JourneyRetirement Insights and Solutions from J.P. Morgan Asset Management

ISSUE 9SUMMER 2013

7 Take it PersonallyCommunicating more effectively with plan participants

15 Speaking InvestmentsBuilding the optimal large-cap equity option in a DC plan

10 Retirement Advisor RoundtableTop advisors share perspectives for greater success in today’s DC business

22 Reality ShowThe truth behind how participant behavior affects target date strategies

19 Ready or NotGuideposts to retirement readiness

the ContentI S S U E 9 S u m m e r 2 0 1 3

IN THIS ISSUE

1 A WordMichael Falcon, head of retirement at J.P. Morgan Asset Management, discusses today’s challenging environment and offers simple solutions that can help participants achieve better retirement outcomes.

2 Legislative CornerNew DOL Guidance on Target Date Funds Tips from the Department of Labor on target date fund selection and how plan fiduciaries and their advisors can translate these recommendations into action.

Rewriting the Rules A look at the Department of Labor’s key initiatives clarifies its current focus.

4 Executive PerspectiveBill McDermott, head of sales and client solutions at J.P. Morgan Retirement Plan Services, shares his insights on industry trends, challenges and opportunities.

6 Stat LifeMore plan sponsors are considering engaging in a re-enrollment as part of their plan design, with target date funds as their qualified default investment alternative.

7 Take it PersonallyDonn Hess, head of product development at J.P. Morgan Retirement Plan Services, discusses the power of persona-driven communications.

10 Retirement Advisor RoundtableA panel of retirement advisors shares its experience and thoughts on the current state of the defined contribution business.

15 Speaking InvestmentsThe importance of reevaluating large-cap equity options in a defined contribution plan.

19 Ready or NotA savings checkpoint, created through rigorous research, provides a quick, personalized snapshot of an individual’s retirement readiness.

22 Reality ShowThe best target date strategies are designed based on realistic assumptions about how participants behave and interact with their 401(k) plans.

25 Did You Know?An updated look at participants’ behavior and views on retirement.

A savings checkpoint provides a valuable guidepost to gauge retirement readiness

TakE IT Personally

PassiveActive

InterestedDisengageD

How persona-driven communications can increase participant engagement

Reevaluating the large- cap equity options in a defined contribution plan

U.S. equities have long played a dominant role in the lineups of most companies’ defined contribution (DC) plans, with large-cap equity strategies being among the most widely used. For many DC plans, large-cap core portfolios are the most common choice for providing participants with broad exposure to large-cap stocks. But many plans also offer large-cap value and large-cap growth strategies that are particularly popular with investors who wish to di-versify their portfolios in ways they believe are likelier to profit from changing markets and economic conditions. As plan sponsors continue to seek out the best invest-

ment options for their participants, it’s wise to look first at the types and number of large-cap options in their DC line-ups, suggests John Galateria, managing director and head of defined contribution investment solutions at J.P. Morgan Asset Management.

Reevaluating your current large-cap optionsOne important reason plan sponsors may want to reevaluate their large-cap fund lineups is to reduce unnecessary clutter and eliminate any potential strategy overlaps and redundancies. While fiduciaries have an obligation to provide plan par-ticipants with sufficient options and appropriate diversifica-

Think OUTSIDEthe Box

SPEAKING INvESTMENTS

J.P. Morgan Asset Management JOURNEY 15

22 JOURNEY Summer 2013

For more information, email Journey_Magazine@jpmorgan.com.

J.P. Morgan Asset Management JOURNEY 1

a Word

In the increasingly complicated world in which we live, J.P. Morgan’s retirement business is committed to using its knowledge and exper-tise to provide products and services that meet the retirement needs of businesses and individuals. We draw on our firm’s rich heritage of innovation and research to help all of our clients and partners—

Staying Focused on What Matters

retirement advisors and consultants, financial advisors, plan sponsors, indi-viduals and policymakers—build and execute successful retirement strategies.

In speaking with other retirement pro-fessionals—in one-on-one meetings with plan sponsors and their advisors and at government and industry forums—I know that many things about today’s challenging environment weigh heavily on our minds. These include concerns about people’s ability to retire securely, fiduciary obligations, new and changing government regulations and the ongoing development of new plan features. Going

forward, these topics will only grow in importance, particularly as baby boom-ers continue to move into the traditional retirement years.

