Retirement and Investment Solutions Newsletter

Insights

November 2009 Issue

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Thank you for joining us for our 10th issue of Insights, our 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:

  • Understanding your investment manager beyond the numbers
  • The economic impact on saving for retirement
  • Evaluating the effectiveness of your company match

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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Disclosures


Beyond the Numbers: Understanding Your Investment Manager

The prevalence of technologies such as e-mail, text-messaging and Twitter have created a society accustomed to instant gratification. This phenomenon is evident when examining investor reaction to short-term performance. J.P. Morgan Retirement Plan Services finds that investors of all types, whether sophisticated plan sponsors or defined contribution plan participants, often place too much emphasis on short-term performance while ignoring the drivers of performance.

As a fiduciary, it is important for you to consider performance within the context of both the market environment and your plan’s stated investment philosophy in order to arrive at a prudent assessment. Understanding an investment manager’s team structure, philosophy and investment process are as important as monitoring results. Failure to adequately understand the drivers of an investment manager’s performance may lead to a decision to replace an investment at a time when its process may be out of favor with the market or worse yet, poised for a rebound.

When evaluating an investment manager, there are certain questions you should consider, such as:

  • How is the portfolio team structured?
    • Is there a “star” portfolio manager or does the strategy utilize a team-based model? Depending on the approach, the departure of a portfolio manager may or may not be a significant development, but understanding the structure of the team and roles of the portfolio manager are crucial to the ability to assess the potential impact of team changes.
    • Identifying compensation structure (retention provisions, vesting programs, etc.) is another factor that should be considered to assess whether the interests of the investor are aligned with the portfolio manager.
  • What are the main tenets of the investment philosophy and process?
    • Is the strategy based on fundamental analysis or is it quantitative in nature? Fundamental managers may come with a higher cost, but a focus on bottom-up fundamental research may help avoid securities that look appealing from a quantitative perspective but have underlying issues not otherwise apparent.
    • Does the strategy employ a top-down, macro-economic aspect? In other words, does the manager look at trends within the economy and attempt to exploit them? If so, gaining a thorough understanding of how these trends are identified and analyzing the manager’s ability to exploit these trends could be warranted.
  • What are the basic guidelines behind portfolio construction and risk mitigation?
    • Risk control measures create a framework for the manager to construct the portfolio within pre-determined parameters. Examples of portfolio construction/risk mitigation factors include: minimum/maximum position sizes, number of holdings, sector allocation and ability to invest in securities outside the stated benchmark. These factors can provide important insights into the relative aggressiveness of a strategy versus its stated benchmark.
    • Stated another way, rigid portfolio construction/risk mitigation functions present less opportunity for a manager to significantly deviate from the benchmark. Understanding the portfolio construction process can provide additional insight into the relative performance of the strategy.  

The market in 2008 and early 2009 saw several well-respected fund management teams struggle in unprecedented ways. Fortunately for investors in those funds, the problem was typically not due to changes to the investment process or team but was instead due to certain investment styles not being favored by the market. Through a robust understanding of the team and process utilized, plan sponsors can work to avoid making unfortunately timed decisions to fire managers based solely on performance. In the end, the rationale for firing an investment manager should be consistent with the reason the manager was hired in the first place.

At J.P. Morgan Retirement Plan Services, your assigned investment strategist can help address these questions and provide insights as to how your investment manager may be expected to perform in various market environments. Armed with an increased understanding of your investment manager, you can be informed in your decision to hire, fire or retain an investment manager while fulfilling your fiduciary obligation.

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Interested in learning more about how a target date fund glide path works?

The J.P. Morgan SmartRetirement® Asset Allocation Glider has been developed to help plan sponsors understand how the glide path works. Sponsors can click on a date of birth range to learn about the corresponding target date strategy and see the asset allocation glide path in more detail.

Generally, the asset allocation of each target date fund will change on an annual basis with the asset allocation becoming more conservative as the fund nears the target retirement date. The target date is the approximate date when investors plan to start withdrawing their money. The principal value of the fund(s) in a plan’s lineup is not guaranteed at any time, including at the time of target date and/or withdrawal.

