Retirement and Investment Solutions Newsletter


January 2010 Issue

Thank you for allowing us to continue to share our insights. This issue includes:

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We look forward to a bright 2010 with the hopes of positive economic activity, job growth and participant balances recovering. This issue of Insights focuses on our New Year’s Resolutions, the prospects of pension reform, including retirement income, and the launch of our updated Target Date Fund paper entitled Ready! Fire! Aim? 2009.

Please continue to share your feedback with us and provide suggestions for topics you would like us to cover in 2010.

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2010 and the Prospects of Pension Reform

By Bob Holcomb, Head of Legislative Affairs, J.P. Morgan Retirement Plan Services

As we say goodbye to 2009, a year that was dominated by the healthcare debate, partisan bickering and even intra-party confrontations on the democratic side, we pause for a moment to consider what, if any, legislative action we can expect on the pension front in 2010.

In July of 2009, the Congressional Research Service issued a report entitled: 401(k) Plans and Retirement Savings Issues for Congress. The report lays out seven major policy issues with respect to defined contribution plans. The issues identified are hardly surprising and reflect longstanding concerns. They include:

  • Access to employer sponsored plans
  • Participation in employer sponsored plans
  • Contribution rates
  • Investment choices
  • Fee disclosure
  • Leakage from retirement savings
  • Converting retirement savings into income

We saw a number of legislative proposals addressing some of these issues introduced last year, but few of the bills made it out of their respective committees. The notable exception was the House Education and Labor committee which reported out a bill that would mandate new fee disclosure requirements for both plan sponsors and plan participants, place new restrictions on how investment advice may be offered and provide some defined benefit funding relief. These provisions have been discussed in greater detail in previous issues of Insights. Of all the bill’s provisions, it would appear most likely that some form of fee disclosure legislation would be enacted in 2010. There are competing fee disclosure proposals in the House Ways and Means committee and the Senate Health, Education, Labor and Pension committee, and any final bill would in all likelihood reflect some level of compromise.

With respect to the other concerns raised by the Congressional Research Service report, we have seen proposals that would address access and participation through mandatory employee payroll IRA contributions from employers who do not sponsor  qualified plans. Both congress and the Department of Labor (DOL) are examining how investments within plans should be communicated and what form investment advice should take. Of  all the issues identified, converting retirement savings into retirement income may be one of the key issues that Washington considers in 2010 and beyond. Bills have been introduced that would encourage participants to annuitize their retirement distributions, and a number of key staff members at both the Departments of Labor and Treasury are advocates of annuities. In fact, the DOL and Treasury intend to issue a request for information on retirement income products in the upcoming weeks. Addressing this issue will be a major step in the 401(k) plan’s continued evolution as the predominant retirement plan for the majority of American workers.

A number of factors will play into how far any pension reform efforts advance in 2010. The upcoming congressional mid-term elections are definitely a complicating factor as the administration and a democratic congress attempt to advance their legislative agenda. On the other hand, the personal income tax reductions that came about as part of the Economic Growth Tax Relief and Reconciliation Act of 2001 (EGTRRA) are due to expire at the end of 2010. This would result in federal income tax increases at all rate levels and increases in the capital gain and dividend tax rates, an issues that the democratic congress will want to address in an election year. Major tax bills frequently serve as a vehicle for pension reform. In any event, it is likely that we will see a debate that will shape the future structure of defined contribution plans.

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Investment New Year’s Resolutions for Plan Sponsors


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Ready! Fire! Aim? 2009

How some target date fund designs continue to miss the mark on providing retirement security to those who need it most.

Authored by: Anne Lester, Managing Director and Katherine Santiago, Quantitative Research Analyst

In 2007, we published Ready! Fire! Aim? How some target date fund designs are missing the mark on providing retirement security to those who need it most. With that study, we addressed the question of whether target date strategies were delivering on their full potential to help 401(k) participants meet their retirement funding needs.

Our research analyzed actual participant behavior and found it to be much more varied and volatile than many of the standard industry assumptions about saving patterns. We also examined how this cash flow volatility interacted with market volatility in shaping potential participant outcomes at retirement.

