Retirement Insigns and Solutions from J.P. Morgan Asset Management

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This weeks white paper is form J.P. Morgan Asset Management. It is their Fall/Winter Issue for 2013. A 28 page magazine with plenty of 401k info inside.

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Retirement Insigns and Solutions from J.P. Morgan Asset Management

  1. 1. Journey I SSUE 10 FALL/WINTER 2013 Retirement Insights and Solutions from J.P. Morgan Asset Management 10 Strategies for Plan Design Success A plan sponsor case study 5 Speaking Investments A new framework for managing risk in DC plan lineups 15 Understanding Target Date Funds Improving participant knowledge of one of America’s most popular DC strategies 18 What Plan Sponsors Want A look at J.P. Morgan’s latest retirement research 21 The Importance of ‘Earnest’ Saving Achieving a financially sound retirement by saving and investing wisely
  2. 2. J.P. MORGAN RETIREMENT INDUSTRY RECOGNITION AND AWARDS J.P. Morgan retirement investments and services received recognition and awards from across the industry— a true testament to our ability to build stronger retirement outcomes by sharing our knowledge and expertise. OV ER A LL INVESTMENTS OVERALL • Top 5 fund family preferred by #1 investment firm for: 1 • Advisor support/value-added services. • Plan sponsor education materials. • Supporting materials. • Wholesalers. • Quarterly evaluation materials. • I N VE STME N TS • RECO RD K E E P I N G RECORDKEEPING • • #2 rated recordkeeper for best • overall service, large plans.2 THOUGHT LEADERSHIP P RI NT ED MAT ERI A LS • The Importance of Being Earnest • won the 2013 RIIA Award.3 The Guide to Retirement won the 2012 RIIA Award.3 plan advisers.4 JPMorgan SmartRetirementSM portfolio management team nominated for 2012 Morningstar U.S. Allocation Fund Manager of the Year.5 “Silver” Morningstar target-date fund series rating as of September 30, 2013.6 2013 Lipper Fund Awards for Excellence: JPMorgan Equity Income Fund.7 #4 mutual fund (SmartRetirement) most recommended by advisers for plan sponsors.8 PA R T I C I PA N T C O M M U N I C AT I O N S • 5 first-place Eddy Award wins for outstanding investment education.9 PARTICIPA NT CO MMUNI C AT I O NS FOR MORE INFORMATION, CONTACT YOUR J.P. MORGAN REPRESENTATIVE. 2013 Retirement Plan Adviser Survey. In July and August, approximately 8,467 adviser subscribers to PLANADVISER were asked to respond to a 42-question survey, developed by the PLANADVISER editorial and research teams. Survey questions pertained to the size and scope of the adviser’s qualified plan business, practice management, compensation and client service, as well as his assessments of investment managers, mutual funds and defined contribution (DC) providers. The results of the practice management section of the survey will be highlighted in the November/December edition of PLANADVISER. At the close of the survey, on August 1, 629 complete responses had been received from retirement plan advisers. To qualify to supply opinions on mutual fund families and specific mutual funds, an adviser had to be personally involved in evaluating and recommending fund choices in an advisory capacity to qualified plan clients; 402 advisers met this qualification. In order to evaluate defined contribution recordkeepers, advisers had to answer affirmatively that they were personally involved in evaluating and recommending DC plan providers in an advisory capacity when working with qualified plan clients; 404 advisers did so. In addition, an adviser had to have worked with a DC recordkeeper more than once for his favorability rating of that recordkeeper to count. To receive more information on this survey and for additional research available, please contact surveys@assetinternational.com. 2 2013 Retirement Plan Adviser Survey. 404 qualified advisers were asked to select the defined contribution provider with the best service. 3 RIIA Retirement Income Communications Awards sponsored by Investment News in the category of printed materials. This is the first time any firm has won the category two years in a row. 4 2013 Retirement Plan Adviser Survey. 310 qualified advisers voted. To qualify, an adviser must be personally involved in evaluating and recommending fund choices in an advisory capacity with qualified plan clients. “Top 5%” = percentage of qualified advisers (of 310 total) who selected the fund family; “1st place %” = number of first-place votes out of total Top 5 votes. 5 Morningstar Awards Nominee 2012. Morningstar, Inc. All Rights Reserved. J.P. Morgan SmartRetirement Team. Nominated for Allocation Fund Manager of the Year, United States. 6 Morningstar report published November 5, 2013. 7 Lipper Fund Awards 2013. 8 2013 Retirement Plan Adviser Survey. Up to five funds could be chosen—254 advisers voting; 1,143 total votes. 9 Pensions Investments 2013. 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. 1
  3. 3. The past 30 years have wi (DC) plans. Once merely a su retirement security for an exp the Content ISSUE 10 Fa l l / Wi n t e r 2 0 1 3 What Plan Sponsors Want From Their DC Plans—And What They 8 Executive Are Doing About It Perspective IN THIS ISSUE 2 A Word Michael Falcon, head of retirement at J.P. Morgan Asset Management, discusses how J.P. Morgan’s research and insights are available to help clients make well-informed decisions about retirement plans. Findings from J.P. Morgan’s inaugural 2013 J.P. Morgan’s retirementContribution Plan Sponsor Survey Defined chief marketing officer discusses how thought leadership, distinct tools and extensive resources can address the needs of clients at every touch point. Why combining automatic enrollment with automatic contribution escalation can help participants increase their retirement savings. g 4 Legislative Corner The Supreme Court’s ruling on the Defense of Marriage Act and guidance on the taxation and administration of employee benefit plans. s R ISK I EVOLUTIONARY—NOT REVOLUTIONARY—CHANGE 18 What Plan 3 Stat Life RIS K J OU R NEY Fall 2013 5 Speaking Investments An outcome-oriented approach requires a broader view of risk when designing and evaluating DC investment menus. a broader definition of risk when designing and investment menus can help potentially increase the ess of defined contribution (DC) plans and may assist ts in reaching their savings and investing goals. What do plan sponsors want to accomplish with their DC plans today? What goals and philosophies are driving their decision making? And how are they shaping the design, investment lineup, communications and administration of their DC plans to meet the growing retirement needs of employees while continuing to fulfill their role as fiduciaries? To answer these questions, J.P. Morgan Asset Management conducted its first plan sponsor survey in the period from December 2012 through January 2013. We canvassed nearly 800 plan sponsors– all key decision makers–representing plans with assets from under $1 million to more than $1 billion. Our findings indicate that plan sponsors are clearly committed to achieving a range of “highly important” goals through their DC plans. These aspirations include the traditional and also shorter term objectives of recruiting and retaining quality employees and demonstrating a level of caring for them. But plan sponsors are equally committed to helping employees achieve the long-term goal of a financially secure retirement. As exhibited most clearly by the larger plans in our survey (those with assets greater than $250 million), plan sponsors are taking steps to fortify their plans to improve participants’ retirement outcomes. Sponsors Want While larger plans lead the continued transformation of DC plans, changes are taking place at a modest pace for OUR FINDINGS IND COMMITTED TO AC GOALS THROUGH Latest research reveals what plan sponsors are thinking and what actions they are taking when it comes to their retirement plans. employment taxes market returns 401(k) sav taxes consumption save consistently medica market returns plan carefully invest efficientl Plan Design Success medicare 401(k) social security income consumpt How one company stays on Funds plan save early entitlements plan 401(k) car Understand Target Date the cutting edge of plan design to employment consumption save early entitlemen better help participants achieve theirsecurity save consistently taxes income medicar social goals. invest efficiently medicare 401(k) market ret income NEW RETIREMENT social security 401 consumption STUDY EMPHASIZES plan carefu 21 The Importance of THE IMPORTANCE OF medicare taxes en income save early DILIGENT,Saving ‘Earnest’ ‘EARNEST’ SAVING save early planResearch demonstrates that a social securi carefully employment medicare comfortable retirement consistently plan taxes 401(k) save is possible market returnsthose who plan carefully, save for entitlements income consumptio consistently employment social security mark consistently and invest efficiently. 15 Understanding save early invest efficiently medicare income Target Date Funds consumption entitlements social security 401(k income save earlyYou Know? consistently 24 Did plan carefully Innovative communications program medicare 401(k) plan carefully market retur seeks to improve participant Retirement facts and figures entitlementsfrom J.P. Morgan’s 2013 Defined consumption save consistently me knowledge of these popular but often social security invest efficiently plan carefull misunderstood investment strategies. Contribution Plan Sponsor 401(k) consumption save consistently medica Survey Findings. LESSONS for 10 From the Field... Strategies HOW ONE COMPANY CONTINUES TO ENHANCE ITS RETIREMENT PLANS TO HELP ITS EMPLOYEES BETTER MEET THEIR GOALS First introduced 20 years ago, target date funds (TDFs) now rank as one of the most popular retirement investment options in America, thanks, in particular, to their growing use in defined contribution (DC) plans. n DC plans face a variety of risks, including market-related risks such tion, fluctuating interest rates and market volatility, as well as personal outliving their assets and making poor decisions when selecting and r investments (as shown in Exhibit 1). While the types and degree of risks re exposed to may vary over time (as shown in Exhibit 2), one fact remains management is critical For more information, email for achieving successful investment outcomes. Journey_Magazine@jpmorgan.com. for a new way of thinking sponsors and advisors are doing their part to help mitigate risk g choice within DC investment lineups, they also need to ensure evaluating and monitoring these investments and solutions in an way. This means taking the potential for delivering better retirement consideration. J.P. Morgan Asset Management J OU R NEY 1
