Retirement and Investment Solutions Newsletter
July 2010 Issue
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Total Retirement Solutions Benefits Sponsors and Participants
Do you have defined benefit (DB) and defined contribution (DC) plans that are currently being administered separately? Have you considered integrating your plans with one provider?
As part of our Total Retirement SolutionsSM offering, J.P. Morgan Retirement Plan Services offers plan sponsors the ability to consolidate benefit administration and pension payroll administration. A sponsor’s single point of contact, the strategic relationship manager, uses our integrated systems to share information with those who support the retirement plan administration.
Total Retirement Solution lets sponsors outsource virtually all aspects of administration to J.P. Morgan. We customize a single file layout to capture the indicative and financial data needed to administer the plans. This allows us to transmit information in a consolidated format, which simplifies data exchange.
Benefits for sponsors
We believe this solution is best for sponsors who look to:
- simplify and consolidate plan administration and data management
- streamline communications for total retirement benefits
- reduce or control costs and find ways to leverage DB assets to reduce retirement program expenses
- help participants plan and understand their financial needs in retirement
Benefits for participants
The cornerstone of Total Retirement Solutions is an integrated participant experience that consolidates DC and DB plan information to simplify and streamline the participant experience.
One phone number
Participants get an 800-number to reach the interactive voice response system (IVR) or a trained retirement education specialist. The IVR provides an initial summary of both the DC and DB accruals. No re-authentication is required when moving between plans. If participants want assistance while using the IVR, they can speak with a specialist at any time.
Specialists are trained on both DC and DB plans, as well as on specific plan provisions. In one call, our specialists can handle virtually all questions from participants.
One Web site
Participants get access to a single Web site for their retirement plan benefits – and also a single user name and password. The site is easy to use and action-oriented.
Like the IVR, the participant Web site initially takes the participant to a summary of accruals in all plans for which we provide administration. The participant then can manage those plans within a single Web session. They can also receive retirement planning or get information about how to manage their overall retirement portfolio investments. Again, no re-authentication is needed as the participant moves from plan to plan.
Participants also get access to the retirement planning tools, investment guidance and advice provided by the plan, including Retirement Dream Machine, Personal Online Advisor and/or J.P. Morgan Personal Asset Manager.
Finally, each participant gets access to a combined statement that provides a holistic view of the retirement benefits. As with the other participant touchpoints, the statement begins with a summary of all plan accruals. Details for each plan are provided, as well. The participant may access these statements online via the Web site and can also choose to receive printed statements.
Integrated tools benefit
Participants get user-friendly information and tools to help them learn about what it takes to reach their retirement dreams and manage savings goals. Sponsors may experience a reduction in participant questions and greater participant awareness of the plans’ benefits.
If you are interested in our Total Retirement Solutions offering or need more information, contact your J.P. Morgan representative.
Sponsor Magazine Focuses on Fund Line-ups
Our spring/summer issue of Journey is all about investments – and fund line-ups specifically. The magazine focuses on ways plan sponsors and benefits professionals review, select and monitor investments offered in the retirement program. Featured stories include:
- Going Global: Sponsors tend to think of domestic and foreign funds as separate categories, but global funds seek the sweet spot where two worlds converge. Learn about the world of investing opportunity outside the U.S., and get a primer on BRICs (i.e., the world’s largest, fastest-growing emerging markets: Brazil, Russia, India and China).
- Plan Sponsor Roundtable -The Fundamentals of Fund Line-ups: Sit table-side as plan sponsors discuss investment line-ups and the critical issues in building plans that help create successful outcomes for employees.
- DC: The Next Chapter: Our industry has entered a transformational period that is expected to change the shape of the retirement landscape for years to come. David Musto, Managing Director and head of J.P. Morgan’s DC Investment Solutions Business, shares insight into how the industry is addressing evolving trends.
Leveraging the Firm – Global Multi Asset Group
One of the many benefits of outsourcing administration of DC and DB plans to J.P. Morgan is access to other products and services offered by JPMorgan Chase & Co. For example, investment management services provided by our Global Multi Asset Group (GMAG) offer an array of DB portfolio management solutions to plan sponsors.
When you choose GMAG to manage the DB plan portfolio, the group provides a co-fiduciary role. We believe this differentiates our proprietary investment management solutions from the rest of the marketplace. Benefits of a single co-fiduciary include:
Depth and breadth of investment management resources
GMAG specializes in building and monitoring robust, global multi-asset portfolios for our clients. GMAG’s tactical and strategic asset allocation is driven by both proprietary quantitative modeling and qualitative strategy creation. The team’s process spans widely diversified asset classes and includes a rigorous risk budgeting and optimization tool.