As those of us who help to build finan-cial security in retirement work to man-age and mitigate these issues, it’s impor-tant to not lose sight of the most pressing priority: helping participants achieve bet-ter outcomes. It is also important to re-main focused on the simple components that we know lead to better outcomes:• People need to save more money, con-

sistently and continually, throughout their working careers.

• People need to invest that money wisely, diversifying, rebalancing and managing risk as appropriate.

• People need to have a vision of the future while they accumulate money, as well as a path for the complex tran-sition to life after work.

Within the plan environment, we have a simple framework. We evaluate and measure our work in four critical areas—plan design, investments, communica-tions and administration—against how it helps people reach their retirement goals. In so doing, we maintain our focus on our mission and continue to meet our impor-tant responsibilities to plan participants.

In this issue of Journey magazine, you’ll learn why three successful retire-ment advisors use a “holistic” approach when working with plan sponsors on plan design and administration. You’ll get useful advice from industry veteran Bill McDermott, head of sales and client solutions, J.P. Morgan Retirement Plan Services, on key trends in communica-tions, investments and plan features. And our policy experts will weigh in on legislative and regulatory develop-ments that could affect how we manage retirement plans in the future. At J.P. Morgan, we believe our ability to build strength in your retirement plans and drive better outcomes is a direct re-sult of the knowledge and resources we share with you. We look forward to work-ing with you to build a brighter future for the many people who rely on us to help them achieve a comfortable retirement.

Michael FalconHead of Retirement J.P. Morgan Asset Management

2 JOURNEY Summer 2013

Legislative corner

New DOL Guidance on Target Date FundsThe broad variety of different target date fund (TDF)designs can result in dramatically different individual participant investment experiences, depending on which type of strategy a plan decides to offer. Given this complexity, in February 2013, the U.S. Department of Labor issued tips on TDF selection that provide welcome insight into TDF evaluation.

The eight starting points shown below will help plan fiducia-ries and their advisors begin translating these recommenda-tions into action.

1. Establish a TDF evaluation process. » Outline what the plan hopes to achieve with its TDF and the specifics about how it expects to accomplish these goals

» Understand how these objectives link to the critical components of TDF design and resulting retirement outcomes

2. Establish a process for periodic TDF review.

» Evaluate overall TDF consistency, as well as any participant population shifts that may warrant a new approach

» Consider how cyclical and secular mar-ket shifts may affect a TDF’s returns and if the strategy is built to weather market and participant life changes

3. Understand the TDF’s investments: the allocation in different asset classes, individual investments and how these will change over time.

» Understand the factors that shape TDF investment characteristics and potential outcomes

» Review asset class diversification and glide path end date, particularly in terms of equity exposure and ex-

pected returns and volatility

4. Review the TDF’s fees and investment expenses.

» Understand all costs and fee transpar-ency

» Analyze cost/benefits to identify if an added expense offers significant value

5. Consider if a custom or non-proprietary TDF makes sense for your plan.

» Evaluate the potential benefits and challenges of a custom TDF

» Consider important factors that may make the due diligence process of a cus-tom series of TDFs more difficult (e.g., individual compliance and operational reviews for each third-party provider, in addition to investment reviews)

6. Develop effective employee communications.

» Focus on how participants learn and invest when developing communica-tions and work with a TDF provider that understands real-world behav-iors and retirement plan usage

» Consider how communications may work with other strategies to help drive constructive behavior

7. Take advantage of available TDF information sources.

» Select from a number of third-party services that research and evaluate the TDF marketplace

» Include value-added programs and services offered by many TDF provid-ers that may also be useful

8. Document the process. » Detail the plan’s evaluation criteria » Incorporate ongoing educational pro-grams to keep the investment com-mittee informed about evolving TDF considerations

J.P. Morgan’s newest Retirement Insights article, Translating Department of Labor guidance into action, offers additional steps to help you decide how these eight tips can be applied to your particular plan’s goals and the needs of its participants.

Contact your J.P. Morgan representative to receive a copy of the article and to ask for more information about our industry-leading target date research and evaluation resources.