  4. 4. a Word pants to save and invest. One of the ways we are facilitating important discourse on retirement issues is through our conferences and events. This year we hosted our first Defined Contribution Summit for retirement advisors and consultants, as well as our recent Defined Contribution Plan Sponsor Conference (with its theme of “Bold thinking. Critical decisions.”), which brought together more than 100 plan sponsors and retirement industry leaders. The interactive sessions at both of these events focused on many of the top-of-mind issues we cover in our latest edition of Journey. The journey continues Gaining New Insights A deep understanding of our clients’ needs is the basis for our strong partnerships with the plan sponsors, advisors and individuals we serve. We seek to be a thoughtful partner that shares research-based knowledge and insights that empower advisors and plan sponsors to make well-informed, highly coordinated decisions about defined contribution (DC) plan design, investments, communications and administration. A year in research Our 2013 Plan Participant Survey Findings: Searching for direction on the journey to retirement and our 2013 Defined Contribution Plan Sponsor Survey Findings: Evolving toward greater retirement security, released in June and August of this year, respectively, provide a rare glimpse into plan sponsor and participant attitudes, views, perceptions and behavior. Some of the most compelling insights illuminate the need for strong guidance—something expressed and shared by both plan sponsors and participants. Today’s plan sponsors value 2 JOURN EY Fall/Winter 2013 their advisors and look to them to bring innovative ideas on plan management to the forefront. For their part, participants look toward their employer and their plan’s administrator to provide access to savings and investment tools that can help them achieve retirement security. In this issue, we’ll hear how one company is moving toward a more outcomes-focused benefits strategy that emphasizes employees’ overall financial well-being. We’ll also explore a new way to think about risk in DC investment menus, review some of our recent research findings and highlight the latest regulatory and legislative activity that may impact retirement policy. Much of this issue is devoted to helping interpret how our latest research findings impact advisors, plan sponsors and the participants they serve. While the full scope of our findings cannot be covered here, we encourage you to reach out to us if you would like additional information or complete copies of any of the research studies referenced. As the year comes to a close, development of our research agenda for 2014 is well underway. We promise to keep asking questions as we continue on the journey to retirement. Dialogue that matters We believe our insights have the most impact when they generate dialogue that leads to improved standards, better alignment of plan objectives with design structure and more effective ways for partici- Michael Falcon Head of Retirement J.P. Morgan Asset Management
  5. 5. Stat life Saving for Retirement Make it automatic The percentage of employersponsored 401(k) plans using automatic enrollment continues to climb, with 43% of plan sponsors now adopting this feature, including 62% of large-sized plans having at least $250 million in assets.1 While these numbers are an encouraging sign that more employees are saving at least a portion of their income for retirement, we believe automatic enrollment is only one ingredient in a welldesigned retirement savings plan. Another method to increase the likelihood that participants will reach adequate deferral levels over time is to combine automatic enrollment with automatic contribution escalation. Build savings automatically While most plans using automatic enrollment typically set 3% as their default contribution rate, many plan sponsors believe employees need to save 10% or more to reach their goals. But, of those companies using automatic enrollment, only 21% also use automatic contribution escalation.1 While this feature helps participants save more, while also overcoming their tendency to stick with the original contribution rate, many employers are reluctant to use it as a default option for fear of an employee backlash. These concerns appear unfounded, however. A study by J.P. Morgan shows that 60% of participants are either in favor of or neutral on the use of both automatic enrollment and automatic contribution escalation.2 In addition, industry experience shows that employees rarely choose to opt out of these features, and generally do not increase their initial contribution rates unless automatic contribution escalation is in place. As a result, those who are automatically enrolled without automatic contribution escalation tend to save less (an average of 4%) than those who participate in 401(k) plans at a level of their own choosing. In 2011, for example, the average savings rate of those who voluntarily enrolled in plans administered by J.P. Morgan Retirement Plan Services was 7.7%. As the chart illustrates, the value of assets accumulated by individuals who save more than the default contribution rate of 3% can be substantial. For example, a person earning a median income of $56,000 in 2012 who contributed 6% over 35 years could retire with roughly $302,000. That’s $128,000 more than the $174,000 an individual would have accumulated who saved at the default contribution rate of 3% over 35 years. The difference would be much larger, of course, for someone with a voluntary savings rate of 7.7% and higher still for those who saved 10%. And this doesn’t even consider the positive impact on retirement assets of an employer match. Put these ideas to use Plan sponsors may want to rethink setting the bar too low. When adopted effectively, higher default contribution rates, along with automatic contribution escalation, can help plan sponsors better assist their employees to achieve their retirement goals. 1 2 J.P. Morgan 2013 Defined Contribution Plan Sponsor Survey Findings. J.P. Morgan 2013 Plan Participant Survey. The Impact of Higher Contribution Rates Value of financial assets $500,000 Voluntary enrollment at 10% $400,000 $492,000 Voluntary enrollment at 7.7% Voluntary enrollment at 6% Automatic enrollment at 3% $383,000 $300,000 $302,000 $200,000 Source: Tax Policy Center, Bureau of Economic Analysis, Bureau of Labor Statistics, J.P. Morgan Asset Management, U.S. Census Bureau, Bloomberg. This example assumes that one family member has earned a median income since 1972, which in 2012 was $56,000. At age 30, the family begins saving, with an equity allocation of 65%, which gradually decreases to 40% by age 65. The rest of its portfolio is allocated to fixed income. Other estimates include applicable federal and state tax rates for each scenario. Estimates for annual equity returns, T-bill rates and inflation are 7.0%, 2.5% and 2.0%, respectively. For tax purposes, 80% of equity gains in after-tax savings accounts are assumed to be realized each year. The example is for illustration purposes only and does not represent any particular investment product. This information is also for educational purposes only and is not meant to provide tax or investment advice. $174,000 $100,000 $0 1972 1982 1992 2002 2012 J.P. Morgan Asset Management J O U R NEY 3
  6. 6. Legislative corner Deciphering DOMA The Supreme Court ruling on same-sex marriage raises questions about the taxation and administration of employee benefit plans On June 26, 2013, the U.S. Supreme Court ruled in United States v. Windsor that Section Three of the Defense of Marriage Act (DOMA) violated the principles of equal protection guaranteed under the Fifth Amendment to the Constitution. Section Three of DOMA provides that, for purposes of interpreting statutes and regulations, “the word marriage means only a legal union between one man and one woman, and the word spouse refers only to a person of the opposite sex.” In finding this language unconstitutional, the Court was considering a case in which a same-sex spouse was denied a spousal deduction on federal estate taxes. Its ruling raised a number of questions regarding the taxation and administration of employee benefit plans. Before the Court’s decision, existing law held that a same-sex spouse would not be considered a spouse for the purposes of consenting to a beneficiary designation or distribution. For employer-sponsored health-care plans that provided coverage to samesex spouses, the value of that coverage was considered taxable income for the employee and subject to both employee and employer payroll taxes. After the Court’s decision, it seemed clear that same-sex spouses in states that recognized same-sex marriage would have rights identical to those of opposite-sex spouses. But it was not clear how the ruling would apply to those states that did not recognize 4 JOURN EY Fall/Winter 2013 same-sex marriages. The basic unresolved question: Would spousal status be determined by whether the marriage was legal in the state in which it was performed (state of celebration) or whether the marriage was recognized by the state in which the couple currently resided (state of domicile)? On August 29, 2013, the Department of the Treasury and the Internal Revenue Service issued guidance that addressed some of the questions raised in the Windsor decision. In Revenue Ruling 2013-17, Treasury and the IRS held that, for federal tax purposes, the term “spouse” included a same-sex spouse if the individuals were lawfully married under state law, and that spousal status would be recognized even if the couple resided in a state that did not recognize same-sex marriage. In explaining their ruling, the agencies discussed the administrative burdens that would ensue if plans were forced to consider the state of domicile in determining spousal status. The ruling also clarified that civil unions, domestic partnerships and other similar formal relationships would not be included in the definition of “spouse” or “marriage.” The ruling went into effect on September 16, 2013. The recent guidance did not cover one important issue: the potential retroactive impact of the Windsor decision. Treasury and the IRS did issue a series of FAQs explaining how employees and employers could file for refunds on any income and payroll taxes paid on amounts that were included in taxable income. But they did not address to what extent same-sex spouses might have claims arising from past plan actions that did not recognize their spousal status. For example, if a participant died and a same-sex spouse was not provided survivor benefits, does he or she now have a claim against the plan? One would hope that just as the agencies recognized the administrative burdens associated with basing spousal status on state of domicile, they would also recognize the ramifications of requiring plan administrators to revisit decisions that were valid based on what was then existing law. Treasury and the IRS have indicated that additional guidance is forthcoming that will address these issues. We will continue to monitor these events and keep you apprised of any new developments.