The GMAG team:
- manages $33 billion ($16 billion from the U.S.)
- has more than 30 years of experience in the marketplace, with many client relationships dating back to the team’s inception
- manages DB plans, as well as assets for both DC plans and absolute return-focused investors
Relationship pricing for outsourcing
Plan sponsors benefit from relationship pricing when plan administration is outsourced to J.P. Morgan for both DC and DB plans, as well as when they retain JPMorgan Chase Bank, N.A. for trust and custody services.
For more information about the GMAG team and the insight, resources and experience offered, contact your J.P. Morgan relationship manager.
Stu Schweitzer, Global Markets Strategist
Economic and Market Insight – Delivered Weekly to Your Voice-mail
Many of our clients benefit from getting the “MacroMinute Weekly” voice-mail from Stu Schweitzer, J.P. Morgan’s Global Markets Strategist. Stu shares his outlook on the global economy, financial markets and asset allocation in a 2- to 3-minute message delivered to your mobile or office phone Monday morning before the start of the business day.
If you’d like to receive the MacroMinute Weekly messages, e-mail Retirement_Insights@JPMorgan.com with your name, company and phone number.
Other resources from J.P. Morgan Asset Management include:
Guide to the Markets, a 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.
Market Video Replays, a timely series of videos featuring Dr. David Kelly, J.P. Morgan Funds’ Chief Market Strategist, and our portfolio managers and market specialists sharing their views and analysis of key market and economic trends.
Marking DB Milestones
Employee communication is the most important part of introducing or promoting a company benefit. If employees don’t know about a benefit, they can’t fully appreciate the value. We find this to be particularly true for DB participants. Often, employees aren’t knowledgeable about the plan, aren’t aware of key DB milestones or don’t know when or what to do once they reach those points.
To help sponsors communicate their DB plan benefits, we offer “Milestones,” a comprehensive employee communication program that:
- increases awareness of the plan
- communicates key career stages
- highlights online retirement planning tools and other resources
- encourages consideration of the DB plan, as related to total wealth decisions
Milestones program components
We contact employees at various milestones of their DB plan life. We send information to them when they are newly eligible, fully vested and eligible for early retirement. The Milestones program targets:
- Newly eligible – This automatically generated letter notifies employees when he or she becomes eligible for the DB plan.
- Fully vested – This communication can be set to drop a specific number of days prior to the employee’s 100%-vested date.
- Pre-retirement – This letter is sent when an employee is approaching retirement. If the sponsor uses this letter, there are three options to choose from:
- Encourage early retirement (most appropriate for traditional plan with early retirement defined) – The letter’s purpose is to congratulate and encourage a participant to consider taking the early retirement option he or she is eligible for. The letter is automatically generated a specific number of days before the participant’s earliest retirement date.
- General pre-retirement (most appropriate for plan with no early retirement benefit defined or where sponsor does not want to encourage or discourage retirement) – The communication focuses on the need to plan for retirement and is typically mailed 30 days prior to an employee’s 45th birthday. The sponsor can specify the age and number of days prior to when the employee reaches the specified age.
- Early retirement retention (best for traditional plan with early retirement defined) – The purpose is to congratulate a participant on attaining early retirement eligibility, but to consider delaying early retirement. This communication is generated a specific number of days before the participant’s earliest retirement date.
Effective DB communications - staged at specific milestones - can help promote the company benefit to employees. This can increase employee engagement and motivation and may also aid in recruitment and retention. If the Milestones program could be beneficial for your employees, contact your strategic relationship manager.
The Way Forward
A Mix of Media and Messages
Since not everyone learns in the same manner, The Way Forward educational program offers a variety of ways for participants to learn about saving and investing for retirement. Participants can read articles, watch videos and Webcasts or listen to audio recordings. For visual learners, we offer a variety of two- to five-minute videos that present topics in a fun and educational way. A 10-minute video, Finding The Way Forward, features Lou (who is close to retirement) and Monica (she’s farther from retirement) as they discuss proactive planning for retirement. And don’t miss the latest episode of “The Biggest Saver,” where the Orange and Blue Teams battle through “Tips to Retire on Track” challenges to vie for the title.
What’s under the hood?