To learn more about JPMorgan SmartRetirement or the glider, please contact your J.P.  Morgan representative or e-mail us at Retirement_Insights@JPMorgan.com.

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Economic Impact on Plan Participants.

The following is a section taken from our recent report released, based on a study conducted with participants this past spring called, “Anything But Certain.”

Guarded optimism

One thing that makes this particular economic downturn unique is that, perhaps for the first time, the average investor is able to see just how dependent each component of our economy is on every other component. Moreover, the severity and breadth of this recession has left everyone in the same boat, relatively speaking, and so it was not surprising to find that nearly half of the plan participants we surveyed said they had fared about as well as most people over the past 12 months. Of note, fewer than 10% of participants felt they had done worse than most Americans, leaving four out of 10 feeling they had managed better.

Perhaps the practice of saving creates optimism. The First Command Financial Behaviors Index found that those who regularly put money into savings are less likely to be stressed out about the current economy than those who do not.* Apparently, the same holds true for retirement saving. The number of those who felt they had managed better than most people was 25% higher for 401(k) participants compared to those who were not contributing to a 401(k) plan.** Likewise, the number that felt they had done worse than most nearly doubled to 17% among non-participants. Looking ahead to the next 12 months, as a group, 401(k) participants are more likely to believe the economy will get better (38% better vs. 27% worse), while those not contributing are more likely to believe it will get worse.

2009 RPS Insights - November Kel Chart 1
2009 RPS Insights - November Kel Chart 2

Compared to most Americans, how have you managed during the past 12 months of the economic environment?

% of Participants

*First Command Financial Behaviors Index, April 7, 2009

** Nonqualified respondents, under the age of 65, working for a for-profit company and not contributing to a defined contribution plan.

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Employer contribution strategies – challenge the status quo

Evaluating the effectiveness of your company contribution may be more important than ever in the current economic environment. In a year where an estimated 20% of plan sponsors have reduced or suspended match contributions, it may be appropriate to consider challenging the status quo.

While we suspect that the level of matching contributions tends to drive employee participation and contributions, the majority of active participants do not change their deferrals when matching contributions are suspended or reduced. In our recently published study, Anything But Certain, we asked survey participants whose company match had been reduced or eliminated the following question:

Insights November Plan Design Chart

As shown above, only six percent of participants ceased contributions, and more than 70% of participants maintained or increased contributions.

It’s time to question the status quo. We’re becoming more sophisticated in understanding participant preferences and participant behavior. J.P.  Morgan’s Participant Preference Model can be used to evaluate the actual preferences and biases of your specific plan population. Options for consideration include:

  • Match maximization – stretching the match to encourage higher participant deferral rates
  • Non-elective employer contributions in lieu of a match
  • Non-elective contributions based on age and/or service in lieu of defined benefit accruals

The 2010 business planning season is upon us. Your J.P. Morgan representative is prepared to discuss employer contribution strategies and at your request, will engage the Participant Preference Model for a detailed analysis of your population’s preferences. Contact your J.P.  Morgan representative for more detailed information.

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The following article is one in a series of case studies that will appear in Insights, which feature our most successful communications programs developed for participants.

Counting Down to Retirement

In today’s economy, many companies are more concerned than ever about the retirement readiness of their employees. For one company, this concern was at the heart of planning a campaign aimed at getting 401(k) plan participants to act – to understand that retirement is not that far away, think about their retirement goals and do something to achieve those goals.

The company offers one 401(k) plan packed with features and tools to help employees plan for the future. Because the company has automatic enrollment, its participation rate is very high. However, many participants are still contributing at the default percentage. For those reasons, communication goals focused on educating participants about the need to save more and encouraging participants to diversify their investments – all framed in the context of today’s market environment.