  7. 7. Managing Risk in DC Menus Speaking Investments Risk Risk Adopting a broader definition of risk when designing and evaluating investment menus can help potentially increase the effectiveness of defined contribution (DC) plans and may assist participants in reaching their savings and investing goals. Participants in DC plans face a variety of risks, including rising inflation, fluctuating interest rates and market volatility, as well as personal risks such as outliving their assets and making poor decisions when selecting and allocating their investments (as shown in Exhibit 1). While the types and degree of risks participants are exposed to may vary over time (as shown in Exhibit 2), one fact remains constant: risk management is critical for achieving successful investment outcomes. The need for a new way of thinking While plan sponsors and advisors are doing their part to help mitigate risk by presenting choice within DC investment lineups, they also need to ensure that they are evaluating and monitoring these investments and solutions in an appropriate way. This means taking the potential for delivering better retirement security into consideration. J.P. Morgan Asset Management J O U R NEY 5
  8. 8. Exhibit 1: DC PLAN PARTICIPANTS ARE EXPOSED TO A BROAD RANGE OF RISKS ll t ou liv l Infl a RIS tio K t es e r sk int e ri rat nc di v i fxe se hat ill lo e Risk t w ri s ties securi f rates i market r isk rt se icip r r ant ity isk pa nt rti Risk is dynamic and multi-faceted om al e ue gs savin ing n y be ero Ris k vit ge on RISK Risk that UMULATION ACC RISK of n io re opti cipan ssi ons t will misuse ve , u (too co nde nservative r-di versi fed) i wi valu eo ded f pri n by inf cip la t al save enough due to la re to ailu wth, low savings rat ck F eo gro of xpected market eve r nt une pa u Ris ent k of c apital or investm losses t due to marke or ass et class volatility il sib Pos stme g inve r ag o Source: J.P. Morgan Asset Management. Shown for illustrative purposes only. According to John Galateria, head of defined contribution investment solutions at J.P. Morgan Asset Management, plan sponsors can no longer afford to just focus on asset class or individual strategies’ risk/ return profiles, something they’ve done historically when evaluating the funds in their investment lineups. “They need to seek ways to address and mitigate the broader set of risks participants face and, in doing so, become more outcomes-focused,” says Galateria. Galateria suggests that focusing on outcomes such as retirement security may necessitate that plan sponsors reassess the way in which they evaluate the role of low-volatility options such as money market and stable value funds in their investment menus. “When you consider that a participant could ultimately invest 100% of his or her assets in a single option, you can make the case that professionally 6 JOURN EY Fall/Winter 2013 managed options such as target date funds (TDFs), which may offer more diversification and growth potential, are relatively low-risk when compared with more conservative options such as stable value,” says Galateria, who also maintains that adopting this view recasts the role of certain types of investments within the plan’s lineup. Changing the paradigm on what is considered ‘low risk’ While most plans offer a range of options starting with relatively lowrisk, low-return choices such as stable value and money market funds, those individuals who invest in these more conservative funds may unintentionally take on other risks that could prove damaging to their longterm saving and investment outcomes. One such risk is the possibility that participants could end up with less savings than those investors whose portfolios are more diversified. For example, young employees between the ages of 25 and 35 who invest all of their savings in a lower-risk, lower-return option such as stable value could end up with substantially less in savings at retirement due to slower growth over time and a marked lack of diversification. On the other hand, for investors between the ages of 55 and 65, a potential shortfall from investing too conservatively may not be as damaging to their savings because they are closer to retirement. A more aggressive investment approach, however, may make these participants more vulnerable to other risks, including the possibility of market downswings at or around the time they are ready to retire, which could substantially impact their savings, right when they are needed the most. According to Galateria, plan sponsors have an opportunity to help improve the investment outcomes of their participants by constructing investment menus that feature a consolidated and simplified core lineup of, where possible, professionally managed solutions such as diversified stocks, diversified bonds and TDFs. “Unlike low-volatility options such as stable value, target date investments offer diversification and asset allocation strategies that may be appropriate for a broad range of participants, regardless of age or retirement time horizon,” notes Galateria. “These types of investment options can also help mitigate some investment risks through effective strategic and tactical asset allocation. In particular, these strategies are able to adapt to changing market conditions and risks.” A wise option for plan participants While TDFs have a built-in ability to manage asset allocation, their philosophies and approaches to managing risk may vary. This has
  9. 9. important implications for the way in which TDFs should be evaluated, assessed and chosen because the types of risk a manager is seeking to mitigate may be different. In addition, managers may prioritize market-related risks— such as inflation, rising interest rates, changing market conditions and asset class volatility—differently over the glide path’s time horizon. Understanding the risks a manager is seeking to address is as important as understanding how the manager seeks to manage these risks, and should impact the type of target date strategy a plan sponsor selects. Daniel Oldroyd, a portfolio manager in J.P. Morgan Asset Management’s Global Multi-Asset Group, notes that target date fund managers are better equipped than individual investors to identify and react to changing market conditions by implementing a change in asset allocation or, in the case of rising interest rates, by changing the duration of their fixed income holdings. Invest in what you know Given their risk-management benefits, professionally managed solutions such as TDFs may offer one of the best ways to achieve a successful retirement outcome. Still, Galateria cautions that understanding a target date manager’s philosophy and approach to managing risk is critical. Important questions that plan sponsors and advisors should consider include: • What is the target date manager’s process for managing risk within the fund’s glide path? • Are the underlying strategies actively managed or do they provide passive-only exposure? • What is the extent of the manager’s ability to diversify his or her fixed income exposure along the glide path? • What expertise does the manager have in managing lowercorrelated, extended asset classes such as high yield and emerging markets debt? Concludes Galateria, “If we are to adopt a more outcomes-focused strategy for how we define and measure the success of DC plans at preparing participants for retirement, then we need to rethink how we define which options are considered lower risk when selecting and evaluating investment options for DC plans. When we do this, it’s easy to see that TDFs are one of the best options for participants of all ages and at all stages of their financial lives.” More so than any other option that is offered in the typical DC menu, TDFs have an innate ability to manage the broad range of risks that participants face as they move closer to retirement. This makes it all the more important for plan sponsors and advisors to understand the methodology underpinning the design of the TDFs they select and to ensure that this methodology is consistent with the needs of the plan. Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable. These views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Past performance is no guarantee of future results. 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. EXHIBIT 2: DC PARTICIPANTS face DIFFERENT MAGNITUDES OF RISK OVER TIME Longest time horizon (up to age 40) 100 The middle years (Ages 40-65) At and in retirement (Age 65 and after) Percentage of Portfolio Allocation 90 INTEREST RATE RISK ACCUMULATION RISK 80 70 60 MARKET RISK 50 INTEREST RATE RISK PARTICIPANT USER RISK MARKET RISK MARKET RISK LONGEVITY RISK 40 30 INFLATION RISK PARTICIPANT USER RISK 20 ACCUMULATION RISK INFLATION RISK 10 0 25 30 35 40 45 50 55 60 65 70 75 J O U R NEY 7 Age Source: J.P. Morgan Asset Management. Shown for illustrative purposes only. J.P. Morgan Asset Management
