Retirement and Investment Solutions Newsletter


May 2010 Issue

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Building the Best Retirement Programs
It Begins With Plan Design

Though plan sponsors may never have been able to disassociate plan design from other components of defined contribution (DC) recordkeeping, the current and projected environment may suggest that plan fiduciaries who do not take an integrated approach to plan design may be doing so at their peril. We believe it is prudent for plan fiduciaries to give in-depth consideration to plan design within the broader context of real-world DC recordkeeping operations.

In Insights last year, we shared enhancements to our Building the Best Plans in America strategic consulting framework. This framework helps address challenges plan sponsors may face by offering a holistic view that takes into consideration:

  • design
  • funding and investments
  • administration
  • communication
  • fiduciary responsibilities

When plan sponsors take an integrated, holistic approach to plan administration, they should also consider taking into account the ever-changing employee benefit plan landscape. Our strategic consulting framework does that.

Consider the following example. It’s based on final regulations issued by the Internal Revenue Service (IRS) in February 2009 on eligible automatic contribution arrangements and qualified automatic contribution arrangements.

Example: A plan sponsor that had not previously implemented either of the automatic arrangements is now considering doing so. Beyond making the necessary amendments to the plan document, the plan sponsor takes a broader view of implementing the arrangements and considers the:

  • impact on employer contributions (i.e., greater level of match contributions, if applicable)
  • possible need to amend the Investment Policy Statement and/or restructure the current investment menu
  • adoption of managed accounts program to serve as qualified default investment alternative
  • impact on current plan operations including possible administrative costs
  • communication program to introduce program and handle required periodic compliance program messages

This example provides a glimpse of how our strategic consulting framework may help inform plan sponsor decisions. We consider implementation of automatic enrollment and other automatic programs to be one of the best practices for effective plan administration and also recognize additional considerations that may need to be addressed.

While our Building the Best Plans in America framework is discussed here within the context of a DC plan, we carry this approach to solutions that integrate DC, defined benefit and other retirement benefit plans. Your J.P. Morgan relationship manager is ready to discuss with you how your plans could benefit from an integrated, holistic approach – delivered through Building the Best Plans in America strategic consulting framework.

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Should Participants Worry About Inflation?

As the markets and economy are showing signs of recovery, we're all breathing a little easier these days. For plan sponsors, this “breather” offers an opportunity to review the plan’s investment lineup and ask, “What could happen next?” One possible concern is inflation and the risk it poses to participants’ real spending power during retirement.

During the recent economic recession, governments around the world provided massive monetary and fiscal stimulus in efforts to support economic growth the private sector was unable to provide. The unprecedented level of stimulus, along with the continuing and growing commodity demand from emerging markets, is causing concern by some about whether inflation will become a serious problem in the future.

The importance of inflation is the subject of much debate, and there are strong arguments on both sides. The key point is that having an inflation-hedging component in a DC plan investment menu or in your target date funds may make sense, regardless of your outlook on inflation.

Inflation-sensitive investments
We believe inflation may be one of the biggest risks that retirees face. When you retire, generally you are highly dependent on your assets and their ability to keep pace with your spending. Additionally, people are tending to live longer and people in general, are spending more during retirement. In other words, inflation-sensitive investments may be considered important assets for DC retirees, regardless of what is happening with inflation.

What about stocks as the inflation-hedging investment of choice? Most of us have grown up under the assumption that traditional investments in equities over the long term will provide a real return in excess of inflation. A recent study performed by Wellington Management LLC1 examined a variety of asset classes and their performance during periods of falling, stable and rising inflation. Not surprisingly, nominal bonds had lower performance during periods of rising inflation. Stocks, however, also had lower performance when inflation was rising, as higher levels of inflation are normally associated with slow economic growth.

Choices for plan sponsors
What asset class choices exist for plan sponsors when selecting an inflation-hedged strategy for their DC plans? Choices include inflation-linked bonds (TIPS), commodities, inflation-sensitive equities (e.g., metals or mining stocks) or a diversified basket of these asset classes.

How should a plan sponsor evaluate these asset classes? The first consideration: Understand expected return and risk, just as you would any other investment option offered by your plan. Second: Consider the inflation characteristics of each; specifically, the correlation and beta to inflation.2

Each of these asset classes performs differently in different types of inflationary periods, and no single asset protects well in all. TIPS, for example, tend to have better performance during periods of rising inflation and slow or no economic growth. Commodities and inflation-sensitive equities tend to have better performance during periods of rising inflation and strong economic growth; however, they tend to be much more volatile than TIPS – but also can be effective for diversifying a portfolio.