The response to our initial study was positive and we have updated our analysis with data from 2007 and 2008. This paper discusses our key findings:

  • Several changes in participant saving patterns may be reason for concern. First, salary raises, on average, have become more uneven. Second, average starting contribution levels have declined and rise more slowly than in the last study. And third, while slightly fewer participants are taking loans from their accounts, those that do require a larger percentage of total portfolio assets.
  • Withdrawal patterns remain unpredictable. This is true both pre- and post-retirement, but one trend is very clear: Once participants stop working, the majority — more than 80% — withdraw their entire account balances within just a few years.
  • Many target date strategies have too much volatility embedded in their portfolio design. The markets in 2008 served as a powerful reminder of how potential volatility and downside exposure can determine participant outcomes. In our analysis, investing at controlled levels of risk, through broader diversification and relatively rapid reduction in equity exposure in the years leading up to retirement, continues to increase the potential number of participants reaching their retirement income goals.

We hope you find this research interesting and useful in helping your participants retire with the income they need. We also want to thank our clients for their continued support as well as their engagement with our portfolio management and research teams. The Ready! Fire! Aim? series exemplifies the kind of groundbreaking work that results from true partnership.

If you have any questions or would like further information on any of the topics covered in this study, please contact your J.P. Morgan representative.

Print and read a copy of the paper now.

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Retirement income policy proposals

In this article we discuss two legislative proposals related to the issue of retirement income policy and the case for annuities.

Legislative proposals

There are currently two bills, one in the House and one in the Senate, that aim at increasing annuity usage. Congressman Pomeroy's bill, H.R. 2748, provides for an exclusion from taxable income of 50% of taxable distributions under a life annuity; the total exclusion is limited to $10,000 annually. For tax-favored arrangements (including qualified plans and IRAs) this exclusion amount is reduced to 25%, and the dollar limit is reduced to $5,000, although the dollar limit is doubled for joint filers. The dollar amounts are adjusted for inflation after 2010. The exclusion does not apply to distributions from defined benefit (DB) plans or to certain non-spouse survivor benefits.

H.R. 2748 also includes relief from the minimum distribution rules for "longevity insurance," generally defined as annuity payments which commence not later than 12 months following the calendar month in which the employee attains age 85. This proposal is designed to allow the use of deferred annuities without violating the minimum distribution rules.

Senator Conrad's bill, S. 1279, provides for an exclusion from taxable income of 50% of taxable distributions under a life annuity, but under S. 1279 the dollar exclusion limit is $20,000. Unlike H.R. 2748, this exclusion would not be available to tax-favored arrangements, e.g., it would not be available for distributions from 401(k) plans.

S. 1279 does not include a longevity insurance provision.

Plan sponsors would likely prefer Congressman Pomeroy's proposal as the break is extended to defined contribution (DC) plans. DB plans are excluded under that proposal because of the cost. That proposal has been around for some time, although it's unclear whether there is broad support in Congress for it.

Iwry proposals

The Retirement Security Project, co-led by key Obama administration policymaker Mark Iwry, produced a set of proposals addressing the issue of "inadequate" annuity usage. Iwry has co-authored two white papers in support of these annuity proposals.

Essentially, the proposals seek to employ the principles of behavioral economics to encourage greater use of annuities. That is, they seek to utilize inertia, the principle that led to the success of automatic enrollment, to default participants into annuities. These proposals suggest that most employees could use a greater degree of annuity coverage. They acknowledge that a simple default to an annuity form at retirement clearly doesn't work (witness the low uptake of annuities in DB plans where a lump sum is offered), so they offer a set of proposals that provide even more of a nudge towards annuities than a simple default.

There are two main proposals:

  1. Provide for a default into a "trial annuity" at retirement that only lasts for two years, financed with one-half of the participant's account.
  2. Provide for a default “phased accumulation” of a deferred annuity income with some portion of each addition to a participant’s account, beginning when the participant is age 45 or 50. The participant could opt out of this purchase pretty much at any time (even at retirement).

There are a number of legal issues presented by this proposal (all of them acknowledged by Iwry and his co-authors).Additional detail is available from your strategic relationship manager. It is possible these proposals are more at the idea stage than at implementation.

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Evolving the roadmap

J.P. Morgan Retirement Plan Services’ vision is to be the best provider of retirement services and investment solutions for every client and each individual. This vision begins and ends with ensuring our valued clients are completely satisfied with the service we provide everyday. We believe, and our clients have told us, that the foundation of client satisfaction is understanding our sponsor’s objectives and needs and being able to help execute on a strategy towards those goals. A customized client business plan is at the heart of how we assess, document and help our client’s manage towards these goals. Through the delivery and execution of your customized business plan we work with you to evolve a roadmap to help you build the best plans in America.

