Several rising stars of the industry address the questions around participant education and offer their recommendations for a solution. Everyone's focus this past year was on implementing the various provisions of the Pension Protection Act (PPA), and it likely will be again in 2008. Plan sponsors dealt with the effects of the landmark PPA legislation for much of last year, and most likely will this year as well. The PPA encouraged automatic enrollment and qualified default investment alternatives, driving up participation rates. However, costs remain a concern for plan sponsors.

1. Education Needs Improvement
Several rising stars of the industry address
the questions around participant education
and offer their recommendations for a solution.
A New Dawn in the Wake of PPA
Everyone's focus this past year was on
implementing the various provisions of the
PPA, and it likely will be again in 2008.
Plan
2008
Roundup
JANUARY 2008 • emii.com
Sponsor
401(k)Plan Sponsors-laydown 12/19/07 4:38 PM Page 1

2. Real Retirement Solutions
These are questions that matter, and JPMorgan can help you answer them.
Call us at 212-648-2496 to learn more.
When choosing the right target date strategy for your plan,
focus on the questions that really impact your participants.
JPMorgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co.
Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., JPMorgan Investment
Advisors Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc.
©2007 JPMorgan Chase & Co.
What solution offers
institutional-quality diversification?
What solution attempts to get the best
possible returns for the greatest number
of your participants?
What solution incorporates
real participant behavior?
SmartRetirement
401(k)Plan Sponsors-laydown 12/19/07 4:38 PM Page 2

3. JANUARY 2008 • emii.com
2008 PLAN SPONSOR ROUNDUP
JANUARY 2008 2008 PLAN SPONSOR ROUNDUP 3
6 A New Dawn in the Wake of PPA
By Stephen Brown
Although signed into law in 2006, the Pension
Protection Act was largely digested and implemented
by the industry this past year. Aside from additional
rules and guidelines, the law created new opportuni-
ties for financial service providers, and it likely will
continue to do so in 2008.
10 Investment Education Needs Improvement
The Pension Protection Act created new rules
designed to boost participation and improve educa-
tion, which has been an ongoing struggle. Several ris-
ing stars of the industry discussed the questions that
arise from these rules and offered their recommenda-
tions for a solution.
16 A Smart Alternative
JPMorgan’s target date strategies seek to achieve
better risk-adjusted returns through the use of
extended market and alternatives exposure. Top man-
agers of the strategy took the opportunity to discuss
the philosophy behind the strategies’ investments,
where they are now and where they are headed.
22 Fixing Your 403(b) Plan: Adopting a Best
Practices Approach
By Tom Blanchar
New regulations for 403(b) plans bring increased
scrutiny to the operation, fee structure and practices
prevalent in the retirement plans available to our
nation’s teachers, health care workers and employees
of charitable and non-profit organizations. But the
rules also offer the opportunity to create a better
product and service offering.
24 Playing It S.A.F.E.R
If you are a fiduciary, you are always at risk of gov-
ernment scrutiny and legal action. RSM McGladrey
has created five steps to help plan sponsors manage
fiduciary liability and minimize their chances of having
issues down the road.
A New Dawn in
the Wake of PPA
Table of Contents
6
10
Investment
Education
Needs
Improvement
401(k)Plan Sponsors-laydown 12/19/07 4:38 PM Page 3

4. 4 2008 PLAN SPONSOR ROUNDUP JANUARY 2008
www.iinews.com
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Editor’s Note
Welcome to the 2008 Plan Sponsor Roundup, a review of the most
important issues affecting defined contribution plan sponsors last
year and a preview of the challenges and opportunities ahead in
the New Year.
Our inaugural issue is packed with insight and analysis from the
defined contribution community. We start with an overview on the state
of the market, including what plan sponsors have been doing this past
year in response to passage of the Pension Protection Act, and pre-
dictions on where the industry is headed (see story, page 6). We fol-
low that up with a roundtable discussion on solutions to one of every
plan sponsors’ biggest perennial concerns – participant education –
featuring four rising stars of the retirement
plan community (see page 10).
Beyond our own original coverage, the
Roundup includes articles sponsored by
major players in the defined contribution
market, including JPMorgan Asset
Management, The Standard and RSM
McGladrey. The topics of those articles
range from the use of alternative invest-
ments in target-date funds (see page 16)
to best practices for fixing 403(b) plans
(see page 22) to better managing fiduciary
liability (see page 24).
The 2008 Plan Sponsor Roundup is the latest in a series of special
supplements produced by Institutional Investor News exclusively for
our newsletter subscribers. It is part of our commitment to bringing our
readers the freshest news and in-depth analysis on important sectors
and timely topics within the financial markets.
All the best in 2008,
Erik Kolb
Editor of Business Publishing
Institutional Investor News
Education Needs Improvement
Several rising stars of the industry address
the questions around participant education
and offer their recommendations for a solution.
A New Dawn in the Wake of PPA
Everyone's focus this past year was on
implementing the various provisions of the
PPA, and it likely will be again in 2008.
Plan
2008
Roundup
JANUARY 2008 • emii.com
Sponsor
From the publishers of:
401(k)Plan Sponsors-laydown 12/19/07 4:38 PM Page 4

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6. 6 2008 PLAN SPONSOR ROUNDUP JANUARY 2008
THE GREATEST IMPACT on the
401(k) industry this past year actually
didn't occur in 2007. It occurred in
2006 with the signing of the Pension
Protection Act (PPA) – a 900-page,
legalese-choked edict that produced the most significant
changes to pension plans since the Employee Retirement
Income Security Act of 1974 (ERISA).
New legislation and regulation usually is greeted with a col-
lective groan from plan sponsors and vendors, as most of what
emanates from Washington, D.C., does little to improve effi-
ciency and everything to aggravate administrative headaches.
But PPA is more than a paperwork creator; many of the pro-
visions in the law create new opportunities for financial serv-
ice providers, few more important as those related to auto-
matic enrollment.
Pronouncements, Procedure and Protection
The PPA introduced two important concepts for 2007 that
enabled automatic enrollment to be, well, more automatic.
The first was the preemption of state payroll withholding laws
that interfere with automatic enrollment. The second provid-
ed an optional nondiscrimination safe harbor for plans estab-
lishing a qualified automatic contribution arrangement
(QACA). Plans adopting a QACA do not have to satisfy the
nondiscrimination tests each year, though the QACA must
provide minimum and maximum contribution rates with
automatic escalation features that are applied uniformly: 3%
during the first and second years, 4% during the third year,
5% during he fourth year and 6% after four years.
The mandatory contribution provision, though a windfall for
some participants, isn't a free lunch. For some plan sponsors,
it considerably raises the cost of implementing automatic
enrollment. “There are a lot of issues whether to auto-enroll
or not,” said Trisha Brambley, president of Resources for
Retirement in Newtown, Penn. “We see a lot of companies
balking at the costs of administration and the additional
match before signing on. For them, it wasn't so automatic.”
Costs not withstanding, PPA further encouraged automatic
enrollment by providing legal protection for employers who
automatically enroll their employees and direct their contri-
butions into diversified investments. These investments could
be a stand-alone product or a fund of funds comprised of var-
A New Dawn in
the Wake of PPA
Plan sponsors deal with the effects of the landmark legislation
for much of last year, and most likely will this year as well
By Stephen Brown
401(k)Plan Sponsors-laydown 12/19/07 4:38 PM Page 6