The J.P. Morgan and plan sponsor team collaborated to come up with an action-oriented theme: Countdown to retirement. Plan the life you want. Start now. In order to create consistency across the various benefits communications, this theme tied in with a previous message, and leveraged the same color palette used for open enrollment materials.

The teams produced a multi-media campaign, using print and electronic communications, as well as face-to-face meetings. Posters, e-mail messages and a special Intranet page publicized the events and informed employees about the tools available for retirement planning. Meetings and a Webcast provided perspective on the market environment. A mailing to homes educated employees about diversification and reminded recipients about tools such as target retirement date funds, J.P. Morgan Personal Asset Manager and Personal Online Advisor.

To add an interactive component to the campaign, a personalized URL was created for each employee, using a custom Web address tied to the campaign theme. This URL was sent to all active employees as a link within an e-mail, inviting them to answer some questions and take action toward their retirement goals.

An electronic survey was e-mailed shortly after the campaign in order to gather feedback, measure participant satisfaction and help in future planning.

Both quantitative and qualitative results point to a successful campaign. Meeting attendance at most locations significantly increased over previous events, exceeding the campaign goals. Response rates to the various pieces were also extremely high. More than 45% of recipients visited their personalized URL, and 40% of those employees intend to increase their savings rate in the 401(k) plan. Additionally, 7.6% of survey respondents changed their investments as a result of the campaign.

Many employees expressed appreciation to their employer for the campaign and the information provided. Write-in survey comments included many a “thank you” for caring about their retirement needs and facilitating the events.

The bottom line –employees are not only counting down to retirement – they are planning the life they want…and taking action to get there!

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      Legislative and Regulatory Update – Using unused leave time as retirement plan contribution

In last month’s edition, we mentioned some regulatory guidance that was issued over the Labor Day weekend as part of the President’s initiative to help Americans save for retirement. One issue for which guidance was received deals with the ability to make a retirement plan contribution of unused vacation time or similar leave at the end of a year or upon termination of employment. This article takes a closer look at this opportunity and some of the issues involved with it.

Options and issues for active employees

Depending on an organization’s paid time-off policies, employees may forfeit unused vacation or sick time at the end of a calendar year. Over time, some employers have expressed a desire to contribute the cash equivalent of this unused paid time-off to a retirement plan on behalf of active employees, or allow employees to defer such amounts into a 401(k) plan. Revenue Ruling 2009-31 allows both approaches, discussed below.

  • Employer non-elective contribution: The cash equivalent of the unused paid time-off contributed by the employer will vary by employee. Contribution of these amounts will not satisfy a uniform allocation formula, thus the amounts will have to be tested under the general nondiscrimination test of IRC §401(a)(4), also referred to as the rate-group test. The cost of this test may make this option unfeasible for many companies.
  • Employee elective deferral: As part of a 401(k) plan, contribution of the unused paid time-off can be subject to the employee’s cash or deferred election.
    • This requires that either a separate election be offered with respect to the unused paid time-off, or the plan must generally specify that the employee’s normal salary deferral election apply to unused paid time-off.
    • To be part of a 401(k) cash or deferred plan, any unused paid time-off not elected to be deferred to the plan must be paid to the employee in cash (i.e. it cannot be forfeited).
    • Amounts contributed to the plan are subject to the IRC §415 annual additions limit, as well as the §402(g) limit on deferrals, and are tested as part of the ADP test for the year deferred.
      • If a plan fails its ADP test, such amounts contributed by highly compensated employees (HCEs) may have to be refunded.