Recognize inflation risk
While the decision on how to implement an inflation-protection strategy is important, the first step may be to recognize the risk of higher inflation to your current and future retirees’ spending power. Once this point is reached, the search for an effective investment solution can begin.

1 Source: Wellington Management Company LLC, Defined Contribution Inflation Solutions, “Rising Inflation is a Headwind for Stocks and Bonds”, January 2010 and Wellington Management Viewpoint / Investor Q&A, December 2009, Inflation The “Real” Risk to DC Plans.

2 Beta: A measure of a fund’s volatility compared to its benchmark. A beta of 1.1 indicates that the fund is 10% more volatile than its benchmark. Correlation coefficient: A statistical measure of the interdependence of two or more random variables. Fundamentally, the value indicates how much of a change in one variable is explained by a change in another. It can vary from -1 (perfect negative correlation) through 0 (no correlation) to +1 (perfect positive correlation).

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Decoding Target Date Fund Design – Diversification

This article is the second in a series. Last month's article: Decoding Target Date Fund Design - Defining Your Goals.

How much asset class diversification does a portfolio need?

Professionally managed multi-asset-class portfolios – such as target date funds – can offer an effective way to gain immediate asset class diversification. Some portfolios focus solely on stock and bond exposure, while others include a wider spectrum of asset classes. How diversified should they be? The answer largely depends on what you expect from the portfolio and your perspective on the role of asset class diversification. Understanding how differences in levels of diversification can affect performance can help you determine the level most closely aligned to your investment goals.

Questions to consider:

Is the manager casting a wide enough net?
An effective diversification strategy requires more than simply spreading assets across large cap, mid cap and small cap equities. Our experience shows that including carefully screened extended and alternative asset classes in a portfolio may help manage both sides of the risk/reward equation.

How does the manager decide which asset classes to include?
“More” doesn’t necessarily mean “better.” Broader diversification requires a disciplined framework to analyze which asset classes may provide additive benefits to a particular strategy. Important factors to consider include liquidity, transparency, economic value, volatility and fees

By uncovering the answers to these questions, you can begin to compare the significant differences between portfolios and help decide which type of diversification strategy makes the most sense for your particular investment needs.

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

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The ABCs of Your SPD

Summary Plan Description (SPD)
ERISA requires a qualified plan to have a written plan document, such as the SPD. The SPD is to be distributed to each plan participant and to each beneficiary and alternate payee receiving benefits under the plan as follows:

  • For existing plans, a new participant must receive a copy of the SPD within 90 days after becoming a participant, and a beneficiary or alternate payee must receive a copy within 90 days after first receiving benefits. For newly created plans, an SPD must be distributed to participants and beneficiaries within 120 days after the plan is first implemented. In addition, a plan sponsor must provide an SPD within 30 days of it being requested by a plan participant.
  • When a plan is significantly modified or there is a change in the information provided in the current SPD, participants must be provided with a revised SPD that reflects the changes or with a Summary of Material Modification (SMM). The SMM or updated SPD must be provided to eligible participants and participants with balances no later than 210 days after the close of the plan year for which the SPD is updated. An SPD must be updated every fifth year if there have been amendments affecting the contents. It must be updated every tenth year regardless of whether amendments have been made.

Legal document and participant communication
The contents of the SPD are governed by ERISA. The SPD must be sufficiently accurate and comprehensive to inform participants of their rights and obligations under the plan. The SPD is as much a legal document as it is a participant communications document, and this becomes obvious in the event of a claim against the plan, a dispute or in the case of plan litigation. Most plan sponsors include a statement in their SPDs that explains that if a discrepancy appears between the plan document and the SPD, the plan document prevails. However, recent court cases have shown that this statement cannot be relied on. Certain courts have found that because the SPD is distributed to all participants and it is more accessible and is easier to understand by the average participant, it is the controlling document participants may rely on.

An SPD is a significant part of a plan’s documentation and should be accurate and complete. Attention to detail and keeping the SPD current will not only aid your participants and help prevent misunderstandings, but can help protect plan fiduciaries in the event of a dispute.

The benefits of a regular review of your SPD include the potential to identify efficiencies in plan administration and update language to clearly articulate plan components.

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Audience of OneSM Personified
Participant Contact Center

At J.P. Morgan, we assist our clients by providing support to your benefits department. One key tool for delivering on this support is our contact center. Technology drives information to retirement education specialists so they can focus on participants and their experience.