7. JANUARY 2008 2008 PLAN SPONSOR ROUNDUP 7
ious investment options. Examples include target-date and
lifecycle funds and certain managed accounts. This legislative
aegis allowed plan sponsors to direct employees to invest-
ments that more closely adhered to modern portfolio pre-
cepts, instead of directing them to less efficient (and less
effective) portfolios that merely minimize annual volatility.
“Only the very biggest plans had anything other than stable
value as a default because people were disinclined to have a
negative return on their default fund,” said Mark Tomkins,
principal at Tomkins & Associates. “What the qualified
default investment alternative (QDIA) did was point out to
the industry that it has a fiduciary responsibility to partici-
pants who don't make an election.”
In October, the Department of Labor issued final regulations
that provided additional guidance
with respect to qualified default
investment alternatives under an auto-
matic enrollment plan. In short, a
plan fiduciary that complies with the
final regulations will not be liable for
any loss that results from investments
in a QDIA.
So far, results are matching intentions.
Hewitt Associates found the number
of companies automatically enrolling
employees in their 401(k) plan
increased to 34% in 2007, up from
19% in 2005.
As would be expected, automatic
enrollment also is driving participa-
tion rates, according to Diversified
Investment Advisors’ recently released
Report on Retirement Plans – 2007.
The report found that companies with 1,000 to 4,999
employees reported a 90% or better participation rate in their
401(k) plan. At the same time, automatic enrollment has
helped fuel growth of target-date funds, which grew to $152
billion in assets by the second quarter of 2007.
Fees were another front-burner issue for many plan sponsors in
2007. Hewitt found that more companies were scrutinizing
401(k) plan fees, a trend due, in part, to an upsurge in govern-
ment and media scrutiny. In fact, 61% of employers noted they
are ‘very’ or ‘somewhat’ concerned about plan expenses.
These concerns led more plan sponsors to embrace open
architecture. Advances in recordkeeping and trading technol-
ogy have made such an arrangement an available and reason-
ably priced alternative. What's more, these hard-dollar pay-
ment arrangements – fees paid to pension administration
firms for required IRS filings and compliance testing, to
ERISA attorneys for plan document drafting and review and
to CPA firms if a plan audit is required – are fairly easy to
monitor, and most plan sponsors can reasonably justify costs
for services provided.
The same cannot be said for soft-dollar arrangements, where
the link between services and fees can become obfuscated.
As multi-fund manager platforms have become more in
demand, the revenue-sharing arrangements among the fund
managers on the platforms have become increasingly signif-
icant, and increasingly complex. The challenge for plan
fiduciaries is to understand what they are purchasing and
determine if they are receiving value for their outlay.
Many of the expense complaints that arose in 2007 targeted
these revenue-sharing arrangements, which
typically involve the transfer of asset-based
compensation from investment management
service providers to administrative service
providers. Complainants – most often plan
participants – contended that fees paid under
revenue-sharing arrangements are excessive
for the service provided.
If enough complaint are recorded (and
enough were), the end result is a class-action
lawsuit, which occurred with greater frequen-
cy in 2007. The St. Louis-based law firm of
Schlichter, Bogard & Denton was particular-
ly active, having filed the first 13 lawsuits
against 401(k) plan sponsors for allegedly
paying excessive fees. The lawsuits alleged
that plan sponsors failed to meet their fiduci-
ary responsibilities by ignoring payments that
investment managers paid to recordkeepers
and other service providers. The suits also
“What the quali-
fied default invest-
ment alternative
(QDIA) did was
point out to the
industry that it
has a fiduciary
responsibility to
participants who
don't make an
election.”
— Mark Tomkins
From Left to Right: Mark Tomkins, principal at Tomkins & Associates,
and Trisha Brambley, president of Resources for Retirement
401(k)Plan Sponsors-laydown 12/19/07 4:38 PM Page 7

8. 8 2008 PLAN SPONSOR ROUNDUP JANUARY 2008
alleged that plan executives failed to disclose these fees to
participants as required by ERISA.
According to Erik Daley, managing director at the
Multhomah Group in Portland, Ore., increased litigation
has forced more small- and mid-sized sponsors to embrace
benchmarking to justify costs. “Vendors are better articulat-
ing what they are doing for sponsors,” he said. “Vendors
used to perform recordkeeping duties but, because they
tended to commoditized themselves, the employers saw it as
no value added. Now there is so much pressure on vendors
to disclose fees, they are more willing to disclose what they
are giving plan sponsors. The sponsors, in turn, can evaluate
if the fees are reasonable.”
Fees were less of an issue with mutual funds, which com-
prise more than 50% of 401(k) investment portfolios. The
Investment Company Institute reported that the average
stock mutual fund had an expense ratio of 1.5% at the end
of 2006, while 77% of stock mutual fund assets in 401(k)
plans were invested in funds with a total expense ratio of
less than 1%. On an asset-weighted basis, the average
expense ratio incurred by all mutual fund investors in stock
mutual funds was 0.88%, and the asset-weighted average
expense ratio for 401(k) stock mutual fund investors was
even lower at 0.74%. Overall, the asset-weighted average
expense ratio across all mutual funds in 401(k) plans was
0.71% in 2006.
Presages, Predilections and Prophesy
Automatic enrollment should continue to drive 401(k) par-
ticipation in 2008. Starting in plan years beginning after
December 2007, an employer may automatically enroll an
eligible employee at a specified contribution level, unless the
employee affirmatively elects to have contributions made at
a different level or elects not to defer any compensation.
The auto-enroll trend should further fuel target-fund sales,
though not everyone believes these funds are the Rosetta
stone to a comfortable retirement. As they gain popularity,
more of their shortcomings will likely be exposed, accord-
ing to George Bush, president of Advanced Financial &
Design Solutions in Endwell, N.Y. “I'm not a big fan of the
lifecycle funds,” he said. “I think they offer too much risk
for minimal downside protection.” Bush's primary com-
plaints are that they can be too expensive, too conservative
and too concentrated.
A broader investment menu would seem a logical alternative
to target-date funds. Indeed, the average number of available
options grew to 16 in 2007, according to Hewitt Associates.
Unfortunately, the menu is often composed of similar, corre-
lated fare. “Many plans I come across are overloaded on large-
cap equity, with hardly any small- or mid-cap and no foreign
exposure,” Bush noted.
Does that mean a greater array of lower correlated invest-
ments will be in the offering this year, particularly in light of
the hyperbolic chatter given to alternative investments in
2007? Probably not. “The more exotic things like hedge funds
and real estate were getting popular, but that has cooled down
because those investments are cycling through,” Tomkins
said. “The positive is that you are seeing greater interest in
emerging markets and international funds.”
Exchange-traded funds (ETFs) could prove to be an enticing
void-filler, as they are cheaper than mutual funds and offer an
equal array of asset allocation options. Between January 2002
and September 2007, assets invested in open-end mutual
funds increased by roughly 71%. In the same period, ETF
assets increased by roughly 564%. Notwithstanding those
divergent growth rates, conventional mutual funds still dwarf
ETFs by a margin of more than 21-to-1, with conventional
funds accumulating $12 trillion in assets compared to the
$551 billion in assets populating ETFs.
The problem for ETFs is that they are bought and sold like
stocks, with investors paying broker commissions for each trade.
This structural barrier has only recently been hurdled, as
BenefitStreet and Barclays Global Investors have partnered to cre-
ate a 401(k) platform offering Barclays’ iShares ETFs. The plat-
form allows participants to invest directly in the ETFs rather than
through a collective trust (a common configuration for offering
ETFs in mutual fund form), thereby minimizing commission
costs and providing fee transparency.
Education, a constant conundrum for any retirement plan,
has been another problem. ETFs are foreign to many plan
participants. In addition, some advisors are hesitant to recom-
mend them because most issues are relatively callow and have
yet to be stress-tested in a down market.
From Left to Right: Erik Daley, managing director at the Multhomah
Group, and Alan Vorchheimer, principal at Buck Consultants
401(k)Plan Sponsors-laydown 12/19/07 4:38 PM Page 8