Options and issues for terminated participants

Payment of unused paid time-off may also apply to terminated participants, again depending on a company’s specific policies and plan design. Revenue Ruling 2009-32 allows these amounts to be contributed to a plan in a similar fashion to that discussed above for active employees. Either a non-elective contribution can be made by the employer, or an elective deferral can be offered to the employee. The same issues identified above for active employees apply to each form of contribution, but some additional considerations should be evaluated for terminated participants:

  • Employer non-elective contribution: In the year the contribution is allocated, the individual must have IRC §415 compensation equal to at least the amount of the contribution (since the §415 limit is 100% of compensation).
    • If the unused paid time-off is the only form of compensation in the year, only one-half of the amount can be contributed to the plan because the amount contributed is not included in IRC § 415 compensation.
    • Example: Participant A terminates employment on December 28, 2009, and the value of unused vacation is $300; $150 is contributed to the plan on January 15, 2010, and $150 is paid to the participant as compensation on that same date. The contribution is 100% of §415 compensation for 2010.
      • In the above example, the plan must define §415 compensation to include payment of bona fide sick, vacation, or other leave that the employee would have been able to use if employment had continued and if paid by the later of: (1) 2 ½ months following termination of service or (2) the end of the limitation year that includes the date of termination.
  • Employee elective deferral: Elections with respect to deferrals of unused paid time-off must be on file prior to termination of employment. In addition, the IRC §415 definition of compensation should include elective deferrals in the event this is the only compensation paid in a given year.

Other considerations

This summary does not attempt to address all issues related to contributions of unused paid time-off. Plan sponsors should check with their own legal counsel before deciding whether or not to adopt these provisions. Other issues to note:

  • Plan documents and paid time-off plans will generally need to be amended.
  • The paid time-off plan should be a bona fide sick and vacation leave plan for purposes of IRC §409A (dealing with nonqualified deferred compensation arrangements).
  • Some state laws may prohibit a change to previously accrued paid time-off.
  • The rulings don’t address the application of these provisions to §403(b) or §457(b) plans.

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Fiduciary Update

According to its Web site, the Employee Benefit Security Administration (EBSA) under the Department of Labor (DOL) is charged with educating and assisting participants covered by private retirement plans, health plans and other welfare benefit plans, as well as plan sponsors and members of the employee benefits community. EBSA seeks to balance proactive enforcement with compliance assistance.

Under the Obama administration, the EBSA has a new Assistant Secretary of Labor at the helm, Phyllis Borzi. From remarks made by Borzi at the ASPPA/DOL Speaks conference on September 14, 2009, we can expect that the EBSA will take a different course than it did under the Bush administration. This article summarizes what that direction is likely to be, and what this may mean to plan sponsors.

Enforcement initiatives

According to Borzi, “The previous administration focused on compliance assistance, but that’s only good if it is combined with strong enforcement.” Implying that enforcement has been weak, we may expect that EBSA will be more active in finding and prosecuting violators of ERISA. As part of her agency’s 2010 goals, Borzi cited a new national priority involving the delayed remittance of contributions. This statement is somewhat perplexing, because this was a stated national priority of the EBSA in 2008. What we can possibly read into this is that the emphasis will be on enforcement.

Previous articles have addressed the need for plan sponsors to remit employee contributions in a timely manner. With the priority focus by the EBSA on this issue, plan sponsors would be advised to review their practices and procedures for compliance.

Other priorities noted at the Speaks conference include a project that would focus on criminal investigations of individuals involved with the embezzlement of plan funds. This would include those who withhold money from worker paychecks without depositing them. In addition, there will be a sharper focus on those who knowingly file false 5500 information. While the EBSA will have other enforcement activities, these are some key ones for retirement plan sponsors to take notice of.

Regulatory initiatives

To complement enforcement, the EBSA will focus on guidance (mostly in the form of regulations) to address key issues. Investment advice regulations will likely be the first priority on this front. After first postponing the effective date and finally withdrawing final regulations developed by the prior administration, a fresh set of rules is on the fast track. After criticism from some members of Congress and others that the prior regulations did not adequately protect participants from conflicted investment advice, these rules will take a more restrictive approach on advice offered by financial institutions and advisors. In fact, new proposed regulations may already be issued by the time you read this. We wait to see what impact these new rules will have on independent investment advice offered under prior DOL guidance, including the SunAmerica advisory opinion that many advice offerings follow.