J.P. Morgan retirement education specialists go through extensive training programs including ERISA guidelines, IRS regulations and plan-specific provisions. Once specialists successfully complete initial training, they are scheduled for ongoing training events and continuing education. All retirement education specialists have FINRA Series 6 or 7 and Series 63 licenses.

How M.A.G.I.C. plays a part
Building a relationship with your participants is the most important part of their training program. We employ customer service training techniques, including Make A Good Impression on the Customer (M.A.G.I.C.), role-playing and telephone etiquette. In addition, contact center managers conduct ongoing monitoring of calls and provide regular feedback to each specialist.

Finally, our specialists also use Audience of OneSM tools to help your participants answer the question, “Am I on track to live comfortably through retirement?”

For more information on our contact center, please speak with your J.P. Morgan relationship manager.

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Participant Behavior Snapshot: A Broad Look at Our Participant Base

Plan sponsors want to ensure their employees are taking advantage of all the benefits their retirement plan offers. The common measures include employee participation, maximum contributions, investment diversification, account rebalancing and loan usage.

According to our experience with participants, nearly three-quarters of eligible employees participate in the plans their employers offer. However, less than 10% of those participating in the plan contribute the maximum amount of $16,500.

Excluding individuals who are already diversified through target date funds and managed accounts, nearly 50% of participants appear to be managing the diversification process on their own. However, only 10% rebalanced their portfolios during the last year. On a more positive note, nearly 80% of these participants do not have outstanding loans from their retirement plans.

Visit with your relationship manager to take a comprehensive look at your participants’ behaviors.

A Broad Look at Our Participant Base

A Broad Look at Our Participant Base

*average participation rate, either pretax or after-tax
^contributions that contributed to the maximum 402(g) limit
‡percent with at least 95% in target date fund, managed account or are 110-age in equity with multiple investments
†percent that executed a trade on their own during the previous year (excluding participants invested with at least 95% of assets in target date fund or managed account)
**percent of participants that do not have outstanding loans

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

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Save the Dates – Webcasts on May 20 and May 25

May 20: Legislative Update Webcast
Please join us for a Legislative Update Webcast featuring Bob Holcomb, vice president of Legislative Affairs.

Date/Time: Thursday, May 20, 2010, 3 p.m. Eastern time 

Topic: This Webcast will provide insight on:

  • the latest legislative developments
  • pending regulations
  • legislative and regulatory agenda

The presentation will last approximately 40 minutes, followed by a Q & A session.

To attend, sign on 15 minutes before the meeting by holding the Ctrl key while clicking the link below.

Or, click to enter the meeting and follow these steps:

  1. At the prompt, enter the Meeting ID and Entry Code listed below.
  2. At the location field, make certain is selected.
  3. Click Join.
  4. Next, enter your name, e-mail address and company name.
  5. Click Continue.

Meeting  ID: Update
Attendee Entry Code: 317682

Audio: Dial 800-857-9624 and use pass code 6126870.

It may be necessary to download software to your computer. A few days before the live event, you may visit a generic meeting to make sure your computer is ready to use Microsoft Office Live Meeting 2007. Please go to and test your setup in advance of the Webcast. For assistance, contact Microsoft Live support at 866-493-2825 or 650-526-6194.

May 25: What’s Next for Small Caps?
Please join us for this Webcast featuring Kimberley West, client portfolio manager for J.P. Morgan Asset Management, on the role of small caps in DC plans.

Date/Time: Tuesday, May 25, 2010, 3 p.m. Eastern time 

Speakers: Kimberley West, client portfolio manager J.P. Morgan Asset Management; Shari Mancher, vice president, Investment Services Group, J.P. Morgan Retirement Plan Services; and moderated by Hal Bjornson, head of Investment Services Group, J.P. Morgan Retirement Plan Services.

Topic: This Webcast will explore small cap investing, examining the current market environment and outlook for the asset class. The discussion will include considerations around the risk/return profile of small cap and the role of this asset class within a DC plan.

To attend, click this link and follow these steps:

  1. At the prompt, enter the Meeting ID and Entry Code listed below.
  2. Click Join.
  3. Next, enter your name, e-mail address and company name.
  4. Click Continue.

Meeting  ID: SCaps
Attendee Entry Code: 309497

Dial in information: 800-593-7169; participant passcode is 3696238

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Legislative and Regulatory Update
Department of Labor Regulatory Projects

The Department of Labor (DOL) has begun to develop regulatory guidance on retirement plan issues – some that have been lingering for some time. This article covers four areas the DOL is working on.

