a fictitious past high school economics teacher, Mrs. Ivanna Retyre, which detailed her concern that perhaps she hadn’t prepared her students for their financial future. Meeting promotion was creative as well; five-foot tall, three-sided pylons designed to resemble a school locker were used to promote financial education meetings. These unique elements, combined with relevant and customized messaging, made the campaign even more intriguing and engaging to employees and plan participants alike.
As a result of the Back to School campaign, 19.83% of the target audience made at least one positive behavior change. The plan sponsor experienced an impressive increase in several of the 7 tips areas including, but not limited to, participation (36% of participants who were not participating enrolled) and saving to the plan match (26% of participants who were saving less than the match increased their contribution to a level that met or exceeded the match).
Overall, we were successful in speaking to participants in a personal, relevant manner. We experienced success in the plan-specific areas of focus and were able to connect participants to the appropriate tools that are readily available to participants when needs arise.
If you’re interested in learning more about Personalized Messaging or how personalized communications can drive positive participant behavior change, contact your J.P. Morgan representative.
Save the Date
Legislative Update Webcast - Please save the date for our Legislative Update Webcast on Thursday, October 29 at 1 p.m.Central time, where we will discuss the latest pension reform initiative and regulatory developments making the rounds in Congress. More to come.
Plan sponsors using "The Way Forward” to reach out and help participants plan for their future.
Last fall many plan sponsors were asking us what tools are available to help their employees stay on track for retirement amidst the volatility in the markets. In response J.P. Morgan launched The Way Forward campaign to help participants get timely resources to help guide participant decisions during these unprecedented times. Since the campaign was launched, over 35,000 participants have visited the site. Many plan sponsors are recognizing the benefits of the campaign and are getting involved by promoting it directly to their employees.
Here are a few simple ways plan sponsors are currently promoting the campaign:
forwarding the monthly The Way Forward e-message announcing upcoming topics
posting promotional material on company intranet
putting recent articles in company newsletter
using recorded Webcasts as brown bag sessions over lunch hours
As a plan sponsor, we encourage you to promote The Way Forward with your employees. Participants can access the content by logging on to their accounts and clicking on the education center, then selecting The Way Forward or by going directly to The Way Forward home page.
Some upcoming topics the program will focus on are:
- helping investors understand risk
- creating withdrawal and distribution strategies
- keeping retirement planning in check
If you would like more information on The Way Forward communication program, please contact your J.P. Morgan representative or visit The Way Forward site.
Market Pulse by Stu Schweitzer
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 Retirement_Insights@JPMorgan.com with “Subscribe to MacroMinute” in the message subject line, and include your name, firm name and phone number.
In the News
House Education and Labor Committee proposes DB funding legislation
On June 24, 2009, the House Education and Labor Committee reported on a bill (H.R. 2989) encompassing enhanced 401(k) plan fee disclosures, limiting investment managers from providing investment advice to 401(k) plan participants and providing limited defined benefit (DB) plan funding relief. The DB funding proposals are new, and will be the focus of this article.
DB funding dilemma summarized
While the recession has placed tremendous stress on businesses in general, those who sponsor DB plans face additional pressures in funding their plans due to the severe financial downturn which caused plan asset/liability ratios to fall sharply. While many companies have suspended matching contributions to 401(k) and similar plans, strict DB funding rules enacted as part of the Pension Protection Act of 2006 (PPA) will actually increase required contributions in these tough economic times for many companies.
The need for funding relief
While it is not the intent of this article to describe PPA funding requirements, the bottom line is that bad things result when plans become poorly funded – limitations on certain benefit payments and future accruals, negative impacts on nonqualified retirement plans, and increased funding requirements to name a few. The Worker, Retiree and Employer Recovery Act of 2008 (WRERA) provided some temporary funding relief for DB plans. H.R. 2989 contains some modest additional relief.
Allow sponsors to re-elect a smoothed yield curve for 2010
Last March, the IRS stated that it would allow, for 2009, the use of "spot rates" for any of the five "applicable look-back months" (rather than only for the month preceding the valuation date) to value 2009 defined benefit plan liabilities. Under this approach, calendar year plans can use the October 2008 PPA full yield curve for 2009 valuations, significantly reducing 2009 funding requirements. For many sponsors, this "rule" fixes DB funding concerns for 2009.
Plan sponsors are concerned that taking this relief would prevent them from switching back in 2010 to 24-month valuation interest rate smoothing. Smoothing generally enhances predictability, reduces volatility and increases companies' ability to plan. H.R. 2989 would allow such a switchback, one time, in 2010.
Reasonable interpretation of rules for 2009
The IRS has proposed rules implementing new DB funding requirements under PPA, but it is unknown when those rules will be finalized. The proposed rules include controversial provisions, including some that many regard as impractical. In Notice 2008-21, the IRS generally allowed (within certain limits) sponsors to adopt a reasonable interpretation of PPA for compliance in 2008 without a concern of being challenged by the IRS.
Reasonable interpretation continues to be in force until final regulations are issued. H.R. 2989 would, in effect, extend this reasonable interpretation treatment for all of 2009, even if final regulations are published this year, by providing that such final regulations can be effective no earlier than 2010.
Investment expenses not part of target normal cost
Included in the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) was a requirement that a plan's target normal cost should be increased by "the amount of plan-related expenses expected to be paid from plan assets during the plan year." After WRERA passed, a number of practitioners raised questions about the application of this provision, pointing out that investment-related expenses have not historically been included as part of normal cost and, further, may not be explicitly reflected in trust returns for some investments, potentially producing inconsistent recognition of these costs for different investments. In essence, while explicit investment-related expenses would show up in current year funding requirements as part of the target normal cost, implicit expenses would generally be amortized over seven years. H.R. 2989 would provide "clarification" that the WRERA provision intended to increase normal cost by "plan-related administrative expenses" only.
Expanded filing for under-funded plans
PPA changed the rules for ERISA section 4010 reporting to the Pension Benefit Guaranty Corporation (PBGC). The issues of who must make a 4010 filing and what it must include are complicated, and not covered here. The purpose of the filing is to allow the PBGC to anticipate and minimize the potential liabilities resulting from the termination of severely under-funded plans.
The new PPA rule requires a 4010 filing if at the end of the preceding plan year the funding target attainment percentage of a plan maintained by the contributing sponsor or any member of its controlled group is less than 80%. The old rule provided for a filing if at the end of the preceding plan year the "aggregate unfunded vested benefits" of the DB plans of a controlled group of corporations (considering only those plans which were underfunded) exceeded $50 million.
H.R. 2989, in effect, requires a plan to make a 4010 filing based on either the old test or the new one. The result: more companies will have to make 4010 filings under the proposed bill. This is one area that H.R. 2989 does not provide relief, but puts greater burdens on large plans, even if they are only slightly underfunded in percentage terms.
H.R. 2989 referred to House Ways and Means
This bill is far from becoming law. Other members of Congress may press for even greater DB funding relief. Actual passage and timing of any relief is the big question mark.
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.
Although high yield bonds have higher return potential, they are also subject to greater risks, including the risk of default, when compared to higher-rated securities.
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: This communication was written in connection with the potential promotion or marketing, to the extent permitted by applicable law, of the transaction(s) or matter(s) addressed herein by persons unaffiliated with JPMorgan Chase & Co. However, JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, to the extent this communication contains any discussion of tax matters, such communication is not intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties. Any recipient of this communication should seek advice from an independent tax advisor based on the recipient's particular circumstances.