  10. 10. E x ecutive perspective Delivering the Firm: An Interview with J.P. Morgan’s Retirement Chief Marketing Officer As chief marketing officer for J.P. Morgan’s retirement business, Benji Baer is responsible for harnessing the intellectual capital and resources of the firm to create content, programs and tools that address the needs of its broad set of retirement clients. This includes developing a unified platform that delivers the firm’s capabilities and insights at every touch point in a meaningful and relevant way. In an interview with Journey, Baer talks about how J.P. Morgan is helping plan sponsors, advisors and individuals achieve better retirement outcomes. people’s financial assets for the long term and, ultimately, for some version of retirement. Our expanded retirement business draws on our strengths and unique capabilities to help people achieve their distinct retirement goals. You’ve been retirement chief marketing officer for 2½ years. What were your first impressions of J.P. Morgan and its retirement business? One of the things that What is J.P. Morgan’s commitment to the retirement business? We believe that how drew me to J.P. Morgan is the firm’s rich legacy as one of the most highly regarded, global financial services firms, with recognized expertise in serving institutions, intermediaries and individuals. I was and still am impressed with the depth of talent, investment expertise and retirement industry knowledge we have within our organization. Everything we do is centered on ensuring the safety and security of 8 JOURN EY Fall/Winter 2013 people prepare for retirement is one of the most important decisions most individuals will face in their lifetimes. For us, retirement is much more than a business, it’s an issue of critical importance for our country. It’s our heritage and culture to share our knowledge more broadly to help all retirement stakeholders prepare for long-term financial stability. This includes driving dialogue among policy makers, economists, advisors and corporate leaders to solve the systemic challenges Americans face, as well as helping individuals understand how to overcome their behavioral realities. Last year you completed research to better understand the core competencies and areas for improvement of J.P Morgan’s retirement . efforts. What did you learn? In speaking to plan sponsors, advisors, industry influencers and others, we heard that people hold our retirement organization and offerings in very high regard. They look to us for our distinct insights and depth of knowledge across a variety of subjects. What they value most is our ability to deliver that information in a way that’s digestible, usable and relevant. Tempering this enthusiasm were others who indicated that they were not fully aware of our range of capabilities and the broad agenda and innovation underway. Does this present a challenge for J.P. Morgan? Not at all. This is largely an indication that we haven’t yet fully delivered on our comprehensive capabilities to all audiences, and our clients are anxious to hear more about what we can do for them. The flip side is that, in the short time we have been aligned and have grown our capabilities, the market has responded favor-
  11. 11. ably to our presence, as evidenced by our strong asset flows, continued leadership in the target date funds (TDFs) space and a growing recognition of our commitment to serving and supporting advisors and plan sponsors across all market segments. So what are you doing to better communicate the firm’s capabilities and key messages? For the past year, we’ve fo- cused on refining and unifying how we interact with clients and prospects, both on a one-to-one basis through our clientfacing teams and more broadly through increased activity and presence in the market. This means delivering industry-leading insights, working through client challenges holistically and offering best-in-class investment and recordkeeping solutions. Does this message apply to both institutional and individual clients? Yes, J.P. Morgan offers proprietary tools and solutions that speak to all of our retirement clients. For defined contribution plans, we offer bundled solutions for all plan sizes. Our Retirement LinkSM solution, for example, can fill the gaps in coverage that exist in the small- to mid-size market, delivered with the expertise, features and high-touch service that our largest institutional clients enjoy. In the case of individual investors, we’re focusing on ways to help advisors drive deeper, more meaningful conversations about retirement planning, encompassing saving, spending and investing strategies. How is J.P. Morgan driving innovation in product development? Three key initia- tives come immediately to mind: first, assisting people in preparing for and living in retirement by helping them plan and create the income streams they will need when they stop work- ing; second, building out our target date capabilities in the U.S. and abroad; and third, packaging and delivering the breadth of financial products and insights from across JPMorgan Chase through an integrated solution that companies can offer as an additional corporate benefit. More broadly, we’re interested in how advancements in technology can create new opportunities for us to engage with our clients. And we’re always looking for ways to better educate and communicate through programs like our award-winning Audience of One® participant experience. What are the benefits of being part of the larger JPMorgan Chase family? Retire- What are your areas of focus? In 2014, themes that ties our thought leadership agenda together is a deliberate focus on how to best shape product solutions we plan to introduce a new wave of innovation for two of our flagship of- ment is an issue that is very important to our entire organization, and we have a healthy, ongoing exchange of information and knowledge—data, insights, focus group research, product and service development—across our asset management business and all parts of the bank. Each party benefits because we use this information to create smarter ways to solve the retirement needs of both individuals and institutions. What are some of the issues you expect will play an important part in the firm’s thought leadership strategy? One of the It’s our heritage and culture to share our knowledge more broadly to help all retirement stakeholders prepare for long-term financial stability. ferings: Target Date CompassSM, which helps advisors and plan sponsors evaluate and select the appropriate suite of TDFs, and Audience of One. We’ll also continue to focus on working with plan sponsors and advisors to holistically address all of a plan’s varied needs. Building and managing retirement plans requires a series of interconnected strategic decisions. For example, plan design choices affect the investments you offer, which can then drive the way you implement and administer your plan and also communicate its features and benefits. and policy to address behavioral realities. For example, at the highest level, we are exploring topics such as how different social structures influence how people interact with their money on both a national and global level. Another important theme is longevity, and how longer life ex­ ectancies are likely p to impact workforce management. We are also spending a significant amount of time and resources on developing a dynamic approach to optimizing retirement income strategies. More to come on this in early 2014. J.P. Morgan Asset Management J O U R NEY 9
  12. 12. STRATEGIES for Plan Design Success... How one company continues to enhance its retirement plans TO HELP ITS EMPLOYEES BETTER MEET THEIR GOALS 10 J O U RN EY Fall/Winter 2013
  13. 13. In 2005, Bemis Company, Inc., a Wisconsin-based packaged goods company, embarked on a multi-year effort to enhance its retirement savings plans. In the last eight years, the company has introduced a series of initiatives—from the introduction of automatic enrollment and automatic escalation programs to the use of target date funds (TDFs) as a default investment option to an annual employee re-enrollment—that demonstrate its commitment to the long-term well-being of its employees. Bill McDermott, head of sales and client solutions for J.P. Morgan Retirement Plan Services, spoke recently to Melanie Higgins, Bemis’ global retirement director, about the goals and design of these initiatives, as well as how other plan sponsors may learn from Bemis’ experiences. Here are highlights from their conversation. Bill: You’ve made many significant changes to your retirement plans over the past few years. What were the main drivers behind these changes? Melanie: Bemis has always had our employees’ best interests in mind when designing and implementing employee benefit plans. And we were eager to encourage greater participation in our retirement plans to help our employees meet their long-term savings goals. So, in 2005, we began automatically enrolling our new hires in our 401(k) plan at a 3% deferral rate. What we experienced, however, was that employees were not opting out of the plan and those employees who were auto-enrolled didn’t increase their contribution rates above 3%. Around that time, we were also planning to implement a new profit-sharing plan. We saw this as a great opportunity to redesign our overall plan so that we could really help our participants be more successful in their saving. Because we felt it was necessary for everyone who was eligible for the profit-sharing plan to participate, we began to automatically enroll all eligible participants on an annual basis. Most significantly, we also required all of our profit-sharing participants to contribute at least 3% to the 401(k) plan in order to maintain their eligibility in the profitsharing plan. Bill: How did your employees react to this change? Melanie: Very few people complained about it. As a result, we felt we could make even more changes to help people save more. In 2008, we introduced an automatic escalation feature to increase contribution rates by 1% a year, up to 8% of an employee’s total pay. And, in 2012, we said to ourselves, “This is working well. Why don’t we change our deferral level to a maximum of 10% of an employee’s total pay?,” which is an amount more in line with what we believe employees need to save over the long run. We also recognized that automatic enrollment was important, not just for the people in our profit-sharing plan, but for everyone. As a result, we now re-enroll all of our employees in the 401(k) plan once a year. These options may not be for everyone, but we want to encourage our employees to save more. If they choose not to do so, however, they always have the right to opt out of our 401(k) plan. Bill: Why have you been so successful in introducing these features? Melanie: I think most importantly is to inform your employees early and often about what you’re planning to do. In our case, that meant frequent and ongoing communications. J.P. Morgan has been a big help with all of our communications. For automatic escalation, for example, we sent a letter to our employees’ homes to let them know their contributions were going to J.P. Morgan Asset Management J OU R NEY 11