Our next Webcast, scheduled for September 1, is on 401(k) “mechanics” – the components of the retirement plan (i.e., fees, investment options, matches, etc.) and how they work together to help employees “drive” toward retirement. Encourage your employees to participate and learn “what’s under the hood” of the plan.
Decoding Target Date Fund Design
Glide Path Strategies
This article is the fourth in a series. Last month's article: Decoding Target Date Fund Design – Asset Allocation.
How do you select the right glide path strategy?
Target date funds can use a range of methodologies to determine their glide path strategies. Different approaches for how multi-asset class portfolios transition from higher- to lower-risk/reward investments as retirement dates near, significantly affect volatility, short- and long-term returns and participant outcomes. Analyzing key glide path differences can help you determine the type of strategy most closely aligned to your investment needs.
Questions to consider:
How does asset class exposure change as the target date fund approaches its target retirement date?
Comparing glide paths requires a basic understanding of how different strategies seek to capture growth opportunities and balance risk across the life of the fund series - particularly as participants move closer to retirement.
How does the glide path affect outcomes?
A glide path’s risk/reward profile is largely shaped by its level of diversification and equity exposure. How the manager approaches these fundamental issues may ultimately determine how probable participants are to reaching their retirement income goals.
By uncovering the answers to these questions, you can begin to compare the significant differences between glide path strategies and decide which type of approach makes the most sense for your particular investment goals.
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.
IRS Stresses Requirement for Timely Forfeitures
Forfeitures occur in a plan when terminated participants are not fully vested in employer contribution accounts. There are two timing aspects of forfeitures which should be addressed in the plan document: when forfeitures occur and when they must be disposed of.
When forfeitures occur
There are two primary approaches to the timing of forfeitures:
- Five-year break-in-service rule – The non-vested benefit is forfeited after the participant incurs five consecutive one-year breaks in service. (This rule can be applied to DC plans and fully insured DB.) Note that this rule does not allow immediate use of forfeitures when participants take a distribution upon termination of employment.
A break in service is a vesting computation period (usually the plan year) in which the participant is not credited with at least 501 hours of service. (Different application of this rule is involved when plans use the elapsed time method to count vesting service.)
- Cash-out rule – The non-vested benefit is forfeited when a terminated participant receives a cash-out distribution (voluntary or involuntary) of his or her entire vested benefit. Under the cash-out rule, a participant who is re-employed prior to incurring five consecutive breaks in service must be allowed to repay the distribution (“buy back”) the forfeited benefit.
Many plans define the forfeiture to occur on the earlier of the five-year break in service or cash-out.
When forfeitures must be disposed of
There are two primary methods to dispose of forfeitures:
- Reduce future company contributions (other than employee contributions) – This is the most common approach used by 401(k) and profit sharing plans. In some cases, forfeitures due to specific contribution sources are used only to offset contributions for that source. For example, matching forfeitures will be used only to reduce matching contributions, and forfeitures due to profit sharing contributions will be used only to reduce future profit sharing contributions.
- Reallocate forfeitures to remaining participants in the plan – Reallocated forfeitures are considered annual additions under IRC §415.
(Plans that use the cash-out rule for forfeitures will generally use forfeitures first to reinstate accounts of rehired participants who buy back their non-vested benefits.)
In the Spring 2010 issue of the Internal Revenue Service (IRS) Retirement News for Employers (Volume 7), the IRS emphasizes the need to dispose of forfeitures on a timely basis and usually within the plan year in which they arise. Holding forfeitures indefinitely in a suspense account is not an acceptable practice in a DC plan, due to the fact all funds must be allocated under a definite formula. This generally precludes carrying over forfeitures from year to year.
If sponsors follow the rules outlined in the plan document and adhere to this compliance issue for handling forfeitures, it may help avoid problems later on.
Legislative and Regulatory Update
Loans, Fee Disclosure, QDROs and Stock Diversification
Participant loans from retirement plans
Due to changes in Federal Reserve Banking Regulation Z, participant loans from employer-sponsored retirement plans are no longer subject to truth-in-lending disclosure requirements. Regulation Z is intended to provide consumers with adequate information to compare financing terms of loan offerings, in order to make informed decisions about what the credit will cost them. The exemption that now applies to participant loans from employer-sponsored plans is generally due to the fact that such loans are repaid to the participant’s (borrower’s) account - rather than to a third party - making a comparison with other commercial or marketplace loans unnecessary.