9. JANUARY 2008 2008 PLAN SPONSOR ROUNDUP 9
Plan participants, though often unwilling to
educate themselves, are willing to accept
investing advice, which could help bridge
the ETF gap. A 2007 survey by Cerulli
Associates found that 88.9% of participants
seek advisor guidance to ensure their money
will last through retirement, which implies
advice-giving could play a larger role in
401(k) management in the future.
Historically, employers balked at the notion of
telling their employees how to invest, fearful that
that errant advice would result in litigation, but
the PPA provides an exemption from the pro-
hibited transaction rules under ERISA for
investment advice provided by a ‘fiduciary advi-
sor’ under an ‘eligible investment advice arrange-
ment.’ A fiduciary advisor is defined by the PPA
to include banks, insurance companies, broker-
dealers and registered investment advisers.
To qualify as an ‘eligible investment advice
arrangement,’ investment advice must be
arranged so that either the fees do not vary based on the investment
options selected or the advisor uses a computer model. The computer
model cannot be biased in favor of the investments offered by the advi-
sor and must account for all the investments offered under the plan, as
well as the participant's age, life expectancy, risk tolerance and other
assets; must be certified by an independent investment expert; and must
apply to generally accepted investment advice theories.The advisor also
must be willing to undergo independent audits to ensure compliance.
Additional Department of Labor guidance and the spread of inexpen-
sive computer modeling are encouraging more companies to provide
advice. Hewitt Associates found that 25% of large employers offer
individualized advice either online, over the phone or through person-
to-person consultations. Another 44% of employers said they were
either ‘very’ or ‘somewhat’ likely to add advice in the coming year.
The person-to-person strategy could be the delivery mechanism
that gains the most traction in coming years. “In the late 1990s
and early 2000s, the push was for interactive Web sites,” said
Daley. “There was almost an endless amount of resources, but the
reality is that the majority of the workforce isn't ready to go there.
More tactile education seems to work better. You're seeing a lot
more one-on-one interaction.”
Maintaining and justifying costs also will remain a hot-button issue
in 2008, with more plan sponsors demanding benchmarks to meas-
ure costs. Bush believes a benchmark coupled with a contemporary
due-diligence report will become indispensable for most plan spon-
sors. “We show a high degree of disclosure on risk-return, actual
returns, style drifts and correlation metrics,” he said. “Large firms
can offload the due diligence to the consulting team they've hired,
but you're going to see more due diligence and
co-fiduciary relationships with smaller spon-
sors and consultants.”
One area on the 401(k) front that could
remain mired is the Roth 401(k). About 20%
of plan sponsors offer Roths, according to the
Profit Sharing Council of America. Roughly
half the companies they surveyed are still
considering whether to add a Roth option to
their 401(k) offering, and many of them are
waiting to see how Roth 401(k) implementa-
tion unfolds at other companies before mak-
ing any changes. Some financial experts have
opined that most workers, except those close
to retirement, would be better off contribut-
ing to a Roth 401(k) than a traditional
401(k), but future income-tax assumptions
and complexity limit their appeal.
“Even with online calculations and educa-
tion, you need to decide how much you want
to put into the Roth, but it depends on your
future tax rate in retirement,” said Alan Vorchheimer, principal at
Buck Consultants. “That's when participants’ eyes glass over. You
need to be a little more sophisticated, which is why they are often
better suited for more professional businesses.”
While the rise of defined contribution plans at the expense of
defined benefit plans has been an ongoing theme for the past sev-
eral years, the most powerful trend for 2008 and beyond could be
the gradual assimilation of defined benefit characteristics by
defined contribution plans. Vorchheimer believes guaranteed life-
time funds built on variable annuities and other guaranteed con-
tracts will likely gain stature into the relevant future. “One of the
benefits of a defined benefit plan is that you could annuitize,” he
said. “Defined benefit plans offer guaranteed money, and more
people are going to want that. You'll see more focus on mortality
risk and the like, with many of the complexities associated with
defined benefit plans migrating to defined contribution plans.”
The defined benefit paradigm also could influence how plan spon-
sors measure their success. “The big thing I see is the utilization of
more results-based measures to determine the efficacy of the retire-
ment plan, rather than looking at the inputs, flow rates, allocation
and participation,” Daley said. “Let's start looking at this like a
defined benefit plan: Will a participant who joins us at 25 and
works until 65 have a successful retirement? That's how success
should be measured.”
If Vorchheimer's and Daley's prophesies hold, 401(k) plans
could soon carry all the tools and accoutrements associated
with their defined benefit brethren – a trend more consultants
and advisors see gaining momentum.
“You'll see more
focus on mortality
risk and the like,
with many of the
complexities asso-
ciated with
defined benefit
plans migrating
to defined contri-
bution plans.”
— Alan
Vorchheimer
401(k)Plan Sponsors-laydown 12/19/07 4:38 PM Page 9

10. 10 2008 PLAN SPONSOR ROUNDUP JANUARY 2008
Investment
Education Needs
ImprovementTop advisors say current programs fall short
of desired goals, but they can be remedied
I
n the past two years, the
U.S. has seen a major
change in the retirement
savings landscape.
Exacerbating these
changes was the passage of the
Pension Protection Act (PPA) in
2006, which brought stricter funding
requirements for corporations provid-
ing traditional defined benefit pension
plans, as well as rules to encourage
employers with 401(k) plans to offer
greater levels of investment educa-
tion, a greater breadth of investment
options and automatic enrollment of
employees into the plans.
401(k)Plan Sponsors-laydown 12/19/07 4:39 PM Page 10

11. JANUARY 2008 2008 PLAN SPONSOR ROUNDUP 11
However, given the passage of the PPA and the fact that an
increasing number of companies are switching from a traditional
defined benefit plan to a 401(k) plan, serious questions have been
raised about the 401(k) industry. Do employees of U.S. compa-
nies have enough investment education to set the proper asset
allocations for their retirement accounts? Are 401(k) plans, in
general, sufficient tools to allow employees to save for retirement?
Are employees educated enough on the risks and drawbacks asso-
ciated with 401(k) plans, such as taking out loans?
Institutional Investor News sat down with some of the leading
wealth and financial advisors – including James Worrell, president
of GPS Investment Advisors; Jennifer Flodin, co-founder and
retirement plan advisor at Plan Sponsor Advisors; Tony Ciocca,
managing director at Institutional Investment Consulting; and
Stephen DesRochers, a wealth management advisor at Merrill
Lynch & Co. – to discuss these questions.
IINews: It’s no secret that most participants of defined contri-
bution plans generally do not have enough investment knowl-
edge to sufficiently save for retirement. What needs to be
done, especially in the wake of the PPA, to encourage employ-
ers to provide more investment options and to implement
automatic enrollment?
Worrell: I believe we have a crisis in America. If we - plan advi-
sors, plan providers, employers, associations, media and the gov-
ernment - don’t succeed in changing how people save and invest,
many Americans will not be able to enjoy the type of retirement
they deserve or expect.
Social Security was only meant to replace 30-40% of income. The
rest has to come from other sources. Given that defined benefit
plans have been steadily disappearing, the 401(k) becomes the key
source of supplementing that Social Security income.
With 401(k)s, where employees are expected to take an active role
in the saving and investing effort, I believe that it is crucial to
make it as easy as possible for people to do what is right for their
retirement. This includes saving a high percentage of their pay in
a retirement plan, investing it in a diversified mix of investments
appropriate for their age and keeping track, rebalancing and real-
locating it so it continues to match their time horizon and risk
tolerance. Some recent trends toward accomplishing this include
age-based funds, automatic enrollment, automatic deferral escala-
tion, default funds that include equities, quicker plan eligibility
and entry dates, increased plan portability and rollover options.
Flodin: What PPA encourages employers to do is add a qualified
default investment alternative (QDIA) to invest in a fund that has
both equity and fixed income exposure. The PPA doesn't encourage
adding funds for the sake of it, rather it promotes the addition of
funds that are balanced and hopefully will have a better long-term
appreciation for the participant than a stable value investment.
So, to answer your question, plan sponsors need to not only adopt
auto-enrollment - for all eligible employees, not just new hires -
but add auto-escalation as well. If sponsors only add the auto-
enrollment feature, they will only be getting their participants
half way to the finish line. They need to make sure the deferral
rate increases each year.
Ciocca: The QDIA allows for the use of target-date portfolios as
default investment options. These options, combined with auto-
enrollment and auto-escalation, can help participants that other-
wise would have never invested for their retirement. The use of
target-date portfolios can make the investment decision much
easier for the average investor.
DesRochers: It is my experience that most plans do not need
more investment options. In fact, far too many plans still believe
that more is better, despite research that shows plan usage actual
decreases with too many investment options. For years, we called
it ‘analysis paralysis,’ but today it is known as the ‘paradox of
choice,’ or the fact that more actually brings you less.
When it comes to automatic enrollment, I am finding that, once
plan sponsors are comfortable that they are covered from a liabil-
ity standpoint and that the administration will not be overly bur-
densome, they are very willing to consider it. I think most
employers believe that the idea of helping their employees to help
themselves is not a good idea. So long as it doesn’t create a sub-
stantial burden on them, they are willing to try it.
IINews: We’ve all seen and heard the horror stories regard-
ing people who’ve retired from their companies with zero
savings. What will employers need to do to provide an
enhanced investment education program for employees
regarding their retirement savings?
Worrell: Plan sponsors must illustrate the dollar amount the
employee will need in retirement in comparison to what they
currently have, as well as what their current saving and invest-
ing level will produce at retirement age. If employees don’t
think they have a gap, they won’t be motivated to close that
gap by changing their behavior.
Flodin: In light of PPA, I think there needs to be a re-analysis of
what we need to educate participants on. I would look to elimi-
nate the basic education of what asset allocation is and start edu-
cating people on how much they are going to need in retirement
and how they can get there.
401(k)Plan Sponsors-laydown 12/19/07 4:39 PM Page 11