  14. 14. Getting to know the Bemis Corporation and its global retirement director From its earliest beginnings printing cotton bags for packing food products, Bemis Company, Inc. has grown into one of the world’s leading suppliers of flexible packaging used by companies in the food, consumer products, medical and pharmaceutical industries. With headquarters in Neenah, Wisconsin, the firm employs approximately 20,000 people in 12 countries, including 10,000 employees in the U.S. It is one of 500 companies listed among the stocks in the Standard Poor’s 500 Index. Overseeing the design and administration of Bemis’ defined contribution and defined benefit plans is global retirement director Melanie Higgins. be automatically increased. We then followed up with additional information in their annual enrollment materials. In this way, people got accustomed to what would happen. They knew what was coming and what they could expect, year after year. Granted, it takes a lot of communicating the first time you do it so that people understand what’s going to happen. But then it becomes fairly standard protocol. Bill: Have you encountered any challenges along the way? Melanie: Probably our biggest challenge, overall, has been in working with the union boards, which tend to be our toughest critics. In working with board members, we take the time to walk them through the potential benefits of our proposals, including the reasons for our recommendations and how employees can opt out at their discretion. Here, again, J.P. Morgan has been a big help. We worked with J.P. Morgan to prepare materials for board members to demonstrate the impact on savings of making automatic increases, compared with not making any increases. This helped to illustrate the results our employees could expect to achieve in the long term. 12 J O U R N EY Fall/Winter 2013 Overseeing the design and administration of the company’s defined contribution and defined benefit plans is global retirement director Melanie Higgins. Higgins, who was appointed to her current position in December 2012, joined the firm as a benefits administrator in 1999. Since then, she has served in a variety of pension and retirement functions of increasing responsibility. She holds a bachelor’s degree in Business Administration and Human Resources from Carroll University (formerly Carroll College) in Waukesha, Wisconsin. Bill: In 2012, you reconfigured your entire investment lineup and then completed a re-enrollment. What was that like? How did your employees respond? Melanie: When we decided to reevaluate our lineup—including looking at the different options that are now available, as well as fees and revenuesharing—we felt we had a really good opportunity to provide new choices that could bring our participants more in line with investments and allocations that would be more appropriate for their age. Most significantly, this is when we decided to implement automatic investment into TDFs. Participants still have the opportunity to enroll in whatever funds we offer, but if they don’t make a choice, we automatically move them into TDFs. One reason I believe this particular re-enrollment has been a big success is that our employees are now accustomed to things like automatic enrollment and automatic escalation, so the process is familiar. As always, we told our employees what was going to happen, we reminded them of our plans and we confirmed everything as we went along. Again, we had very few complaints or pushbacks. Bill: Can you talk a little more about how you selected your new lineup of funds? What kind of assistance did you get from your consultant, recordkeeper and others in implementing these changes? Melanie: We started the process by working with our consultant [Russell Investments] to evaluate the number of funds in our lineup. Traditionally, we’ve always been very conservative and have only offered a few choices. When we reevaluated the lineup, we considered our choices from our participants’ perspective. Most of our employees aren’t very sophisticated when it comes to understanding investments, and they often have difficulty making choices. One of the most important decisions we made was to reduce the number of equity funds in our lineup. First, we cut the number of large-cap options from five to two: one active and one passive. We also dropped two smallcap options in favor of one small/midcap blend fund, while continuing to offer one international equity fund. At the same time, we were careful to ensure we were offering great funds at low costs, and also moving away from revenue-sharing.
  15. 15. After these decisions were made, we went through the enrollment process with the advice and support of J.P. Morgan, which has been through these changes many times before. One of the things J.P. Morgan recommended was to do a “teaser” to let our employees know the changes were coming. We also mailed participants a booklet with information on all of the new plan components: the new funds; how existing funds would be mapped; what impact the changes would have on the “do-it-yourselfers” and the people in the managed accounts; and what would happen if people didn’t make any new choices. We then scheduled educational meetings and webinars to provide even more information. supported by facts, so I always come prepared with lots of data, such as how many people generally stay at the auto-enroll level and how many are not taking advantage of the full company match. Facts don’t lie, and you can use them quite convincingly to support your arguments. For instance, if 70% of large-sized employers offer certain benefits and you don’t, your committee members should know that. results for the union plan have increased from 8% to 21%. That’s almost triple the number of participants on track to replace 70% of their income. Most of this success has been driven by our higher level of deferrals. By first enrolling all of our salaried employees, contributions moved gradually from 3% to 4% and so on. Now, virtually everyone in this group is at 8% or higher. We’ve seen similar results for an automatic Bill: So, in general, you haven’t en- enrollment we conducted with people countered many obstacles in making who became Bemis employees as part of changes to your plan? a 2010 acquisition. These new employees were auto-enrolled at 3% when they Melanie: No, we really haven’t. I think it came aboard and are now at contribuall goes back to what I said before about tion rates of 5% and 6%. communicating early and often. You For me, it’s all about making sure need to make sure everyone understands that people have enough money to reBill: Do you have any suggestions on what you’re doing and why it can help tire. Everything we decide from a plan how to work more effectively with an your employees save more. design perspective is done with an eye investment committee when evaluatYou also need to let your employees toward retirement readiness, and it’s very ing potential new funds for a plan? know the company is working in their encouraging to see the impact these best interests. We want our employees changes have had on the income replaceMelanie: Well, first, I think it’s essen- to take full advantage of all the benefits ment numbers of our participants. We’re tial that someone from your human re- available to them, including the profit- also pleased that our recent re-enrollment sources staff have has put more of our a presence on the “Everything we decide from a plan design perspective is participants into investment comsound, approprimittee. This helps done with an eye toward retirement readiness, and it’s very ate asset allocation build rapport and encouraging to see the impact these changes have had strategies that are trust with the comon the income replacement numbers of our participants.” both well diversimittee members. fied and tailored to - Melanie Higgins the behavior of the More importantly, it gives you participant. a “voice” to educate the committee. The members are not sharing plan and the company match. Bill: How do you go beyond the numbers necessarily subject-matter experts, and We don’t have any “skin in the game.” In to look at overall financial wellness? they’re not as familiar with your 401(k) fact, as more people participate at higher plan or pension regulations, among other levels, Bemis is actually contributing Melanie: We focus a lot on wellness things, as you are. more because of the company match. through our assistance programs At Bemis, even though I’m not a formal because we know our employees need to member of the investment committee, I Bill: What kind of results have you seen? take care of themselves, both mentally attend all of the meetings. And I always and physically. We understand that find the members are quite receptive to Melanie: We are very proud of how a lot of things can weigh on people’s hearing what’s happening with our em- our efforts are making a difference. minds, and financial issues are one ployees and to getting detailed informa- When we compare our current results of them. If you live day to day, for tion on our results. We also keep mem- to when we started this program, the example, and can barely pay your bills, bers up to date on the industry, discuss number of nonunion participants now it’s hard to justify putting money away best practices and reassure them that on track to achieve at least 70% income for retirement. the proposed changes will be positive replacement at retirement has increased So, we focus a lot of our communicafor both the employees and the company. from 25% to 58%, or more than double tions on financial wellness and on help All of this information needs to be where we were seven years ago. And our ing people get on track for retirement. J.P. Morgan Asset Management J OU R N EY 13