As of July 1, 2010, we discontinued truth-in-lending disclosures on loan applications (whether by paper, on the Internet or through a retirement service center representative). However, such information can still be obtained by participants who take loans.
Both the U.S. House of Representatives and the Senate passed respective versions of a bill that would extend certain expired and expiring tax provisions (tax-extenders legislation). The House version contains provisions for fee disclosure, but the Senate version does not. The legislation is ping-ponging back and forth between the two chambers of Congress, and the outcome for fee disclosure is uncertain as of this writing. However, Representative George Miller, chair of the House Education and Labor Committee, continues to push strongly for inclusion of fee disclosure language in any final bill. While the Department of Labor had been holding issuance of regulations dealing with fee disclosure to plan sponsors until the legislative process had been completed, it decided to wait no longer. On July 16, 2010, interim final regulations under ERISA §408(b)(2) were published in the Federal Register. These regulations detail the disclosures that service providers must give to plan sponsors so that fiduciaries can determine if fees are reasonable (a requirement that must be satisfied to avoid a prohibited transaction). As these regulations were issued just before press time, an analysis for this article was unavailable.
Final regulation for time and order issuance of QDROs
On June 10, 2010, the DOL issued final regulations to the interim rule published in 2007 dealing with domestic relation orders (DROs). The final regulations are effective August 9, 2010. The regulations were issued pursuant to the Pension Protection Act of 2006 (PPA), which required the DOL to clarify certain issues relating to the timing and order of issuing DROs under ERISA and the Tax Code.
The regulations rely heavily on examples to illustrate the general principles of the qualified domestic relations order (QDRO) rules. However, the regulations point out that while the examples illustrate the application of these rules to certain circumstances, they also apply to other circumstances not described in the examples.
The regulations cover three primary points:
- Subsequent DROs – A DRO does not fail to be a QDRO solely because the order is issued after (or revises) another DRO or QDRO.
- Timing – A DRO does not fail to be treated as a QDRO solely because of the time at which it was issued (e.g., after the participant’s death).
- Requirements and protections – A DRO can become qualified only if the order satisfies the same requirements and protections that apply under ERISA. This point primarily confirms such things as: the QDRO cannot require a benefit form or option not otherwise provided by the plan; and that a QDRO cannot assign a benefit to an alternate payee that has already been assigned to another alternate payee.
Stock diversification rules finalized
On May 19, 2010, the IRS issued final regulations to address employer stock diversification rules that went into effect January 1, 2007, under the PPA. The rules deal with publicly traded employer securities held in certain DC plans, other than ESOPs that do not include contributions subject to testing under IRC §401(k) or §401(m) (e.g., elective deferrals and matching contributions).
The IRS previously issued guidance in Notice 2006-107, Notice 2008-7 and proposed regulations on January 2, 2008. The final regulations are effective for plan years beginning on or after January 1, 2011. Prior to the effective date, plans may rely on the final regulations or any previous IRS guidance.
The final regulations, which closely follow proposed regulations in most respects, provide helpful clarifications, including:
- Employer securities held indirectly, such as in a mutual fund or other broad investment option, are not subject to the diversification requirements if the aggregate value of the employer securities does not exceed 10% of the value of the fund’s assets. Exchange-traded funds are now included in the definition of a broad investment option, and the 10% determination is made at the end of the preceding plan year using the fund’s latest disclosure of holdings.
- Generally, plans are not able to impose restrictions (either directly or indirectly) with respect to divestment of employer securities that are not imposed on other funds in the plan. Certain exceptions apply:
- Rules that prevent investment into a frozen stock fund are permissible. The reinvestment of dividends into a frozen fund does not violate this rule.
- The final regulations permit investments into and out of a stable value fund on a more frequent basis than the employer stock fund or other funds in the plan.
- Transfers out of a qualified default investment alternative (QDIA) within the first 90 days to satisfy the QDIA rules are permitted - even if this is more frequent than for other funds.
- The final regulations clarify that a plan can restrict reinvestment of amounts divested from an employer stock fund back into that fund, as long as there is another employer stock fund with essentially the same characteristics into which monies can be invested. This is true even if the cost basis between the two funds differ.
In the News
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For questions about your personal retirement plan, contact J.P. Morgan Retirement Plan Services at 800-345-2345 or call your retirement plan provider.
Availability of products and services featured in Insights vary by plan. For details, contact your J.P. Morgan representative.
This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for investment, accounting, legal or tax advice.
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.
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