12. For most people, this retirement account is the largest account
balance they have ever had. Yet, they have no comprehension
how far this will take them through retirement and how much
they can expect to take annually and not run out of money.
Typically, they can only take out 4-5% of their retirement sav-
ings per year for the first 10 years of retirement.
DesRochers: In an era where the burden of retirement income
has shifted from employer to employee, I don’t believe the
answer is as simple as an investment education program. Sure,
an education program is a part of any solution, but the best
solution is going to involve fostering a corporate culture that
embraces helping its employees help themselves and prides itself
on sending well-prepared employees into retirement.
The simple fact is the change from defined benefit plans to
defined contribution plans may have released companies from a
long-term financial burden, but companies still have the same
motivations they did when defined benefit plans originally were
developed. Companies want happy, productive employees who
feel like a valued part of the company they work for. Employees
who are constantly worried about not having enough for retire-
ment or who hear through the corporate grapevine that retiring
from their employer only leads to a dismal future are not happy
and productive. Imagine the morale at a company whose last
four years of retirees are living on food stamps. The brightest
companies will figure out quickly that helping their employees
to help themselves makes sense for both parties.
IINews: In the wake of PPA, many more companies are mak-
ing the switch from defined benefit plans to 401(k) plans.
In terms of education, how difficult has the transition been?
Worrell: Most of us learn about finances from prior genera-
tions. Because the prior generations had pensions, they didn’t
have to worry about saving in a 401(k) and therefore didn’t
teach the current generation about the importance of saving in
a 401(k). It is now abundantly clear that today’s worker will
have very little in retirement other than Social Security unless
he/she has built up a 401(k). After more than 20 years, this mes-
sage is beginning to sink in, as people realize they need to save
for their own retirement.
With defined benefit plans, the employer saved and invested
for the employee’s retirement and managed their income pay-
ments in retirement through death. Now, with 401(k)s, plan
sponsors are asking employees to handle that complex task.
What the statistics – such as average account balances, aver-
age investor returns, asset allocation, investor behavior, etc. –
show is that employees are not doing nearly as good a job as
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13. JANUARY 2008 2008 PLAN SPONSOR ROUNDUP 13
the actuaries, investment consult-
ants and other professionals, who
in the past would have managed
that employee’s account. The tran-
sition therefore has been very diffi-
cult and not well executed, though
great strides have been made
recently in plan design, legislation
and industry approaches to educa-
tion and tools.
Flodin: It is very difficult.
Participants are not educated to
understand how much they should
save, how they should invest and
how much they can spend each
year in retirement. All the things a
defined benefit plan automatically
took care of now have been thrust into the employee’s lap for
him/her to decide.
Ciocca: I would say that the transition has been taking place over
the last 25 years or so. With auto-enrollment, auto-escalation and
the use of target-date funds as default options, we have started the
process of simplifying the 401(k) plan.
DesRochers: Education actually has become easier in light of the
change from defined benefit plans. Most employees understood
very little about defined benefit plans and very few understood just
how valuable a benefit they actually had.
When was the last time you heard of a perspective employee
inquiring if a company had a defined benefit plan and what type
of formula it used to calculate the benefit. On the other hand, if a
company has a 401(k) plan and how much of a match they offer
is a standard question of perspective employees. There are of
course exceptions to this, where the culture is built around defined
benefit plans. Police, firefighters and educators come to mind.
IINews: One of the big worries plan providers have is that
their employees take too many loans from their 401(k) plans
without thinking about the implications of taking out a loan
or liquidating their accounts altogether. What needs to be
done in terms of both education and regulation to improve
this situation?
Worrell: Employees don’t understand the impact on their account
of taking out a loan. They need to be educated at the time they are
asking to take a loan on the negatives of doing so. Once an
employee gets into the habit of using the plan as a loan vehicle, it
is harder to break the cycle. Therefore, intervention is critical the
first time an employee requests information about a loan.
Plan sponsors need to collaborate with their providers to reduce the
number of loans. This can be done through print media and, espe-
cially at point of inquiry, with live phone reps or live chat operators.
Human resource executives need to be included in the discussion
and need to understand the negative impact so they can help com-
municate it with the rest of the organization and with employees.
Flodin: There needs to be more behavioral education – real life
examples that demonstrate what taking a loan can do to your future.
I also think there has to be data that talks about the myths and real-
ities of taking a loan. For example, it is not bad in general to take a
loan from your 401(k) account. The behavior that is bad is stopping
your deferrals while the loan is outstanding and having those dollars
go towards your loan payment. If you keep your deferral rate the
same and make your loan payments in addition, that isn't nearly as
bad as the alternative of stopping deferrals until the loan is paid off.
I think vendors can help educate participants on those details.
Ciocca: I have worked with some very successful plans that do not
offer a loan provision, but many plans are afraid that if they take this
approach they will lose participants. As an industry, I think we have
sent a mixed message on the loan issue. Some folks actually talk
about it as a huge benefit of a plan, using the rationale that you are
paying yourself back the interest as a way to make the loan look like
an attractive solution.
I am not sure we will see any major changes to the loan regulations,
but I would like to see regulation limiting participants to one out-
standing loan at a time. In the meantime, more education around
the consequences of taking a 401(k) loan would help some.
DesRochers: Loans are a double-edged sword. The fact that they
exist and are available in an emergency helps to make many partici-
pants more comfortable about saving in the plan, thus helping
From Left to Right: Tony Ciocca, managing director at Institutional Investment Consulting;
James Worrell, president of GPS Investment Advisors; and Jennifer Flodin, co-founder and retirement
plan advisor at Plan Sponsor Advisors
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m
he
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15. JANUARY 2008 2008 PLAN SPONSOR ROUNDUP 15
participation. Clearly, the downside is participants using their
retirement plan as a savings account. As an industry, I am not
sure we have done a great job of showing the effects loans can
have on retirement savings.
IINews: With the PPA encouraging more investment
options in 401(k) plans, what do advisors, advice providers
and bundled providers need to do to educate participants
on diversification?
Worrell: I have heard that the number one most widely held
investment in a plan today is company stock and the number
two is a money market fund. This indicates to me that employ-
ees don’t truly understand the concentration risk of company
stock or the inflation risk of money markets.
Plan sponsors need to educate employees on the long term ben-
efits of diversification and make it easier for employees to
diversify through proper design of the fund menu. The ways to
do this are to offer pre-diversified or managed accounts and to
offer model portfolios of the plan’s underlying funds.
Ciocca: The best plans seem to have one thing in common: the
management of those organizations makes the plan a priority.
The organization’s culture can make a huge difference in the
success of an education program, and typically you’ll see
mandatory 401(k) meetings with significant involvement from
senior managers. Of course, there are problem plans at organi-
zations with great corporate culture and vice versa, but without
senior level buy-in it is hard to run a great plan.
DesRochers: Behavioral finance has shown us pretty clearly
that most employees are not interested in becoming investors.
Concentrating education efforts on investment topics, such as
asset allocation, diversification, dollar cost averaging and the
like, is a mistake. These topics attract the minority of employ-
ees and usually the very ones who would seek out such knowl-
edge without our help.
Education efforts are best focused on creating savers rather
than investors. Keeping employee education simple, com-
pelling and easy for the average person to walk away with a
workable plan, a plan that they are convinced can make a dif-
ference, is the key to reaching the majority of employees
The best way to solve diversification issues is through asset allo-
cation programs, advice programs and diversified funds such as
lifestyle funds. These programs give employees a simple answer
to a concept that many find complex and are a great step for-
ward, but I do have some concerns. I would caution that such
programs still need to be combined with advice and a very clear
description of how such programs work. I am concerned that
many employers are using such programs as an opportunity to
remove advice and counsel from plans, believing that such pro-
grams take the place of this feature.
The early results for these programs are promising, but they are
coming in a market that, until very recently, has been very favor-
able to investors. The true test of whether these programs were
positioned correctly will be how many participants move their
investments to fixed accounts and/or stop contributions during
times when the markets show negative returns.
For years, I have been using asset allocation programs to
build clients diversified portfolios. No matter how much
explaining I do, during times of market turbulence, I spend
much of my time hand-holding those very clients who clear-
ly understood the concept six months or a year ago. I am not
yet convinced that there is a good alternative available that
can take the place of talking to another human being who
can listen to your concerns and reassure you that you are
doing the right thing.
IINews: With automatic enrollment becoming easier
through the PPA, is there a way to encourage 401(k) par-
ticipants to save more?
Worrell: Automatic enrollment and automatic deferral escala-
tion are great tools that tap into key behavioral economic
findings about how people think about saving and investing.
These techniques in themselves will not solve the problem,
especially when participants can opt out.
It is key to pair these techniques with a continual message
about the dollar amount each employee will require to retire
comfortably. Other solutions include personalized gap analy-
ses, suggestions for how much to save and how to invest to
achieve a targeted goal and information repeatedly delivered
in a way that participants can act upon, such as check the box
reply cards.
DesRochers: Auto enrollment is simply another tool. When
combined with lifestyle funds, it may simply be the best set of
tools our industry has ever had to help employees. However,
I still am a firm believer that success ultimately will come
down to a partnership between employee and employer, not a
single tool or law change.
The shift from corporate pensions to personal accountability
is a major cultural change. The effects of the change will not
be readily apparent as they will take years to move through
the system, but one way or the other they will be society’s to
solve. It makes sense for all involved that we find a way to
help employees help themselves.
ICE
y of
tion
ned
ees.
ment
127.
127
party
ndard
tions.
401(k)Plan Sponsors-laydown 12/19/07 4:39 PM Page 15