  16. 16. Results: Best Practices: Boosting Attendance at Re-enrollment Meetings Delivered meetings over When Bemis Company, Inc. decided to change the default option of its overall retirement program, it opted to conduct a re-enrollment of all its eligible employees. One important way in which the firm worked to aid employee understanding of the changes and to increase plan participation was to encourage strong attendance at its educational and enrollment meetings. With the help and support of J.P. Morgan Retirement Plan Services, Bemis developed a promotional campaign to boost employee attendance. Its goal: Increase participation for onsite meetings from 10% (the typical attendance at similar educational meetings held in the past) to 25%. Build the level of engagement among site managers at meeting locations across the country through a targeted marketing communications campaign about the re-enrollment process and the new default options. • Conduct exclusive webinars for site managers, providing information to help employees understand and accept the changes. • Award prizes, such as J.P. Morgan duffel bags, to the managers of the three sites with the highest participation rates. • Create different types of campaign collateral, such as surveys, webinars, e-messaging and posters, as well as giveaways, such as candy bars, buttons and other items. Ultimately, though, many of our people may not necessarily do what we suggest. But there will always be at least one person who we’ll touch with our efforts. It’s gratifying to know we can make a huge difference in a person’s life and future. Bill: Are you considering any other changes to your retirement plan? Melanie: We continue to monitor what’s happening in the industry, and we keep an eye on possible new regulations, as well as other options that may affect our plan. We’re also considering a number of enhancements that are probably farther off on the horizon. One is a brokerage window capability and another is the possibility of offering an annuity within the plan. We’d also like to offer more advice, especially for employees who are getting closer to retirement age. For example, think about people in their late 60s who want to retire and have each saved $500,000 in the plan. Is that enough? How much can they withdraw without 14 J O U R N EY Fall/Winter 2013 worrying about depleting their savings? These people have clearly done many things right, and now they don’t want to make a mistake at the 11th hour, which is when many people do make bad decisions. They may withdraw too much too soon. Or they retire too soon because they think they’ll have enough money, and then they realize they don’t have enough. There’s not a lot of advice available to help and support people like 54 meeting days 42.5% attendance Among the initiatives implemented by the company: • 170 70% Resulting in a increase in attendance over the goal of 25% As of August 2013. You need to do what you think is best for your employees. Don’t worry too much about how they’ll react or how they may question your actions. When and if the time comes, you can deal with any feedback, but I assure you it will be a lot less than you’d expect, especially if you’re communicating with them throughout the entire process. Honestly, some of our employees don’t always appreciate the changes we make, “I think fear is something that holds people back, so I’d say, don’t be afraid to go for it!” - Melanie Higgins this, and I think plan sponsors need to do much more in this area going forward. Bill: If you could give only one piece of advice to a plan sponsor about how to improve its plan, what would that be? Melanie: I think fear is something that holds people back, so I’d say, “Don’t be afraid to go for it!” and I haven’t always been seen as the “good guy.” But I don’t think these same employees are going to complain when the time comes for them to retire and they have enough money to do so comfortably. I always say, “It’s okay to make tough decisions now, because our employees are going to be thankful later.”
  17. 17. Understand Target Date Funds First introduced 20 years ago, target date funds (TDFs) now rank as one of the most popular retirement investment options in America, thanks, in particular, to their growing use in defined contribution (DC) plans. J.P. Morgan Asset Management J OU R N EY 15
  18. 18. $2.2 trillion Since the end of 2005—the year before the Pension Protection Act set the stage for the explosive growth of TDFs—total TDF assets have grown from $71 billion to approximately $378 billion (as of 2011).1 $378 billion $71 billion By 2015, McKinsey Company estimates that targetdriven solutions will account for roughly $2.2 trillion in assets, or nearly 40% of all DC assets. 2005 While these numbers may seem to validate plan sponsors’ belief that TDFs are a good fit for their plans (because they offer investors easy access to professional management and diversification that adjusts over time), several research studies show that, despite the industry’s best efforts, many investors apparently do not understand what they are investing in or how TDFs actually work. In one well-publicized survey released by the Securities and Exchange Commission (SEC) in February 2012, only 36% of respondents correctly identified that a TDF does not provide guaranteed income in retirement. In addition, the study revealed that fewer than one-third of respondents were able to identify the correct meaning of the year in the fund’s name. 1 2 Understanding target date funds Many DC providers believe the key to solving this gap in knowledge is to provide even more information about target date strategies to plan participants. Yet others question how this simple approach will help when, according to research conducted by J.P. Morgan, many participants are not paying attention to the information they already receive. For example, a recent study2 by J.P. Morgan of 401(k) participants revealed that about three-quarters of respondents say they don’t take the time to read all of the investment information that is currently provided to them. And 44% say they are already getting more information than they can absorb. Target-Date Series Research Paper: 2012 Industry Survey, Morningstar Fund Research, May 2012. J.P. Morgan 2013 Plan Participant Survey. 16 J O U R N EY Fall/Winter 2013 2011 2015 (est.) To help educate participants, J.P. Morgan has undertaken a new initiative that builds on best practices in retirement communications to establish a higher standard for helping investors understand target date strategies. As a result, the firm launched a program complementing its JPMorgan SmartRetirementSM series of TDFs that focuses on four important things prospective and existing investors need to know: what TDFs are, how they work, who they are designed for and how to select the fund that is most appropriate for their needs. “Given the growing importance of TDFs in plans, we developed this program to specifically address gaps in participant knowledge,” says Catherine Peterson, director of Retirement Insights for J.P. Morgan Asset Management. “This is
  19. 19. particularly important because research continues to show that, while DC plan participants want access to TDFs for retirement savings, they do not understand some of the most basic components of how these funds work.” According to Peterson, the new suite of educational resources is distinguished by its fresh, creative approach to addressing the most important things investors need to know about TDFs. For example, the program includes a dynamic website that features an animated video explaining how a glide path works (go to www.jpmorgansmartretirement. com for the answer), as well as taped comments from individuals about why “I believe at the heart of every fiduciary decision is a single question: ‘Will it help plan participants?’ Educating participants about TDFs gives them confidence to make the right decisions that will improve their ability to retire with dignity.” - Kathleen A. Kelly Compass Financial Partners, LLC they are already invested in TDFs or are thinking about investing in TDFs. In addition, an “infographic-style” brochure has been created to present complex information in a simple and highly visual manner. The program also supports the needs of many different types of investors who may want to know more about target date strategies. For example, for those individuals trying to make a decision about TDFs, the program is designed to help them quickly understand if a solution is right for them and how to select a fund. And for those participants who have been defaulted into a target date strategy, the materials can be particularly valuable in helping them understand what they are now investing in. “At the same time,” says Peterson, “the program offers important benefits for retirement advisors and plan sponsors. First, the resources available through the program may be leveraged to fit a retirement plan’s specific communications strategy. Second, the program addresses the needs of different types of plan inves- “I hold out hope that the net result of ‘auto everything’ and the massive shift from DC to QDIAs (namely TDFs) will not only result in more retirement-ready participants but also in more engaged participants.” - Scott Matheson CAPTRUST Financial Advisors tors, including those who prefer to hand off their investment decisions to others (‘delegators’), as well as those who prefer to make decisions themselves (‘do-it-yourselfers’). And, finally, the program can be used to potentially increase participants’ understanding of TDFs over time. “Considering the critical role that TDFs play in 401(k) plans and successful retirement outcomes, we think it is very important for plan sponsors to apply these best practices to their participant communications,” says Peterson. “It’s time to raise the bar on TDF communications and ensure the industry takes every opportunity to educate and inform investors in a way that is accessible and understandable.” A new way of looking at target date funds In seeking to increase investors’ understanding of target date strategies, J.P. Morgan’s new SmartRetirement communications program uses easy-tounderstand terminology supported by animation and infographics. Because J.P. Morgan believes this information is valuable to all prospective and existing TDF investors, the firm is making this program available to all of its JPMorgan SmartRetirement clients, regardless of which recordkeeper is servicing their plans. Materials can be used by plan sponsors with all of their plan participants, regardless of whether the SmartRetirement Funds are already part of the company’s plan or are being offered for the first time. Resources include: • Brochure • Website: www.jpmorgansmartretirement.com • One-page fund profiles (by share class) • Participant presentation • Sample re-enrollment newsletter For additional information, contact your J.P. Morgan representative. J.P. Morgan Asset Management J OU R N EY 17