Service provider disclosure of fees to plan sponsors
Fee disclosure regulations were first drafted under the Bush administration, but were never finalized. On March 3, 2010, the DOL, under the Obama administration, sent a new set of regulations to the Office of Management and Budget (OMB) for final review. OMB has a maximum of 90 days to review the regulations before they are released for publication. This means we should see something soon after the publication of this article. These regulations are to be issued in interim/final form. This allows service providers, plan sponsors and the public to submit comments even after the rules are finalized. Such comments could result in follow-up guidance by the DOL.

Phyllis Borzi, the assistant secretary of labor of the Employee Benefits Security Administration, speaking at a conference in Kansas City on April 23, stated that the effective date of these regulations would allow sufficient time for service providers to comply. However, she was not specific as to how long after publication that would be.

Plan disclosure of fees to participants
Another set of DOL fee disclosure regulations – this one aimed at participants – will soon be sent to OMB for review. Thus, the timing for issuance should be in the late summer or early fall. These are also expected to be published as interim/final regulations. Of the two sets of fee disclosure regulations, this one may be of most interest. In order for fee disclosure to be meaningful to participants, there must be enough useful information to help in making informed decisions, but not excessive quantity (or complexity) to prevent participants from reading the information.

It will also be interesting to see how or if the disclosure of administrative credit arrangements between investment funds and service providers will be addressed. This has been a point of emphasis raised by plaintiffs in several of the 401(k) fee lawsuits brought during the last few years and the topic of much debate in Congress when legislative initiatives on fees were previously introduced.

Request for information on retirement income options
It is well-documented that DC plans have become the primary source of retirement income for many American workers. One area of concern with these plans is the lack of any form of guaranteed lifetime income. Many DC plans provide only a lump-sum distribution option leaving it to participants to determine how to preserve and draw on their account balances to last throughout retirement. On February 2, 2010, the DOL and the Treasury Department issued a joint request for information (RFI) to determine whether and, if so, how retirement security for participants can be enhanced.

The RFI consisted of 39 questions to gather input on a variety of issues, including:

  • retirement income products – advantages and disadvantages
  • why do participants not select annuities when available under a plan
  • fiduciary issues related to participant education and selection of annuity-type products
  • costs of providing such lifetime income options in plans

Responses were due by May 3. The input gathered will determine the next steps to be taken by the agencies, which could be in the form of hearings, increased educational information for participants, proposed regulations or some combination of these.

Investment advice under the Pension Protection Act
On March 2, 2010, the DOL published proposed regulations relating to investment advice to participants in individual account plans. Once finalized, these rules replace final regulations issued on January 21, 2009, but later withdrawn by the DOL. The focus of the proposed rule is investment advice being provided by financial institutions that also provide investment options under employer plans.

While these regulations are more narrowly focused than the Bush administration version, it is important to note that they do not invalidate prior investment advice guidance issued by the DOL. This means that the standard used by many in the industry for providing advice, the SunAmerica Advisory Opinion, may still be relied on to provide independent investment advice.

The proposed regulations, while having limited applicability to most plan sponsors and investment advice providers, raise some issues that bear close monitoring. The DOL is seeking input on what constitutes generally accepted investment theory and what criteria are appropriate and are an objective bases for asset allocations generated by computer models. Areas for which input is sought include how past performance of a particular investment option should, if at all, be considered; how investment management style (active vs. passive) should be taken into consideration; and how fees relative to investment performance should be weighted. The big question is how the answers to these questions will shape future regulatory initiatives.

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Market Pulse

Resources from J.P. Morgan Asset Management:

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.

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

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In the News

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

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Contact us at:

For questions about your personal retirement plan, contact J.P. Morgan Retirement Plan Services at 800-345-2345 or call your retirement plan provider.

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Availability of products and services featured in Insights vary by plan. For details, contact your J.P. Morgan representative.

This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for investment, accounting, legal or tax advice.

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

J.P. Morgan Institutional Investments Inc. (JPMII) has hired Financial Engines Advisors L.L.C. (“FEA”) to provide sub-advisory services. JPMII is a federally registered investment advisor. FEA, a federally registered investment advisor and wholly owned subsidiary of Financial Engines Inc., is an independent company that is not affiliated with J.P. Morgan Retirement Plan Services LLC or JPMII. Neither JPMII, FEA, nor its affiliates guarantee future results. Financial Engines® is a registered trademark of Financial Engines, Inc. All other marks are the exclusive property of their respective owners. ©2005-2010 Financial Engines, Inc. All rights reserved. Used with permission. J. P. Morgan Retirement Plan Services provides plan recordkeeping and administrative services.

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.

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.

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.

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.

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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