16. 16 2008 PLAN SPONSOR ROUNDUP JANUARY 2008
WHEN THE PENSION
Protection Act was passed in
2006 and again when the
Department of Labor issued new
guidelines for retirement plan
fiduciaries, many asset managers and plan sponsors scrambled
to meet their new obligations. Specifically, the new regulato-
ry focus required managers and sponsors to balance return
and capital preservation, neither to the exclusion of the other.
Managers at JPMorgan Asset Management believe that the
new rules are a confirmation of the approach they already had
in place with their SmartRetirement strategy and target-date
funds. The commingled portfolio was introduced in August
2005, with the similarly managed mutual funds introduced in
June 2006.
Some of the challenges that plan sponsors are facing in assur-
ing that their employees can retire comfortably are how to
get participants into the plan and how to keep them there.
Great returns and low costs in the default fund will help, but
getting eye-popping returns usually means taking on a lot of
risk and accepting a lot of volatility. That may work for
aggressive, veteran investors, but a downturn in the markets
may prompt conservative or inexperienced investors to either
change their investments to cash or stable value or to stop
contributing altogether.
A Smart
Alternative
JPMorgan’s Target Date Strategies Seek to Achieve
Better Risk-Adjusted Returns with Extended Market
and Alternatives Exposure
SPONSORED ARTICLE
“It's hard to imagine crafting a robust defined
benefit portfolio from the choices in most defined
contribution plans...and isn't that a standard we
should be holding ourselves to?”
—Anne Lester, Managing Director
JPMorgan SmartRetirement Portfolio Manager
401(k)Plan Sponsors-laydown 12/19/07 4:39 PM Page 16

17. JPMorgan’s strategy is an illustration of one of its core beliefs:
highly diversified target-date strategies that include non-tra-
ditional assets, such as emerging equity, emerging debt, direct
real estate, REITs and high-yield fixed income, may help a
higher percentage of participants reach retirement with the
401(k) balance necessary to provide income security and
maintain their lifestyle.
Recently, JPMorgan’s top managers of the strategy – Anne
Lester, managing director, and Daniel Oldroyd, CFA and vice
president, both of the Global Multi-Asset Group - took the
opportunity to discuss the philosophy behind the strategies’
investments, where they are now and where they are headed.
Q: What led you to develop target date strategies with an
allocation to alternatives?
Lester: We have managed money on behalf of some of the
largest and oldest defined benefit plans for more than 75 years
— this is our institutional heritage. Before we launched the
target date portfolios, 70-80% of our business had been in
defined benefit plans, so we are very well versed in managing
assets and liabilities and thinking in terms of surplus volatili-
ty optimization.
Our target date philosophy comes straight from our desire
and ability to bring institutional-quality diversification to
defined contribution plans. By offering similar access to
extended and non-traditional asset classes, we are able to
provide additional diversification, which leads to better risk-
adjusted performance. We have for some time included asset
classes such as emerging market debt,
emerging market equity, direct real
estate and real estate investment trusts
(REITs) in our institutional portfo-
lios, and more recently in our 130/30
long-short strategies. We have the
tools and techniques to construct
broadly diversified, risk-efficient
investment vehicles.
Oldroyd: When you look at the results
— especially over the past few quarters,
which have seen significant market
volatility — our approach is justified.
Focusing more tightly on capital
preservation and growth, we have been
successful in our pursuit of risk-adjust-
ed returns since inception. What’s real-
ly important is that we are not reliant
on any particular alpha technique.
Q: What are your assets under management so far?
Lester: We have a little more than $3 billion in assets under
management in the SmartRetirement strategy. That breaks
out into a little more than $1.8 billion in the commingled
portfolio, $800 million in mutual funds and one separate
account with about $500 million.
Q: Do the mutual funds mirror the commingled funds?
Lester: They do to a very large extent, but there are a few
things we can do in the commingled portfolios for ERISA
investors that we simply cannot do in the mutual funds.
Direct real estate is one. In addition, most
hedge fund strategies cannot be bought
through a mutual fund. Altogether, there is
an 80–90% overlap in the underlying
strategies.
Q: Philosophy, asset allocation and disci-
pline translate into performance. How
have you done?
Lester: If you look at our fund performance
since inception, we are really pleased with
not only performance, which has been solid,
but also with the volatility that we have seen
in our strategy. We really feel like we are
delivering to plan sponsors exactly what we
said we would: risk-adjusted performance.
Oldroyd: Let's remember that we have put
extended and alternative investments in our
strategy to minimize volatility and risk. Our
JANUARY 2008 2008 PLAN SPONSOR ROUNDUP 17
From Left to Right: Dan Oldroyd, vice president, and Anne Lester,
managing director, both of the JPMorgan Global Multi-Asset Group
“Our objective
is not return
at any price.
It is to eliminate
volatility so
plan sponsors
can encourage
employees to
get in and
stay in.”
— Dan Oldroyd
SPONSORED ARTICLE
401(k)Plan Sponsors-laydown 12/19/07 4:39 PM Page 17

18. 18 2008 PLAN SPONSOR ROUNDUP JANUARY 2008
SPONSORED ARTICLE
Comparison of Asset Allocation Glide Paths
401(k)Plan Sponsors-laydown 12/19/07 4:39 PM Page 18

19. JANUARY 2008 2008 PLAN SPONSOR ROUNDUP 19
objective is not return at any price. It is to eliminate volatili-
ty so plan sponsors can encourage employees to get in and
stay in. We are trying to narrow the range of outcomes. We
need to be clear on that goal, and we are asking plan sponsors
to be clear with participants. The risk of unmet expectations
for sponsors is frightening.
Q: How do you counter that risk of unmet expectations
for plan sponsors?
Lester: The major problem is that not enough people are
making it to retirement with enough money. We have con-
structed our portfolios to maximize the number of individual
plan participants who reach retirement with the level of
income replacement they need in order to maintain their
working lifestyle. We figure that to be 40% of pre-retirement
income from the 401(k) plan, and we anticipate that Social
Security will account for another 40%, for a total of 80% of
pre-retirement income.
That is very different from the goal of having the maximum amount
of money in the plan for any given individual. If you care about the
number of people who make it to that 40% replacement level, then
you care passionately about those people who fail. If you target the
highest balance per participant, then there will be a greater number
of people with more money, as well as a greater number of people
with less money. The winners will win bigger, and the losers will lose
bigger. We want to avoid fat tails on the distribution of returns, espe-
cially on the downside. That balancing of risk and reward comes
from our heritage as defined benefit managers.
Oldroyd: The challenges facing partici-
pants are compounded by the reality
that people are living longer. Combined
with the fact that they are not saving
enough, there is a very real chance that
many retirees will run out of money at
some point in their retirement.
Longevity risk is a major consideration.
Many participants cannot afford to
potentially lose what little they have
saved. So understanding behavioral
finance and the drivers of participant
behavior and incorporating that into our
philosophy is central to our approach of
seeking risk-adjusted returns through
enhanced diversification.
Lester: The most important question
for plan sponsors to ask participants
and for participants to ask themselves
is if they are on track or not. That is
why we work for risk-adjusted
returns. It is possible to get higher returns with greater risk,
but then you see volatility. That’s when people open their
statements, say “Ugh” and stop contributing.
You have to understand behavioral finance. Losing hurts
more than winning delights. Plan sponsors and portfolio
managers have to care about downside volatility. That is what
the extended market and alternative investments are for.
Q: In balancing risk and reward, how did you decide what
to include in the strategy?
Oldroyd: The test for what would go into the
SmartRetirement strategy was the relative liquidity of the
investment, how transparent it is, what the costs are and how
we could execute on the strategy. There are lots of things we
could use, but we wanted to be sure that whatever assets were
included fit well within the strategy.
Once we decided what would fit into the strategy, we had to fine-
tune how each asset class would grow or shrink within the retire-
ment glide path. Among the alternative investments and extend-
ed markets, the biggest proportional position is in direct real
estate, the true alternative. That makes up 10% of the
SmartRetirement portfolio for a 25-year-old participant and 7%
for someone 65 years of age or older. REITs are a close second,
declining from 8% to 3% over time. Emerging markets equity
starts at 5% and is adjusted down to 2% for older investors. In
contrast, high yield and emerging market debt each make up just
2% of the initial allocation but grow to 5%.
Q: Is there a balance or juxtaposition
between your direct real estate holdings
and your REIT holdings?
Lester: There is no direct relationship
between the two. Of course, that is because
they perform like separate asset classes on a
short to medium timeframe. REITs act more
like small-caps, while real estate is not close-
ly correlated to equity performance.
Our return assumptions for REITs and direct
real estate are pretty close. For REITs, the
expected 10- to 15-year annualized compound-
ed return assumption is 7%. Due to leverage,
that is a bit higher than the return on direct real
estate. The return assumption for the unlevered
U.S. direct real estate is 6.75%. That is less
than equity, but more than fixed income
returns. And, as we noted, it has a low correla-
tion to both. Our current performance reflects
strong yields from operating income.
“If you’ve got the
skill and an unlim-
ited fee budget,
you can do any-
thing. But we
have to balance
the ideal portfolio
with what the
market is going to
accept in terms of
liquidity and
transparency.”
— Dan Oldroyd
SPONSORED ARTICLE
401(k)Plan Sponsors-laydown 12/19/07 4:39 PM Page 19