  20. 20. What Plan Sponsors Want From Their DC Plans—And What They Are Doing About It J.P. Morgan’s inaugural 2013 Defined Contribution Plan Sponsor Survey Findings 18 J O U R N EY Fall/Winter 2013
  21. 21. The past 30 years have witnessed an incredible transformation in defined contribution (DC) plans. Once merely a supplementary benefit, DC plans have become the cornerstone of retirement security for an expanding proportion of America’s workforce. What do plan sponsors want to accomplish with their DC plans today? What goals and philosophies are driving their decision making? And how are they shaping the design, investment lineup, communications and administration of their DC plans to meet the growing retirement needs of employees while continuing to fulfill their role as fiduciaries? To answer these questions, J.P. Morgan Asset Management conducted its first plan sponsor survey in the period from December 2012 through January 2013. We canvassed nearly 800 plan sponsors—all key decision makers—representing plans with assets from under $1 million to more than $1 billion. Our findings indicate that plan sponsors are clearly committed to achieving a range of “highly important” goals through their DC plans. These aspirations include the traditional and also shorter-term objectives of recruiting and retaining quality employees and demonstrating a level of caring for them. But plan sponsors are equally committed to helping employees achieve the long-term goal of a financially secure retirement. As exhibited most clearly by the larger plans in our survey (those with assets greater than $250 million), plan sponsors are taking steps to fortify their plans to improve participants’ retirement outcomes. EVOLUTIONARY—NOT REVOLUTIONARY—CHANGE While larger plans lead the continued transformation of DC plans, changes are taking place at a modest pace for the group as a whole. On the positive side, more than 75% of all plan sponsors (and 85% of those with larger plans) rate having their plan “help make sure employees have a financially secure retirement” as one of today’s “highly important” goals. In addition, plan sponsors appear to be moving toward success criteria that align with the goals of retirement outcome, and they are factoring these goals into communications and plan design decisions. On the other hand: • Only 44% consider the “percentage of participants whose account balances are on track to replace at least 80% of their final salary in retirement” as a “highly important” criteria by which to measure plan effectiveness. “Employee/ participant satisfaction level” and “investment performance” are the most frequently cited measures of plan success. • Only 25% see “promoting an understanding of the amount of income participants are on track to receive in retirement” as among the “top three” goals for plan communications. Twice as many give the top spots to “educating employees about the benefits of the plan” or “having employees view the plan as a benefit.” • Twice as many say they base plan design decisions on what they perceive to be “participant needs” (29%) or on “cost to the company” (28%), versus “getting the maximum number of participants to experience adequate income in retirement” (11%). • Roughly 65% to 75% feel that their DC plans have been “highly effective in recruiting, retaining and demonstrating a level of caring for employees,” while only about 50% to 60% say their plans are “highly effective in providing financial security for employees, helping to ensure that employees have a financially secure retirement and allowing employees to retire at their normal retirement age.” A more concrete indication that plan sponsors’ actions may not be evolving as quickly as their plan objectives is the rate of adoption of innovative plan features designed to help participants achieve a financially secure retirement. It is encouraging that target date funds (TDFs) and automatic enrollment have been embraced by the majority of larger plans, and also that close to half of these plans are using automatic contribution escalation. But implementation has been slower for plan sponsors overall, with less than half using TDFs and automatic enrollment and even fewer employing automatic contribution escalation or conducting re-enrollments into their qualified default investment alternatives (QDIAs). THE RETIREMENT CHALLENGE Our survey findings highlight one of the key challenges for plan sponsors: evolving their DC plans to attract, retain and ensure a high level of satisfaction among employees today, while helping employees achieve a satisfactory retirement lifestyle tomorrow. Results from our survey suggest that OUR FINDINGS INDICATE THAT PLAN SPONSORS ARE CLEARLY COMMITTED TO ACHIEVING A RANGE OF “HIGHLY IMPORTANT” GOALS THROUGH THEIR DC PLANS. J.P. Morgan Asset Management J OU R N EY 19
  22. 22. success will require dispelling misconceptions that may be impeding DC plan evolution, as well as a collaborative effort among all parties involved—participants, plan sponsors, providers, advisors, consultants and policymakers—to improve participant outcomes. PERCEPTION VERSUS REALITY The following true/false queries highlight how important it is for plan sponsors to: • Understand participant behavior • Stay on top of developments in plan design • Be informed of plan sponsor best practices • Take advantage of policy changes designed to offer them protection in their role as fiduciaries TRUE OR FALSE? T OR F Employees would rather make all their own decisions. FALSE Our survey findings indicate that most employees feel they need guidance and are generally accepting of plan features that can simplify their investment decision making. • More than half of participants say they do not have enough talent to plan for retirement on their own, and many are overwhelmed by the amount of information they already receive. • Results from a separate J.P. Morgan study, the 2013 Plan Participant Survey, find that more than 60% of employees “favor” or are “neutral” on offering a combination of automatic enrollment and automatic contribution escalation features. (Plan sponsors may be underestimating the level of participant support for these features, since the most frequent reason given by plan sponsors for not introducing automatic enrollment and automatic contribution escalation features is a concern that employees would not approve and would then, presumably, be dissatis- 20 J O U RN EY Fall/Winter 2013 fied with the implied loss of control.) shows that those who choose the “do-it-yourself” route tend to have results that underperform the results achieved by those who select the TDF approach.1 Despite these findings, fewer than 25% of plan sponsors describe their philosophy on driving participant decisions as “placing participants on a strong savings and investing path” (versus “focusing on participants making their own choices”). R • esearch Promoting an understanding of the amount of income participants are on track to receive in retirement can be a powerful motivator for improving participant saving and investing behavior. TRUE While our survey of plan sponsors indicates that only 25% consider promoting the use of this outcome-oriented information as an important “goal” for their DC plan communications, our research shows that exposure to such personal income replacement projections can improve individuals’ income replacement rates, as well as the percentage of the plan’s participants on track to receive an adequate level of income in retirement. Participant assets defaulted into a plan’s qdia during a re-enrollment would expose plan sponsors to increased fiduciary risk. FALSE Our survey results indicate that more than half of plan sponsors are not fully aware of the potential to receive fiduciary protection under the Pension Protection Act of 2006 when they engage in a plan re-enrollment. Greater clarity on this issue could lead more plan sponsors to pursue re-enrollment, which might dramatically improve a plan’s asset allocation. J.P. Morgan Retirement Plan Services proprietary research; period of analysis is December 31, 2009, to December 31, 2012. 1 A COLLABORATIVE EFFORT Providing more Americans with the experience and satisfaction of a secure retirement calls for the continued evolution of DC plans, best accomplished with all parties questioning prior assumptions and actively contributing to improved outcomes. Participants need to save more and be more engaged in planning for their retirement. Employers must continue to strengthen their plans, balancing the goals of ensuring employees’ current satisfaction with helping employees achieve long-term satisfaction in retirement. Policymakers, in our view, must continue to motivate individuals to save and invest, as well as help employers shoulder the fiduciary responsibilities involved in providing retirement security to their employees. And, finally, plan providers, as well as advisors and consultants, can play a crucial role by working with plan sponsors to design and develop plans that address employers’ goals, incorporate appropriate innovative design features, leverage policymakers’ support and educate and encourage employees to save and invest. For more insight on how plan sponsors are viewing and evolving their DC plans, visit www.jpmorganfunds. com/retirement to access the 2013 Defined Contribution Plan Sponsor Survey Findings: Evolving toward greater retirement security. A related video of the findings is also available on the website. RETIREMENT INSIGHTS 2013 Defined Contribution Plan Sponsor Survey Findings Evolving toward greater retirement security
  23. 23. NEW RETIREMENT STUDY EMPHASIZES THE IMPORTANCE OF DILIGENT, ‘EARNEST’ SAVING J.P. Morgan Asset Management J OU R N EY 21
