Retirement and Investment Solutions Newsletter


December 2009 Issue

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Thank you for joining us for the December issue of Insights, J.P. Morgan's monthly retirement newsletter.

Our vision is to be the best provider of retirement and investment solutions — for every client and each individual we serve. We hope that this newsletter is insightful and helps you through some of the issues you face as a plan sponsor.

Topics in the November issue include:

  • Performance Perspective of the year in review
  • A message from Anna Van Ophem, head of client services talking about Best Plan in America
  • Understanding your Fiduciary Responsibility in regards to changes in qualified investment options

If you have questions about any of the articles or suggestions for topics you would like to see included, please let us know.

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Performance Perspective

It is now more than a year since the start of the market meltdown of 2008 and months since the market bottomed in March. We are now at a point where performance for many asset classes has turned positive and in fact through October, many stock market indices boast double digit returns year-to-date. Consider the table below which illustrates performance for various indices year-to-date and for longer time periods. The numbers that participants saw in their third quarter statements were still reflecting the negative one-year performance through September but as we move forward performance reports should start to reflect the market’s rebound and could start to show positive results for the five-year period as well. Diversification could have mitigated some of the loss; fixed income investors, those who invested in a core bond fund or stable value fund generally saw positive returns through this period.

While it may not be wise to focus on short-term performance and in a 401(k) plan in particular, it is noteworthy that we have seen a positive turn after such a bleak period last year. It may give those investors who stayed invested some satisfaction that things can and generally have improved and that focusing on the long-term goals of retirement savings requires that disciplined thinking. It may also provide a lesson for people who try to time the market because it would have been difficult to predict this turnaround. For example, 401(k) plan participants who have been dollar-cost averaging through this downturn may see the impact of the rebound in equities to have a solidly positive impact on their balance.

Plan sponsors have considerations as well; just as overall performance for plan participants has improved in the recent period, so to could the investment menu for the plan overall. This may give a sponsor an opportunity to revisit asset managers on the plan menu that may have rebounded to determine if that asset manager still fits with the goals and objectives of the plan and its participants. Again, plan sponsors may want to take into account the original decision factors and reviewing long-term performance of the manager.

The lessons here are not new. But they do remind us of some important considerations basic to any investment decision.

  • What were the goals of choosing the asset manager and or allocations?
  • Have those goals changed?
  • Does the manager still fit the plan needs?

The recent improvement in performance demonstrates that staying the course and establishing a program of systematic investing can benefit long-term investors. If the impact of the market’s sell-off was severe enough to have changed a participant’s target retirement date, then perhaps having a more conservatively positioned diversified portfolio is more appropriate.

Period Ending November 30, 2009.

Index Name Year-to-date 1-Year 3-Years  5-Years  10-Years 
MSCI EAFE 26.03% 33.50% -8.14% 1.43%  -0.36%
Russell 1000® 25.38% 27.38% -5.71% 1.02% -0.15%
Russell Midcap®  32.91% 38.59% -6.34% 2.15% 5.28%
Russell 2000® 17.7% 24.53% -8.36% -0.46% 3.82%

Copyright Russell Investments 2009.  Copyright MSCI 2009. All rights reserved. Past performance is not a guarantee of and may not be indicative of future results.

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Building the Best Plans in America

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Investment Dynamics

The following is a section from the report, "Anything But Certain," which is based on a study conducted with participants this past spring. The research was conducted in an effort to better understand how individuals, who are currently contributing to 401(k) plans, have reacted to the market downturn.

People like the 401(k) idea

It seems a majority of participants are prone to investor inertia and appear to have mixed feelings about devoting more time and energy to retirement investing. Nevertheless, according to a study of 1,077 employees participating in 401(k) plans, nine out of 10 participants believe their 401(k) plan is an effective way to save for retirement, and even more agreed that it was a valuable employee benefit. There is ample evidence that participants understand the fundamentals of their plan well enough to appreciate the value of payroll-deducted contributions as a disciplined means of building retirement savings.