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401(k)Plan Sponsors-laydown 12/19/07 4:39 PM Page 20

21. JANUARY 2008 2008 PLAN SPONSOR ROUNDUP 21
Q: What other asset classes might you
consider adding?
Lester: There are two other huge buckets that
people typically think of in terms of alterna-
tives — private equity and hedge funds.
Private equity is something we would love to
figure out how to include, but if you have per-
formance fees, those are difficult in a daily net
asset value (NAV) investment. And with pri-
vate equity, you are potentially holding some-
thing at book value for a while. How do you
figure that out for the daily NAV?
With regard to hedge funds, we use market-
neutral strategies and tactical asset alloca-
tion. Many people would call both of those
hedge fund strategies, so we are using a little
bit of that. But both of those types of strate-
gies are liquid, transparent, have a daily
NAV and have no performance fees, at least
the way we use them.
Oldroyd: If you’ve got the skill and an
unlimited fee budget, you can do anything. But we have to balance
the ideal portfolio with what the market is going to accept in terms
of liquidity and transparency. We also have an eye on expenses. We
built this strategy understanding that costs are a critical factor for
sponsors, and sponsors are trying to figure out how to get some-
thing plan participants will see value in.
Lester: We are constrained by the need to strike a daily NAV, and
we have to care about the fees. We are very aware of the effect the
sticker price has on the participants and how their reaction affects
the plan sponsor.
Oldroyd: We are trying to create an attractive basket of invest-
ments that is liquid, transparent and economical. That limits us to
about 10% true alternative investments and about 15% in the
extended market.
Q: Even if you are doing well with your alternative investments,
do they intimidate plan participants or even some potential
sponsors?
Lester: The extended market and alternative asset classes are
definitely an advantage for most plan sponsors, but sometimes
we need to do a little education around the benefits of an insti-
tutional approach to 401(k) investing. Most sponsors welcome
the opportunity to give their participants access to things like
real estate or emerging markets without having to worry about
how they might be misused if they were put in the core fund
line-up of the plan.
With regard to participant education, we
really focus on our ability to help participants
understand whether or not they want to man-
age their own investments directly or whether
they want to hire a professional to do it for
them. We discuss the use of a broad set of
asset classes in the context of the overall risk
of the strategy and avoid an attempt to edu-
cate them on how to create an efficient fron-
tier. There is broad consensus in the industry
that we can’t turn participants into sophisti-
cated investors by pushing more education at
them – that is one of the reasons why so
many plan sponsors are embracing target-
date funds and using them as default funds.
Oldroyd: In our first year or two, we have
seen tremendous interest on the part of retire-
ment plan sponsors. Part of the reason is that
we are running this much more in the style of
a defined benefit plan than the defined con-
tribution program that it is. We have also
designed it with plan sponsors in mind. We
have a lot of options and, for a sponsor, more
options are good. But the ultimate focus is risk-adjusted returns.
Those are what are going to bring participants into the plan and
keep them there. We do the things that defined benefit programs
do and that more defined contribution plans should consider.
For more information, contact David Skinner at (212) 648-2496 or
david.d.skinner@jpmorgan.com. You also can visit our website at
www.jpmorgan.com/definedcontribution.
Opinions, 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
but should not be assumed to be accurate or complete. These views and
strategies described may not be suitable for all investors. References to specif-
ic securities, asset classes and financial markets are for illustrative purposes
only and are not intended to be, and should not be interpreted as, recom-
mendations.
Assumptions are provided for illustrative purposes only. They should not be
relied upon as recommendations to buy or sell securities. Forecasts of finan-
cial market trends that are based on current market conditions constitute
our judgment and are subject to change without notice. References to specif-
ic asset classes and financial markets are for illustrative purposes only and
are not intended to be, and should not be interpreted as, recommendations.
JPMorgan Asset Management is the marketing name for the asset manage-
ment businesses of JPMorgan Chase & Co. and its affiliates worldwide.
Those businesses include J.P. Morgan Investment Management.
Copyright © 2008 JPMorgan Chase & Co. All rights reserved.
“There is broad
consensus in the
industry that we
can’t turn partici-
pants into sophis-
ticated investors
by pushing more
education at them
– that is one of the
reasons why so
many plan spon-
sors are embrac-
ing target-date
funds.”
— Anne Lester
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22. 22 2008 PLAN SPONSOR ROUNDUP JANUARY 2008
ACCORDING TO SPECTREM
GROUP, approximately $652 bil-
lion was invested in 403(b) plans as
of December 31, 2006. Of those
assets, 45% were invested in fixed
annuities, 34% in variable annuities and the remainder in
mutual funds. The majority of the assets (44%) was invested
through higher education programs, 26% was invested
through public school (K-12) programs and another 19% was
invested through healthcare programs. The remainder was
invested through private school (K-12) and other programs.
On July 23, 2007, the IRS issued final 403(b) regulations, the
first comprehensive guidance in 43 years. The new regula-
tions generally will take effect on January 1, 2009. With such
a large amount of retirement savings at stake, the issuance of
the new 403(b) regulations is a long-awaited and welcome
event in the retirement plans industry.
The Opportunity Is Now
The final 403(b) regulations bring increased scrutiny to the oper-
ation, fee structure and practices prevalent in the retirement plans
available to our nation’s teachers, health care workers and employ-
ees of charitable and non-profit organizations. Today, plan spon-
sors have an exciting new opportunity to make significant contri-
butions toward a best-practices approach to sponsoring a 403(b)
plan. The end result can be a vastly improved product and service
offering for plan participants.
The regulations will place new administrative duties upon
plan sponsors. The good news is that there is highly qualified
help available. 403(b) plan sponsors have an opportunity to
leverage plan assets to attract knowledgeable and seasoned
retirement plan advisors, product providers and other service
vendors who can help them deliver the best retirement plan
possible to their employees.
Learning From The Past:
More Is Definitely Not Better!
The most prevalent model by far in the public education sec-
tor, and in many of the 501(c)3 organizations, is the multi-
provider platform. This model, which one rarely sees in the cor-
porate sector, has developed over time in an effort to provide
employees the ability to choose their investment options from a
menu of retirement plan providers. In the past, it has not been
uncommon for many well-meaning (but uninvolved) employers
to have approved 10, 20 or even 50-plus insurance and mutual
fund companies as investment providers.
The multi-provider model is flawed in two very basic ways
and has produced just the opposite results that were intend-
ed. First, there have been numerous studies that show when
people are given too many choices of anything, they lose con-
fidence (or make no decision) because the choices are over-
whelming. Second, the multi-provider platform is inefficient
and does not allow sponsors to leverage total plan assets and
receive appropriate pricing based on aggregate assets.
The Advantage of a Single-Provider Model
The single-provider model can alleviate the two major con-
cerns that 403(b) plan sponsors have regarding the new regu-
lations: greater fiduciary responsibility and increased admin-
istrative duties. By selecting a single provider, plan sponsors
can enhance their purchasing power and can negotiate lower,
transparent investment fees for participants. In addition, par-
ticipants get a more manageable number of institutional-
quality investment options to choose from, as well as benefit-
ing from customized and consistent enrollment, education
and ongoing communication materials.
Fixing Your 403(b) Plan:
Adopting a Best Practices Approach
New regulations offer the opportunity to create a better retirement plan for all
By Tom Blanchar, 403(b) Product Manager, The Standard
A Snapshot of the Final 403(b) Regulations
• Written plan documents must be adopted and main-
tained by the employer
• New requirements for 90-24 transfers
• Revised testing and notification requirements for uni-
versal availability
• Increased employer responsibilities regarding loans,
hardships, catch-up contributions and required mini-
mum distributions
• Increased fiduciary role for the selection and monitor-
ing of available investment options
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23. JANUARY 2008 2008 PLAN SPONSOR ROUNDUP 23
Such a 403(b) plan can give the employer an advantage over
the competition in attracting and retaining employees. The
single-provider model also allows the plan sponsor to out-
source many or all of the plan administrative responsibilities
and receive accurate and timely reporting of plan activity
and regular monitoring of the investment options available
to participants.
Fiduciary Responsibility: Awareness Is Critical
The new regulations make it clear that even plans not covered
by ERISA place some fiduciary responsibilities on 403(b)
plan sponsors.
There is currently much litigation and media coverage regard-
ing fees and marketing agreements currently underway in the
401(k) arena. The 403(b) arena is not without its own litiga-
tion. One of the more high-profile lawsuits currently in exis-
tence involves the National Education Association (NEA).
According to a July 2007 article in the New York Times, the
lawsuit contends that the NEA breached its duty to members
by accepting millions of dollars in payments from two finan-
cial firms whose high-cost investments it recommended to its
members in an association-sponsored retirement plan.
The case was filed on behalf of two NEA members who had
invested in annuities sold by the two providers. It contends
that, by actively endorsing these products (which purported-
ly carry high fees), the NEA through its NEA Member
Benefits subsidiary took on the role of a retirement plan spon-
sor, which must put its members’ interests ahead of its own.
The suit contends that, by taking fees from the two providers,
the NEA breached its fiduciary duty to the participants.
403(b) plan sponsors should require that the retirement plan
provider accept contractually, where applicable, ERISA sec-
tion 3(38) fiduciary responsibility for the selection and mon-
itoring of a 403(b) plan's investment options.
Full Fee Disclosure and Cost Comparison
Are an Absolute Requirement
403(b) plan sponsors should require that their retirement
plan providers be forthcoming and transparent regarding the
fees that plan participants pay. Fiduciary responsibility
requires that expenses must be reasonable in relation to the
product and/or services received. And if fees are hidden, like
the revenue sharing an intermediary (such as an outside advi-
sor or plan provider) might receive from the mutual fund
provider, then how does someone know if the fees are reason-
able or not?
Leveraging Technology to Reduce Plan Expenses
If the plan sponsor wants to lower the cost of its plan even
further, then it must assist in making enrollment and employ-
ee education more efficient. Technology is the key and needs
to be used to educate and enroll 403(b) plan participants via
the Internet and other available media like VRS and call cen-
ters. This requires cooperation with the provider and commu-
nication to employees. Not only does this make good sense, it
also provides a way for the plan sponsor to meet its obliga-
tions under the ‘universal availability’ rule applicable to
403(b) plans.
Conclusion: Imagine the Possibilities!
Although the new regulations represent new and uncharted
ground for most 403(b) plan sponsors, the opportunity exists
for improved plan offerings to employees. By becoming edu-
cated and developing best practices, both employer and
employee will benefit. The result will be a better retirement
plan for all. And, just maybe, a better retirement for all.
Tom Blanchar is the 403(b) and
457 Plan Product Manager for
StanCorp Equities, Inc. (“The
Standard”). He can be reached at
(866) 559-5510, or he can be
emailed at tblancha@standard.com.
5 BEST PRACTICES FOR PLAN SPONSORS
An Action Plan
1. Form a 403(b) advisory board of five to seven members.
2. Seek out assistance from qualified outside advisory servic-
es. Employing the services of an experienced and knowl-
edgeable retirement plan consultant or advisor can help
plan sponsors in many ways:
• Knowledge of the marketplace
• Education regarding appropriate fees and fee disclosure
• Meeting fiduciary responsibilities
• Written plan requirements and provisions
• Development of an Investment Policy Statement
• Development and distribution of RFPs; analysis and
evaluation of RFP responses
