Retirement and Investment Solutions Newsletter


November/December 2010 Issue

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

Decoding Target Date Fund Design: Fiduciary Responsibility

This article is the seventh and final in the series. Last month's article was Decoding Target Date Fund Design – RebalancingSee additional articles from the series.
What are the fiduciary responsibilities for target date fund (TDF) selection?

Since the passage of the Pension Protection Act of 2006, many 401(k) plans have selected target date funds as their qualified default investment alternatives (QDIAs). Prudent TDF selection, however, has become more challenging given the significant differences in fundamental portfolio design. From a fiduciary perspective, this process typically involves defining what the plan is trying to achieve and then analyzing the types of TDF strategies best suited to meet these goals.

Questions to consider:

  1. What is involved in a typical TDF selection process?

    A critical component of fiduciary responsibility is developing a prudent TDF selection process that examines the types of investments, allocations, risks and costs most appropriate for the plan’s participants. This process must carefully consider what the plan hopes to achieve with the TDF, as well as the underlying assumptions used in the selection and monitoring process.

  2. Does the plan have a documented process to evaluate TDF design differences?

    It is important for fiduciaries to understand the relationship between TDF design and participant outcomes at retirement. J.P. Morgan Asset Management developed this Decoding Target Date Fund Design series to help plan sponsors understand the critical elements of TDF construction. This article is the final installment in the seven-part series examining how fundamental TDF differences may shape outcomes.

The answers to these questions can help fiduciaries begin to compare the significant differences between TDF strategies and make the most appropriate selections for their plans’ particular investment needs. 

Missed any of the Decoding articles? Here's a recap of others in the series:

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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Emerging Markets Equities as a Defined Contribution Plan Option

Given strong recent performance of the Emerging Market Equities (EME) asset class (it returned 79% in 2009), as well as the long-term growth potential, many plan sponsors and consultants are considering offering a stand-alone emerging market option in their defined contribution (DC) plan as part of their equity exposure.

There have been a number of industry studies alluding to the fact that DC participants are underexposed to equities outside the United States. A Hewitt Associates study reports that, as of Dec. 2009, only 18% of DC plans offer an EME option, with participant assets at just 1% in those funds. This is relatively in line with our client base. As of Sept. 30, 2010, about 10% of our clients offer a dedicated EME fund, with participant assets at 3% in those funds.

In "Emerging Market Equities as a DC Plan Option" (download PDF), we define EME and then examine pros and cons of offering this asset class in a 401(k) plan as a stand-alone option. We also offer things to consider when evaluating if an EME is the right solution for your DC plan.

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Participant Communication: Planning for 2011

As planning for 2011 gets underway, there are probably many items on your “to-do” list. There are legal requirements, legislative activities to review, plan changes to consider and numerous other tasks. But have you considered how and what you will communicate to participants in 2011? How will you make sure your plan participants are saving appropriately for retirement? And what does “appropriately” even mean? 

The answer, of course, is that “appropriate” is different for everyone. Our award-winning Audience of OneSM communication approach accounts for this fact and treats all participants as individuals, based on their unique, personal needs and goals for retirement. Knowing this, and also knowing there is uncertainty about the direction of the market, where and how do you start communication planning for next year?

To determine areas of focus and content development in 2011, we surveyed our participant communications team and asked them which subjects plan sponsors were most interested in communicating to their employees. Surprisingly, the key communication topics of interest to sponsors across the board are almost identical and relatively unchanged from previous years. Here is a list of the top-five requested communications for 2011, in no particular order:

  1. rebalancing
  2. rollover-in
  3. deferral increase
  4. target date fund education
  5. asset allocation

As you create your communication plan for 2011, consider not only fiduciary and plan-related communications like fund changes, but also communications that drive changes in participant behavior, such as those mentioned previously. Using our award-winning Audience of One communication approach, we can move the needle and help participants better answer the question, “Am I on track to live comfortably through retirement?”

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Reminder: 409A Transition Relief for Correction
of Document Failures Expires Dec. 31, 2010

As mentioned in our Nov. 4, 2010, Instant Insights e-mail, in Jan. of this year, the IRS issued Notice 2010-06, which provided a mechanism for employers to correct certain plan document failures in their nonqualified deferred compensation plans and other employment, change in control or severance agreements that are subject to the regulations under Section 409A. The notice provides a transition period that would allow for the correction of certain technical document problems without adverse tax consequences, if made prior to the end of 2010.

Plans sponsors are encouraged to review their plans that are subject to Section 409A with counsel to ensure that their plan document language is compliant, and take any necessary corrective action prior to the end of the year. Read more Instant Insights news briefs.

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Compliance Calendar

The Compliance Calendar is a reference tool that plan sponsors can use throughout the year to help ensure they fulfill their fiduciary responsibilities by meeting the critical deadlines applicable to their plan each year. Download compliance calendar.

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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.

Back to top     Disclosures

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 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.

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.

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: 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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