For instance:

  • Three times as many participants began contributing to a 401(k) plan before they turned 35 than did after that age (59% vs. 19%), indicating an appreciation for investment returns and time value of money.
  • Although 87% of participants were aware that they could borrow funds from their 401(k) plans, only 26% considered the information an important feature. 59% said the feature was not important to them.
  • 95% of participants continued to contribute to their plans despite the poor economy, the severe drop in stock prices and some employers reducing or eliminating matching contributions.

Download the report for more information about the findings from this study.

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A new way to save time and customize communications

It is always our goal to develop communications that are custom and reflect the client’s personal brand. A communication that is successful in this capacity can resonate more strongly with the participant base and will usually lead to a higher participant response rate. Developing a custom communication can certainly expend a lot of resources and take time, so we are always searching for new ways to expedite this process.

The recent conversion of multiple plans for a large distribution company offered us the opportunity to try a new way to develop custom conversion newsletters. Our new capability allows us to spend less time on the customization piece (still providing a custom final product) while focusing instead on brand development.

Our goals for this campaign were as follows:

  • To provide a customized newsletter experience to each of the multiple plans in a more efficient manner than we have done in the past
  • Use the time saved from the new customization process to develop two new brand campaigns for the plan sponsor
  • Drive a traditionally Web-averse group to the Web in order to take advantage of a re-enrollment period

The use of a new printing capability, called the IGen Printer, allows the creation and development of multiple custom newsletters more efficiently than in the past. With this new capability, the goal is to create “semi-static” text. This means that the insides of the newsletters are all the same, but the front and back pages (two each) contain custom information and design.

This capability greatly increased the speed with which we could create multiple versions of a newsletter, while still providing a custom look and feel. The extra time allotted allowed us to spend more time working on the brand development for the client.

This campaign ended with the successful development of custom newsletters and the creation of two new branding themes for the client using images that reflect their industry and tie-in with the client’s self-described image. The communication also stressed the potential benefits of a re-enrollment period as well as introduced the shift to electronic statements and online beneficiary designation.

As a result of this campaign, 25.20% of all 401(k) plan account holders visited the Web site during the re-enrollment period. The plan sponsor declared the branding a success with participants and will use it in communications going forward.

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Retirement Dream Machine 2.0…enhancements are well received by participants!

There has been a significant increase in users following the launch of Retirement Dream Machine 2.0 in mid-September—and participants are taking positive actions. Since September 18, 2009, nearly 6% of Dream Machine unique users have taken action and clicked the “Increase Contribution” button, which takes them directly to the Contribution page. In comparison, prior to September 18, 2.6% clicked directly through to the Contributions page.

2009 RPS Insights - Dream Machine Page Views

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      The Way Forward: Lessons learned*

We discovered that even though tough economic times have tested participant nerves, participants are still betting on the future. Despite the poor economy, the drop in stock prices and some employers reducing or eliminating matching contributions, a resounding majority of respondents still see their 401(k) plan as a valuable benefit (93%) and an effective way to save (90%).

That kind of plan endorsement also was shown by the 95% of surveyed participants who continued to contribute to their plans. In addition, 76% made no changes to their contribution levels, and 9% actually increased their contributions.

Recent market conditions brought home that nothing can guarantee against losses. However, we learned no one, not even the “experts,” can consistently predict with certainty which investments will go up and which will go down. As of the end of April 2009, more than 75% of respondents made no changes to their 401(k) investments during the previous 12 months. This was not necessarily a good thing, because some people went into the downturn, with too much exposure to stocks.

The last year has taught us much about asset allocation and diversification, but there’s a lot left to learn — such as, not only how much you may need to save for retirement, but also how to make those savings last through retirement.

Keep checking back to The Way Forward for information on these and other important topics. We’re still here for you!

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Fiduciary Responsibility-Qualified change in investment options

For a plan fiduciary or investment committee, there will come a time when a given investment option in a defined contribution plan may need to be replaced. Often times, this is due to an under-performing fund as measured against a stated benchmark, or for some other reason outlined in an investment policy statement. When such a change occurs, it is common practice for participants’ balances in the fund being replaced (the “replaced” fund) to be transferred automatically to the new fund (the “replacement” fund). This is sometimes referred to as a mapping from the replaced fund to the replacement fund.