3. Review existing providers for investment performance,
investment options, fees, expenses and service standards.
4. Seek proposals from qualified defined contribution plan
providers and do not limit the process to current vendors.
5. Create standards for ongoing monitoring of the plan.
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24. 24 2008 PLAN SPONSOR ROUNDUP JANUARY 2008
PERHAPS YOU’RE A MEMBER
of your company’s 401(k) plan com-
mittee or someone entrusted with
managing the plan. Maybe you’ve
attended investment committee
meetings or perhaps you helped select the third-party admin-
istrator or investment advisor. Your day-to-day routine prob-
ably consumes most of your time without even thinking
about fiduciary liability. You may even have fiduciary liabili-
ty insurance so you don’t spend too much time thinking
about it. But with volatility in the investment markets,
greater scrutiny by regulators and increasing plan level litiga-
tion, you could be headed for trouble.
To determine whether you are or could be a fiduciary, it is
helpful to review the definition under the Employee
Retirement Income Security Act of 1974 (ERISA). For pur-
poses of ERISA, a fiduciary is generally anyone with discre-
tionary authority or control over the management of a plan,
administration of a plan or disposition of a plan’s assets. Thus,
many of the activities involved in operating a plan can make
the person or entity performing them a fiduciary, to the
extent discretion is used. Fiduciary status is based on the
functions performed for the plan, not just a person’s title.
In most cases, authority to administer the plan and select its
investments falls on either the company sponsoring the plan
(plan sponsor) or the plan committee. Therefore, the compa-
ny and/or the committee usually are fiduciaries under ERISA.
This is true even if a third party actually administers the plan.
Most third-party administrators limit their activities to min-
isterial duties, performed at the discretion of the plan sponsor
or plan committee, to avoid becoming fiduciaries to the plan.
Every plan must have at least one ‘named’ fiduciary, who can
appoint other fiduciaries. Anyone who makes such appoint-
ments has a duty to prudently select those persons and to
periodically review their work to make sure they are fulfilling
their responsibilities. Fiduciary appointments might include
the plan’s trustees and investment advisor and any committees
that have discretionary authority to manage the plan or its
assets. If a plan committee is appointed, the individual com-
mittee members are fiduciaries and must perform their duties
under ERISA fiduciary standards.
All fiduciaries have potential liability for the actions of their
co-fiduciaries. For example, a fiduciary who knowingly par-
ticipates in another fiduciary’s breach of responsibility, con-
ceals the breach or does not act to correct it is also liable.
The duties of plan sponsors and their fiduciaries are numer-
ous and complex. It is nearly impossible for employers to be
aware of all relevant rules, and plan sponsors usually need
assistance to ensure compliance. Yet failure to comply with
ERISA rules can result in penalties, government audits and
even personal liability.
Whether you or one of your colleagues is a fiduciary, the
question is how do you protect yourself from governmental
scrutiny and worse - penalties or even personal liability?
While there are many opinions on this, we have developed a
unique approach for helping our clients manage these respon-
sibilities. Following the S.A.F.E.R concepts outlined below
Playing It S.A.F.E.R
Five Steps to Help Plan Sponsors Manage
Fiduciary Liability
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25. JANUARY 2008 2008 PLAN SPONSOR ROUNDUP 25
can help you to minimize your chances of having issues down
the road.
Spell It Out
Let’s start with S for Service Providers and the impact of the
selections made. By adhering to a clearly defined methodology,
fiduciaries can limit exposure. In deciding who to work with, start
by determining the services needed from outside providers to
manage the plan effectively. Services can range from plan design
and documentation to employee education and investment selec-
tion. Request formal bids from potential providers and ask poten-
tial providers about their range of services, experience with the
specific type of plan, fees and expenses and customer satisfaction.
There are two basic arrangements that plan sponsors and fiduci-
aries can consider:
• A single bundled provider who can deliver all required
services
• A team of providers with specialized expertise in each
service area
Both approaches have advantages and disadvantages, and one
approach may be better suited than the other for your com-
pany and plan. Make sure you understand the terms and con-
ditions of any agreements presented and all fees associated.
Most importantly, prepare a record of the process followed
and the reasons for which decisions were made. If challenged
with regard to these decisions, this documentation will go a
long way to protect you and show that you acted in a pru-
dent manner.
A is for Asset Management. This is probably one of the
areas that causes the most concern for
fiduciaries and makes them feel most
vulnerable because plan participants
focus on investment returns. As a
fiduciary, you may be called upon to
demonstrate that you followed pru-
dent procedures in selecting and
monitoring investment options for
the plan and participants. In order to
comply, you should be able to pro-
duce a written Investment Policy
Statement and documentation show-
ing how the plan’s investment options
were selected.
Monitoring investment performance
on a regular basis is equally important.
Prepare and keep reports to document
your on-going oversight of investment
performance. Evaluating and selecting
assets can be a daunting process.
Working closely with an experienced retirement plan invest-
ment advisor during this process will help to address the fidu-
ciary responsibilities for making prudent decisions.
Investment advisors also can help monitor investments on an
on-going basis.
On-going asset management responsibilities include:
• Following criteria in your written investment policy
guidelines
• Meeting regularly to evaluate investment performance
• Seeking information and advice from experts and service
providers
• Monitoring performance, expenses and benchmarking
• Removing and replacing underperforming investment
options
Fiduciaries also may need to consider default investment
alternatives. This includes deciding how to invest the funds of
participants who do not submit investment elections.
Fiduciaries have liability for the proper handling of these
investment selections. These situations commonly arise when
converting to a new investment provider or as a result of
using automatic enrollment provisions in the plan.
While many plan sponsors choose money market or stable
value funds, Qualified Default Investment Alternatives
(QDIAs) also should be considered as they can provide some
fiduciary protection under Section 404(c). The Department of
Labor has finalized the QDIA regulations and, in order to qual-
ify for relief, assets must be invested in either age-based lifecy-
cle funds, risk-based lifecycle funds, balanced funds or a man-
aged account. There also are certain notice requirements. A
QDIA notice must be given to participants at
least 30 days in advance of the date they
become eligible for the plan OR at least 30
days in advance of the date any investments
are made in the QDIA.
The notice must:
• Describe the circumstances under which
assets may be invested on behalf of a par-
ticipant
• Explain the rights of participants to direct
the investment of assets in their individual
accounts
• Include a description of the QDIAs and a
description of where the participants can
obtain additional investment information
about the other investment alternatives
available under the plan
Remember to document, document and con-
tinue to document. This will help to successful-
“Remember to
document, docu-
ment and continue
to document. This
will help to suc-
cessfully defend
any decisions
made in the event
that participants
bring litigation
against you.”
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26. 26 2008 PLAN SPONSOR ROUNDUP JANUARY 2008
ly defend any decisions made in the event that participants bring
litigation against you. With litigation on the rise, this process is
critical.
Fees and expenses comprise the F in S.A.F.E.R and rep-
resent an area under intense scrutiny by Congress and govern-
ment regulators. Because of this, fiduciaries should be more
concerned with understanding and evaluating plan fees and
expenses. Compensation paid directly or indirectly to
providers must be reasonable. Therefore, fiduciaries must
understand the following:
• All direct and indirect fees applicable to plan investments
and plan services
• How service providers are being paid
• What services are being provided for the fees the plan is
being charged
Fiduciaries should be proactive in obtaining information
about fees and expenses. Vendors will provide information
about direct and indirect fees and expenses relating to plan
assets if requested. This information will serve as the basis for
determining whether the expenses are reasonable. Because
reasonable is sometimes difficult to ascertain, you should
compare the fees and expenses of your plan with those that
are available from other vendors.
A 401(k) fee disclosure worksheet can be found on the
Department of Labor’s website at www.dol.gov/EBSA. This
worksheet will help determine the total costs of the plan and
compare fees and expenses of competing providers. When
evaluating fees and expenses, fiduciaries should keep in mind
that the lowest cost is not always the best value and that cost
is only one factor in determining if fees are reasonable.
E is for Employee Education. This is perhaps one of the
toughest areas for a fiduciary. There are many challenges in this
area, including the ability to:
• Reach all demographics within the employee population
• Help employees understand the importance of saving for
retirement
• Provide enough information for employees to make informed
decisions
• Offer a variety of investment alternatives
Fiduciaries can measure the effectiveness of education programs
by monitoring participant investments. When monitoring results,
be sure to consider:
• Actual investment activity vs. industry benchmarks
• Analysis of statistics for subsets of the employee population
• Review of existing programs and services and their effective-
ness
• Alternatives to current programs and services
• Setting reasonable goals for improvement
In an effort to make investment advice more available to plan par-
ticipants, the Pension Protection Act of 2006 amended ERISA
§408 and IRC §4975 to create a statutory exemption from the
prohibited transaction rules governing revenue from fiduciary
advice, if certain conditions are satisfied. Qualified advice is
divided into two categories and may be provided by investment
advisers whose fees do not vary depending on the investments
selected, or those whose fees vary by fund if a computer model is
used. Both must acknowledge that he/she is a fiduciary, and an
independent auditor must conduct an annual compliance audit
and provide the plan sponsor with a written report.
This brings us to R, which stands for Review Internal
Procedures. Many employers feel their fiduciary responsibili-
ties are satisfied once they have engaged outside specialists to serv-
ice the plan and often overlook tasks that are critical to operating
the plan properly. Examples include documenting the processes
required to enroll participants on a timely basis, ensuring partici-
pants are able to defer and receive employer contributions on all
eligible compensation and tracking years of service properly.
Requiring written guidance on such internal steps for each
department (human resources, payroll, finance) reduces the
chance for mistakes during periods of turnover or absence of the
staff responsible for each function.
It is critical that employers operate the plan according to the
terms of the plan document. This is difficult when good internal
procedures are not in place. Without written internal procedures,
mistakes can occur which can be costly to correct. Mistakes can
range from allowing ineligible employees to participate to failing
to make timely deposits of employee deferrals.
How can you lessen your risk associated with the plan as a
fiduciary? A first step is to implement the principals that
define the S.A.F.E.R concept. Certain steps can be time con-
suming, and you may not have the time it takes to fully inte-
grate S.A.F.E.R. You might consider hiring a firm that special-
izes in retirement plan consulting to assist you. While you
will still be liable for your actions or lack thereof as a fiduci-
ary, a retirement plan specialist can assist with much of the leg
work and analysis. The specialist also can assist in drafting an
Investment Policy Statement.
When you do engage any consultant or advisor, be sure to
clearly communicate what you want them to do, get a clear
understanding of the fees and closely monitor their progress.
And remember to act upon the recommendations of the spe-
cialist. It will be up to you to implement any changes and to
continue to monitor your plan going forward.
To learn more about these S.A.F.E.R concepts or the services pro-
vided by RSM McGladrey, please visit us online at
www.rsmgladrey.com/retirement or call (888) RET-401K.
To
inf
80
inv
Pas
for
divi
Gro
Gold
by t
Fun
SPONSORED ARTICLE
401(k)Plan Sponsors-laydown 12/19/07 4:39 PM Page 26