Our approach, defined by our strategic consulting framework we call “Building the Best Plans in America,” allows us to focus on your objectives to ensure we’re driving towards what’s most important to you.We use a consultative, solutions-based approach to partner with every client to identify and execute on key goals that will help move their retirement program forward.

Your strategic relationship manager will engage you in a deliberate manner to determine what initiatives and results are most important for your organization, your plan and your participants this year and in years to come.

The principle components of your customized business plan include:


  • Evolution of our partnership and how our work together has culminated in the current status of the retirement plan benefit
  • Plan and participant trending statistics and what those statistics tell us about opportunities within your retirement benefit program


  • Deliberate discussion to understand your short and long-term definitions of satisfaction


  • Current view of the program and clarity on the areas of focus for the next 18 months.
  • Identification and agreement on detailed goals that include specific action steps, timeframes and responsible parties.
  • Long term goals that are under consideration

During the business planning process and throughout the year, expect your J.P. Morgan strategic relationship manager to focus on your needs and deliver our best thinking to achieve your goals using the Building the Best Plans in America strategic consulting framework.

We manage towards these goals throughout the year, helping ensure that we follow the roadmap that ultimately produces desired results for you and your participants. Periodic updates are essential to the plan. Relevant updates will be provided throughout the year in the form of periodic checkpoints as well as pointed discussions on participant trending, fee disclosure, competitive analysis and investment reviews.

As we enter 2010, we are excited to bring you our best ideas in an effort to evolve your benefit program. Look forward to a detailed planning discussion with your J.P. Morgan strategic relationship manager in the coming weeks.

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Less than half of participants are on track to receive what they think they will need

One of the most important things to plan sponsors and participants is making sure that individuals will be able to retire how and when they want. As an industry, participants are bombarded with messages that state they need between 70 to 80% of their pre-retirement income. But on an individual level, what do participants think they will need? In our recently published study, Anything But Certain (October 2009), we asked participants, “When you retire, what percentage of your pre-retirement income do you think you’ll need to live comfortably in retirement?” A third stated that they would need at least 50% but less than 75% while another 29% said they needed 75 to 100%.One number that is just as important is the nearly two in ten that said they weren’t sure how much they would need.

2010 RPS Insights January Chart 1

To better understand where participant felt they stood on reaching their goals, we asked participants “Making your best estimate, what percentage of your pre-retirement income do you think you are currently on track to receive in retirement?” As one can see, 29% stated they are on track to receive less than 50% of their pre-retirement income, followed by another 28% that stated they think they will receive between 50 to 75%, with almost another quarter of participants that stated they were not sure.

2010 RPS Insights January Chart 2

While the results are interesting, plan sponsors really want to know what percent of participants are on track to receive what they think they will need. We looked specifically at the individuals that identified with a specific pre-retirement income goal. Of those participants, nearly half reported that they were not on track to receive what they think they will need, while a third reported being on track and less than one in ten reported being ahead of goal.

2010 RPS Insights January Chart 3

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New Year’s Resolution

Coming out of a deep recession during which many participants saw their retirement account balances drop significantly, the initial reaction of many was to hold someone else accountable for their resulting financial condition. With respect to a qualified retirement plan, that someone is generally the plan sponsor, investment committee or other plan fiduciary. Perhaps for the first time, participants have discovered the importance of paying attention to how their plans work and understanding what (and where) the risks are. If any good comes from the events of the last 18 months, it will be a heightened level of knowledge and a greater awareness of roles and responsibilities on everyone’s part to help reduce the severity of such an event in the future.

At the core of our Building the Best Plans in America strategic framework, is that each plan should operate from a solid fiduciary foundation. What does this mean? Listed below are some items that we consider important in this regard.

  • Acting in the best interests of participants and beneficiaries.(This is at the heart of ERISA’s fiduciary requirements, which we have discussed in previous articles.)
  • Staying informed of what is happening in the industry (e.g. legislative and regulatory updates).
  • Understanding the plan qualification rules, and following the terms of the plan document and administrative procedures.
  • Understanding any unique needs of participants, and tailoring communication and education programs to address those needs (our belief in Audience of OneSM).
  • Having a prudent process in place to evaluate and monitor services, investment options and all related fees.(This has been a key factor cited in favor of fiduciaries in the dismissal by the courts of some of the 401(k) fee lawsuits brought by participants.)
  • Keeping minutes of committee meetings and documenting decisions.
  • Distributing all required notices and disclosures in a timely fashion.
  • Ensuring that employee contributions are transmitted to the trust timely (the Department of Labor will more vigorously seek criminal prosecution of violators in 2010).
  • Updating the ERISA fidelity bond amount as necessary.(Fiduciaries should also consider having fiduciary liability insurance.)
  • Correcting plan operational errors and fiduciary violations as soon as discovered, utilizing the IRS and DOL correction programs as appropriate.