Regulations dealing with fee disclosure to plan sponsors and participants will likely follow new investment advice rules. Fee transparency is part of a few bills working their way through Congress, but the EBSA will likely issue guidance before any new laws are enacted. It is anticipated that regulations will contain many attributes of these legislative proposals. Expect fee disclosure regulations in early 2010, with an effective date sometime later.

The EBSA will be working with the Securities and Exchange Commission (SEC) on helping participants better understand how target-date funds work and what the potential risks are. It is unclear what will emerge on this, but better disclosure is almost a given. And finally, recognizing the need for lifetime retirement income, the DOL will continue to look for suggestions on how to encourage annuitization of account balances in defined contribution plans. This is an area that is already receiving the attention of the retirement industry.

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Ongoing communication with participants: The Way Forward

“How are participants doing?” is a question we at J.P. Morgan Retirement Plan Services have been especially concerned about since last fall when the volatile market and turbulent economic conditions began. The Way Forward series has provided participants with timely resources to help them stay on track, even in the midst of a challenging environment. Our goal is that your employees continue to benefit from the articles, videos, Webcasts and podcasts each month and, as a result, will be able to make better decisions today that will affect their retirement future.

Upcoming topics for The Way Forward will focus on:

  • diversification strategies
  • fixing your asset allocation
  • lessons learned
  • tips to help participants get back on track

Read our most recent articles featured on The Way Forward, like Start young to build your (retirement) wardrobe and (Re)balancing act.

Participants can access other content by logging on to www.retireonline.com and clicking on the education center and then selecting The Way Forward or by clicking directly to The Way Forward home page.

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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.

For the remainder of 2009, the firm will be closed on the following days:

  • Thanksgiving Day – Thursday, November 26
  • Christmas Day – Friday, December 25

The markets will close early at 1 p.m. Eastern time on the following dates. Because of this, our Retirement Service Center will also close early.

  • Friday, November 27
  • Thursday, December 24

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 Corporate Bond Monthly Webconference:

A monthly discussion on recent corporate credit market performance and trends. The discussion will focus on the latest trends in the credit markets (spreads, new issues and secondary market performance) as well as give the outlook for credit over the coming months.

Speakers:
Lisa Coleman, Head of the Global Investment Grade Corporate Sector Team
David Martin, Research Analyst, U.S. Investment Grade Corporate Credit Team

  • Tuesday, November 17
  • 9:30 a.m. Eastern time
  • Pre-registration is required for webconference attendance. Please RSVP to attend.

JPMorgan SmartRetirement Mutual Funds Quarterly Review Webcast:

Fine Tuning Your Portfolio Key trends in moving out of the crisis Webcast:

Join our experts who will provide you with perspective on industry trends, as well as a current market update and outlook for targeted asset classes. They will specifically address:

  • Industry trends as they relate to high yield and global and international equities
  • Making the most out of your allocation
  • Aligning risk and return expectations

Speakers:
Jim Shanahan, Portfolio Manager, Fixed Income
Nigel Emmett, Client Portfolio Manager, Global and International Equities
Jean Walshe (moderator), Strategic Client Group Advisor

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.

Speakers:
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 Retirement_Insights@JPMorgan.com 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 www.jpmorganchase.com.

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Contact us at: Retirement_Insights@JPMorgan.com

For questions regarding your personal 401(k) plan, contact your 401(k) plan provider.

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Disclosures


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.

J.P. Morgan Funds are distributed by JPMorgan Distribution Services, Inc., which is an affiliate of J.P. Morgan Retirement Plan Services LLC and JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees for providing various services to J.P. Morgan funds, including fees for investment management, shareholder servicing, administration, distribution, custody, fund accounting, securities lending and other services.

J.P. Morgan Retirement Plan Services LLC and its affiliates and agents may receive compensation with respect to plan investments, including, but not limited to, sub-transfer agent, recordkeeping, shareholder servicing, 12b-1 or other revenue-sharing fees.

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.

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.

Neither JPMorgan Chase & Co. nor its subsidiaries or affiliates provide tax, legal, accounting and/or investment advice. Please consult your tax advisor or attorney for such guidance.

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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