Under ERISA, fiduciaries generally do not receive §404(c) protection in a fund mapping. This is because participants affected by the mapping have not made an affirmative election to invest in the replacement fund, and therefore, have not exercised sufficient control over their accounts to satisfy §404(c). Thanks to the Pension Protection Act of 2006 (PPA), there is now a way for fiduciaries to receive §404(c) protection for a “qualified change in investment options.” This provision became effective for plan years beginning after December 31, 2007.

A qualified change in investment options generally occurs when:

  1. Participants’ accounts are reallocated among one or more new investment options instead of those offered immediately before the change; and
  2. The characteristics of the new investment options, including those characteristics relating to risk and rate of return, are immediately after the change, reasonably similar to the characteristics of the investment options offered immediately before the change.

For this rule to apply:

  1. The plan administrator must provide participants with a 30- to 60-day advance notice describing the change, including information comparing the existing and new investment options, and an explanation that unless an affirmative investment election is received, account balances from the replaced option(s) will be invested in a new option(s) with reasonably similar characteristics;
  2. The participant does not provide affirmative investment instructions in advance of the change contrary to the proposed reinvestment in the replacement fund(s); and
  3. The participant’s investments in effect immediately prior to the change were the result of the participant’s exercise of control over his or her account; in other words, the participant had not been defaulted into a fund that is being replaced.

To date, the Department of Labor has issued no guidance to describe what “reasonably similar characteristics” are with respect to risk and rate of return. Thus, a fiduciary who wants to take advantage of this extended §404(c) protection will need to make a deliberate determination as to whether the conditions summarized above are satisfied.

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Legislative and Regulatory Update—Challenges with certain automatic enrollment arrangements

We have seen an industry trend of automatic enrollment arrangements being adopted at a fairly rapid pace by sponsors of 401(k) plans. This effort to make inertia work in favor of participants was encouraged by the passage of the Pension Protection Act of 2006 (PPA). PPA introduced qualified automatic contribution arrangements (QACAs) and eligible automatic contribution arrangements (EACAs). A QACA provides a nondiscrimination testing safe-harbor, while an EACA may allow automatically enrolled participants up to 90 days to request a refund of default contributions made upon their initial enrollment into the plan. EACAs also give plan sponsors a six-month window to correct failed nondiscrimination tests before incurring a 10% excise tax.

Earlier in 2009, final Treasury regulations were issued to set some ground rules for QACAs and EACAs. Then during the Labor Day weekend, Revenue Ruling 2009-30 was issued to address automatic increases under plans utilizing automatic enrollment. The regulations in particular include some provisions that may be problematic for plans that use immediate eligibility for employee deferrals. Three key provisions discussed below involve timing of the required notice to participants, when the first default contribution must be made for a participant and when automatic increases must occur.

Notice requirement

In general, notice of these programs must be provided to participants 30 to 90 days before the beginning of each plan year. To the extent this timing cannot be satisfied for newly hired employees, notice is required no later than the eligibility date. Based on concerns expressed in comments on proposed regulations for plans with immediate eligibility, the final regulations provide a bit of relief. As stated in the preamble to the final regulations: 

“…if it is not practicable for the notice to be provided on or before…an employee becomes eligible, the notice will nonetheless be treated as provided timely if it is provided as soon as practicable after that date and the employee is permitted to elect to defer from all types of compensation that may be deferred under the plan earned beginning on that date. Thus, an employer is required to provide the notice…prior to the pay date for the payroll period that includes the date the employee becomes eligible.”

In a nutshell, for a plan with immediate eligibility, this means that the notice may be given on or soon after the date of hire, but it must be received in time to implement an employee’s election to contribute from the first paycheck. Where distribution of the notice is outsourced (it is often included in enrollment kits), and for decentralized payrolls (especially weekly or bi-weekly frequencies), this could be a challenge.