Perhaps you are doing all of these things and more. If so, keep doing them and stay vigilant. If you are not doing these things, it is not too late to make a new year’s resolution to start in 2010. Most participants have not shown the interest or taken the time to map out a plan for achieving the kind of retirement they dream about. Participants are looking to their employers and other fiduciaries to help them achieve their goals. That is a lot of responsibility and one that should not be taken lightly. Contact your J.P. Morgan representative to find out how we can assist you in this effort.

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Legislative and Regulatory Update

With Congress being consumed lately with the health care debate, retirement legislation has taken a hiatus. However, there have been a couple of proposals that are worth taking note of and watching to see if they progress.

The Retirement Fairness Act of 2009 (H.R. 4126) was introduced by Lloyd Doggett (D-TX) to “prevent the overstatement of benefits payable to non-highly compensated employees under qualified plans, and for other purposes.” Of significance is the fact that the bill currently has 18 co-sponsors, many of whom are colleagues of Rep. Doggett on the House Ways and Means Committee.

The qualification rules for retirement plans require that benefits not discriminate in favor of highly compensated employees (HCEs) - generally those who earn over $110,000. A complex set of testing rules exist to ensure against such discrimination. H.R. 4126 would make it more difficult for plans to pass various nondiscrimination tests by imposing the following requirements:

  • When performing nondiscrimination testing, only vested benefits of non-highly compensated employees would be considered, but all benefits (vested and non-vested) would be considered for HCEs. This could pose a problem for plans that include a vesting schedule, even though all eligible employees are receiving contributions or benefits.
  • Coverage testing is conducted to ensure that a sufficient percentage of non-highly compensated employees are benefiting under a qualified retirement plan. H.R. 4126 would require that non-highly compensated employees working less than 2,080 hours a year be counted as a fraction of an employee. (This would require that hours be tracked for these employees, and seems to penalize plans that cover less than full-time workers.)
  • An elaborate testing mechanism, known as cross-testing, would generally be prohibited. Cross-testing currently allows contributions to be converted to equivalent benefits before testing for nondiscrimination. Such testing is generally beneficial for a plan that provides higher contributions as employees age or earn greater years of service. One form of cross-testing would still be allowed. Cash balance plans would have to be tested using equivalent contributions, even though these arrangements are defined benefit plans.

The Lifetime Income Disclosure Act (S.2832) has been introduced by Senators Jeff Bingaman (D-NM), Johnny Isakson (R-GA) and Herb Kohl (D-WI). The bill would require that defined contribution plans annually inform participants of the monthly lifetime annuity benefit their account balance would translate into. The monthly benefit would be based on the current account balance (not projected), and specified as if the benefit started at the normal retirement age. The Department of Labor would issue tables that employers could use in calculating the annuity equivalent, along with model disclosure language. Plan fiduciaries would not be liable for the annuity equivalent information provided. The measure is patterned on the annual statements sent by the Social Security Administration.

Both of these proposed bills are still in committee at this point. It remains to be seen how or even if these measures will progress.

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Save the Dates

Please join us for the 2010 Economic and Market Outlook

  • Date/Time:
    • Wednesday, January 13, 2010
    • 11:00a.m. Eastern time 
  • Speakers:
    • Stu Schweitzer, Global Markets Strategist
    • Ehiwario Efeyini, Associate Global Strategist
  • Agenda: Our Global Markets Strategists will share their views on the latest challenges and opportunities impacting the global economy and capital markets.  Areas for discussion will include:
    • How strong an economic recovery should we expect? 
    • Can equity markets add to their gains of 2009? 
    • Will rising interest rates lead to poor fixed income returns? 
    • Is the dollar set to weaken further?
    • Dial in and webcast link details.

Please join us for the 1st Quarter 2010 Legislative Webcast Update

  • Date/Time:
    • Wednesday, January 27, 2010
    • 3p.m. Eastern time
    • Additional details will follow. 

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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.

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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.

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.

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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