27. A long track record.
A feature almost unknown among
asset allocation funds.
Asset Allocation Portfolios from Goldman Sachs. Long, favorable track records. That’s what
Goldman Sachs offers clients interested in asset allocation funds. In fact, the Equity Growth Strategy
Portfolio ranks in the top 1% of 398 funds in its Lipper category for 5 years of performance through
October 31, 2007. To learn how Goldman Sachs can help you find balance in an ever-changing
investment landscape, visit www.goldmansachsfunds.com or call 1-800-526-7384.
Asset
Management
To learn more about Goldman Sachs Funds, visit www.goldmansachsfunds.com. Prospectuses containing more complete
information are available online, and may also be obtained from your authorized dealer, or from Goldman, Sachs & Co. by calling
800-526-7384. Please consider a Fund’s objectives, risks, and charges and expenses, and read the prospectus carefully before
investing. The prospectuses contain this and other information about the Funds.
Past performance does not guarantee future results. Lipper Analytical Services, Inc., an independent publisher of mutual fund rankings, records rankings for this and other Goldman Sachs Funds
for 1-year, 3-year, 5-year, and 10-year total returns periods. Lipper Total Return Rankings: Lipper compares mutual funds within a universe of funds with similar investment objectives, including
dividend reinvestment. Rankings are based on total return at net asset value and do not reflect sales charges, and do not imply that the fund had a high total return. As of 10/31/07, the Equity
Growth Strategy Portfolio (A) ranked 65/631 (1 yr) and 2/398 (5 yr); as of 9/30/07, it ranked 75/627 (1 yr); and 2/397 (5 yr) among Mixed-Asset Target Allocation Growth Funds. The ability of the
Goldman Sachs Asset Allocation Portfolios to meet their objectives is directly related to the ability of the Underlying Funds to meet their objectives as well as the allocation among the Portfolios
by the Investment Manager. An investment in the Asset Allocation Portfolios will involve not only the expenses of a Portfolio itself but a proportionate share of the expenses of the Underlying
Funds (including operating costs and investment management fees). Goldman, Sachs & Co. is the distributor of the Goldman Sachs Funds. © 2008, Goldman, Sachs & Co. All rights reserved.
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28. 401(k)Plan Sponsors-laydown 12/19/07 4:39 PM Page 28