Timing of first default contribution

Another major issue is the date the first default contribution must be withheld from a participant’s pay. This requirement must coordinate with the timing of the applicable notice, because the notice must be provided sufficiently early so that the employee has a reasonable period of time to make an affirmative election – either to opt out or elect a contribution rate other than the default rate. The final regulations require that a QACA make the default election effective no later than the earlier of:

  1. the pay date for the second payroll period that begins after the date the notice is provided; and
  2. the first pay date that occurs at least 30 days after the notice is provided.

This rule seems to be directed at plans with immediate or short eligibility periods. While the final regulations do not seem to specifically require this same timing for an EACA, the IRS has informally indicated that it also applies to such arrangements. When dealing with employees on weekly or bi-weekly pay cycles, and understanding how plan sponsors transmit payroll data and receive contribution elections captured by the recordkeeper, this can be a real challenge as well.

Timing of automatic increases

Default contribution rates under a QACA or an EACA must generally be uniform. One exception to the uniformity requirement is that the percentage may vary based on the number of years or portions of years since the beginning of the initial default period for an employee. This requirement impacts plans that have required automatic increases as part of their automatic enrollment design. QACAs must include such a feature if the initial default contribution rate is less than 6% of pay, and EACAs can optionally include an automatic increase feature.

The regulations generally provide that these increases are to occur on the first day of the plan year for all participants. However, in response to requests to allow mid-year increases to coincide with salary adjustments, the final regulations allow this within the uniformity rule above that the increases be based on the number of years or portions of years since the first default contribution. Thus, if pay increases are given each February 1, it would be permissible to implement the automatic increase on this date for all employees in the arrangement. However, increasing the contribution rate automatically on employment anniversaries would not be uniform.

[This uniformity rule seems to disregard new hires in plans that allow multiple entry dates throughout the year, because the automatic increase date will differ in the number of years or portions of years for each employee who has a different eligibility date.]

If you have or intend to adopt one of these arrangements, you are encouraged to consult with legal counsel as to the impact these rule may have on your plan.

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Holiday schedule for remainder of 2009

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

  • The markets will close early at 1 p.m. Eastern time on Thursday, December 24. Because of this, our Retirement Service Center will also close early.
  • The firm will be closed on Christmas Day – Friday, December 25

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

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Save the Date

J.P. Morgan Long Term Capital Markets Returns Assumptions Webcast:

As the year draws to a close, our speakers will discuss our forecasts for 2010 and unveil our long-term (10-15 year) return expectations, expected volatilities and correlations across key asset classes.

Stu Schweitzer, Global Markets Strategist
CS Venkatakrishnan, Head of Product Management for U.S. Fixed Income

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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 with “Subscribe to MacroMinute” in the message subject line, and include your name, firm name and phone number.

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In the News

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

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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.

Recordkeeping and administrative services for the plan 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.

J.P. Morgan Asset Management is the marketing name for the investment management businesses of JPMorgan Chase & Co. and its affiliates worldwide. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., JPMorgan Investment Advisors, Inc., Security Capital Research and Management Incorporated and J.P. Morgan Alternative Asset management, Inc.

*“5 Lessons from the Crash,” Penelope Wang, Money Magazine, September 2009pgs. 78-83.

“Anything But Certain a nationwide study of attitudes and behaviors among 401(k) participants,” J.P. Morgan Retirement Plan Services and Harris Interactive, Spring 2009.

Dollar cost averaging does not ensure a profit or protect against a loss in declining markets. This investment strategy involves continuous investment in securities, regardless of fluctuating price levels. An investor should consider his or her financial ability to continue purchases in periods of low or fluctuating price levels.

Diversification does not assure a profit nor does it protect against loss of principal. Diversification among investment options and asset classes may help to reduce overall volatility. 

Publications referenced in this material are presented for general educational purposes only. 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 and its affiliates

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.

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, 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. ©2005-2009 Financial Engines, Inc.  All rights reserved.  Used with permission.  J. P. Morgan Retirement Plan Services provides plan recordkeeping and administrative services.

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.

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