  24. 24. R Ma retu rket rn s Consumption vs. savings TOT AL E CONTRO J O U R N E Y: Let’s start with the ques- uncertain U.S. fiscal policy, people are now shouldering a greater responsibility for funding their own retirements. tion that’s probably on most people’s minds. Why did you name your paper “The Importance of Being Earnest”? JO URN E Y: How do you address these new responsibilities in your study? C E M BA L E ST: Oscar Wilde wrote a C E M BA L E ST: The study analyzes the play by that name in the late 19th century in which the actions of one of the main characters—a gentleman who pretends to be someone named “Ernest,” but whose behavior is anything but “earnest”—represent many of the ironies of life in Victorian London. If the play were written today, Wilde could well be talking about retirement. That’s because, while most people can plainly see how important it is to plan for retirement, they may find that what they see in front of them may not be as straightforward and forthright as it seems. challenges facing both median-income and affluent families who are planning for retirement and provides insight into the strategies needed to ensure an appropriate level of retirement income. Our goal was to develop an analytical model that would take a fresh perspective in studying these issues. It also details scenarios that could adversely affect outcomes without proper planning. JO URN E Y: What were your most important conclusions? vit TROL SOM L e o ng O CON RETIREMENT m p r n l oy m d u in g s e nt: ra t a n d io n T UR olio rtf k Po ris YO CO OU F NT O L E a e In a new study called “The Importance of Being Earnest” (which he coauthored with a team of J.P. Morgan investment and retirement experts), Cembalest unveils the findings of new research that can be used by defined contribution (DC) plan sponsors and their advisors to understand and reinforce how plan participants can better reach their retirement goals. Here are highlights from an interview with Cembalest about the findings. THE RETIREMENT EQUATION y regarding Polic tion, savi taxa tlem ngs ents enti Michael Cembalest, chairman of market and investment strategy for J.P. Morgan Asset Management, believes the key to a successful retirement is to get into the habit of saving at a young age and then continue to save and invest for a lifetime. y L and other after-tax savings vehicles. Many Americans now live for two to three decades after they retire. Without adequate planning, some may struggle to create sufficient savings and post-retirement income and, subsequently, may suffer declines in lifestyle. The value of a 401(k) plan can mean the difference between a high level of retirement preparedness and significant financial stress. Second, the research shows once again how critical it is to find the proper balance between savings and consumption, as well as an appropriate level of portfolio risk. For example, there are a number of different actions—highly conservative investing over the long term, excess spending and the early withdrawal of retirement benefits—that can seriously harm any portfolio, as well as significantly erode retirement savings. CEMBALEST: First, the study confirms J O U R N E Y: Why isn’t it so straight- forward? C E M BA L E ST: Families planning for retirement today face very different dynamics from previous generations. Because of rising life expectancies and 22 JO U RN EY Fall/Winter 2013 how critically important a 401(k) is as a retirement savings vehicle and source of retirement income for both medianincome and affluent earners. Higher limits and employer matches make these vehicles more effective in accumulating retirement assets than IRAs JOU RNEY: But isn’t it possible for peo- ple to take new actions that can get their retirement planning back on track? CEMBALEST: If you “undersave,” there really isn’t any investment rate you can realistically expect that will let you
  25. 25. “earn” yourself out of the hole you’re in. That’s why it’s so important to take retirement planning seriously when you’re young. The good news, however, is that, with enough time and diligence, a secure retirement is possible for those who plan carefully, save consistently and invest efficiently. J OU R N E Y: How do you bring these im- portant messages to life in your research? C E M BA L EST: The study provides sce- narios leading up to and through retirement for two prototypical families— one with median income, the other affluent (earning six times the median income)—that illustrate many of the challenges faced by those who don’t take retirement planning seriously. In using these examples, we illustrate complex financial issues in a very real and compelling way, helping to demonstrate how these issues can affect many individuals. J O U R N E Y: Do your findings vary de- pending on a person’s income? C E M BA L E ST: Yes, but our overall recommendation never changes: It’s important for all people to plan and save for retirement. At the same time, however, there are some key differences in how certain factors such as government policy may impact individuals with varying levels of income. For instance, it’s estimated that for median-income families, approximately 75% to 85% of retirement cash flow will come from Social Security. This means the potential impact of fiscal and retirement policy changes on retirement income for these earners should be relatively minimal. While savings are still important for these families, they can still be well positioned to replace the income they need for a secure retirement as long as they spend and invest wisely. For affluent families, Social Security will make up a much smaller portion of their retirement income. This means the impact of any changes to retirement and fiscal policy will likely have a more significant impact on their retirement income. While there are a number of variables outside of their control, affluent families are still in command of other important considerations that can positively impact their savings, such as savings rates and risk exposure. As a result, affluent families need to accumulate enough savings to maintain their standard of living up to and through retirement. JO URN E Y: How can someone truly get a handle on saving for retirement when there are so many variables to consider? C E M BA L E ST: Generally speaking, re- tirement income is a by-product of three things: factors that you cannot control (such as market returns and taxes, as well as entitlements such as Social Security and Medicare); factors you can control in part (such as longevity and employment); and factors over which you have total control (such as the amounts you save and spend). And it is critical for any investor to do his or her best to control those factors that can be controlled, while ignoring the rest. M E E T M ICH A E L CE M BA LE ST Michael Cembalest is chairman of market and investment strategy for J.P. Morgan Asset Management. In this role, he is responsible for leading the strategic market and investment insights across the firm’s Institutional, Funds and Private Banking businesses. Cembalest is also a member of the J.P. Morgan Asset Management Investment Committee and a member of the Investment Committee of the J.P. Morgan Retirement Plan for the firm’s 260,000 employees. Most recently, he served as chief investment officer of the firm’s Global Private Bank. Cembalest joined the company in 1987 in the Corporate Finance division. He earned an M.A. from the Columbia School of International and Public Affairs and a B.A. from Tufts University. “ TH E IM P ORTA NCE OF B E ING E A R NE ST ”— AWARD-WINNING INSIGHTS JO URN E Y: How can plan sponsors and their advisors make use of these findings? CEMBALEST: This study can be a help- ful tool for employers and advisors in demonstrating how third-party research validates many of the approaches they are recommending. These results can help them continue to encourage effective savings and investment behaviors to put their participants on the right path to reaching their retirement goals. Clearly, being earnest about investing and saving and also reassessing the viability of a retirement plan are two actions that can positively impact a person’s ability to save for retirement. RETIREMENT INVESTMENT INSIGHTS INSIGHTS THE IMPORTANCE OF BEING EARNEST Implications of saving, investing and future policy changes on today’s retirement investor “The Importance of Being Earnest” analyzes the unique challenges facing both medianincome and affluent families planning for retirement. This year, the paper was recognized for its “excellence and thought leadership” in the retirement industry by winning RIIA’s 2013 Retirement Income Communications Award for printed materials. Contact your J.P. Morgan representative to receive a copy of this study. J.P. Morgan Asset Management J O U R NEY 23
  26. 26. 60% Almost of plan sponsors said they have a “very high sense of responsibility for the overall financial wellness of their employees.” 1/3 Nearly of plan sponsors don’t fully understand the methodology used to construct the target date fund in their DC plan. 56% Only 44% of plan sponsors say the “percentage of participants with account balances on track to replace at least 80% of their final salary in retirement” is an important criteria for evaluating the success of their DC plan. ½ Only of plan sponsors rate their plan as effective in “helping make sure employees have a financially secure retirement.” 5% Only of plan sponsors are “extremely confident that their participants have the appropriate asset allocation.” 24 JO U RN EY Fall/Winter 2013 J.P. Morgan 2013 Defined Contribution Plan Sponsor Survey Findings Retirement plans by the numbers of plan sponsors are unsure whether or not they will receive fiduciary protection for participants who are defaulted into their plan’s QDIA during a reenrollment.
  27. 27. MORNINGSTAR DISCLOSURE: ©2013, Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its providers; (2) may not be copied or distributed; (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damage or losses arising from any use of this information. For each fund with a three-year history, Morningstar calculates a Morningstar Rating™ metric each month by subtracting the return on a 90-day U.S. Treasury Bill from the fund’s load-adjusted return for the same period, and then adjusting this excess return for risk. The top 10% of funds in each broad asset class receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. 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  28. 28. Retirement Insights and Solutions from J.P. Morgan Asset Management J.P. Morgan Asset Management 270 Park Avenue New York, NY 10017-2014 Return Service Requested INST-JMAG-20

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