J.P. Morgan Asset Management JOURNEY 3

Rewriting the RulesDOL regulatory agenda comes into focus

As Congress prepares to debate the difficult subjects of tax reform and deficit reduction, the timing and content of the upcoming legislative agenda are uncertain, as are the possible implications on retirement savings.

From a regulatory standpoint, however, we have a much clearer picture of what is being considered. In its most recent regulatory agenda, the Department of Labor (DOL) outlined several initiatives, including anticipated delivery dates. (It should be noted that the delivery dates are estimates and it is very likely that these dates will slip.)

Three initiatives stand out: participant statements and lifetime income projections; fiduciary definition; and final target date fund disclosure.

1. Participant statements and lifetime income projections. The DOL is pre-paring to field a series of focus groups and surveys on participant statements. The stated purpose of these studies is to determine how statement informa-tion can be presented in a way that helps participants better prepare for retirement. In looking at the sample statements and survey questions, it’s clear that the focus is on how lifetime income projections should be calcu-lated and presented.

Just recently, in May 2013, the DOL’s Office of Management and Budget issued an Advance Notice of Proposed Rulemaking. It is clear from the notice that the DOL is leaning toward a man-date that statements should include some form of lifetime income projec-tion. The DOL has indicated that it will be using this notice to solicit industry comments that specifically address ex-amples of lifetime income projections, calculation examples, how to deal with participants’ “unmet expectations” and a possible safe harbor. The DOL has said that it does not wish to stifle the industry innovation or disturb current best practices in drafting any proposed regulation. We will continue to monitor developments closely and offer comments to the DOL.

2. Fiduciary definition. The DOL first proposed changes to the definition of who is considered an investment advice fiduciary in 2010. After much industry pushback, the proposed regu-lations were withdrawn in September

2011. The DOL has said that it intends to again propose new fiduciary defini-tions, with its most recent agenda an-ticipating a July time frame. It’s highly unlikely we’ll see anything that early, but we should expect something prior to year-end. Indications from the DOL are that the new submission will be accompanied by proposed prohibited transaction exemptions (PTE). If the new proposal tracks the original one, we’ll need to read it carefully in con-junction with the PTE to assess the impact on sponsors, intermediaries and providers.

3. Final target date fund disclosure. In 2010, the DOL proposed new disclo-sure requirements for target date funds (TDFs). The DOL anticipates fi-nalizing these regulations in Novem-ber of this year. In all likelihood, the final rules will require some form of a graphic representation of the TDF glide path, a discussion of when the fund reaches its most conservative asset allocation and some consider-ation of whether the TDF is a “to” or “through” fund and what this means to participant contribution and with-drawal behavior. These final rules will require amendments to both the Qualified Default Investment Alternative and the participant fee disclosure notice.

We will continue to monitor these events and will keep you apprised of any new developments.

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Legislative corner

E x E C U T I v E P E R S P E C T I v E

4 JOURNEY Summer 2013

What is driving the DC industry for-ward today? Plan sponsors are not only realizing that many people won’t be financially ready to retire, they are also recognizing this issue as having a business impact beyond ben-efits. Many Americans are not on target to replace 70% of their pre-retirement income. Particularly for large compa-nies, that has enormous implications for talent management and employee costs.

As a result, we’re seeing more large-plan sponsors examining the outcomes their plan delivers instead of sim-ply focusing on cost and provisions. Instead of asking, “How do I avoid getting sued?” plan sponsors are ask-ing, “What changes will improve in-come replacement rates?” They’re not necessarily looking for innovation, but they are taking a more strategic approach to DC plan design as part

Quest for Better Outcomes Drives Need for DC Change

In a recent interview with Journey, veteran industry ex-ecutive Bill McDermott, managing director, head of sales and client solutions at J.P. Morgan Retirement Plan Services, shares his insights on trends and new di-rections in the defined contribution (DC) industry.

of a broader benefits strategy, and in the process, undertaking change to improve outcomes. We describe it as the “maximum and minimum.” What can you do to have the maximum number of people achieve at least the minimum lev-el of income replacement at retirement?

How do plan sponsors hope to improve participant outcomes? Plan design is the strongest lever a plan sponsor can use, and adjusting even a single plan feature can have impact. For example, typical de-ferral rates have ranged from 1% to 6%, but that level of savings may not gener-ate adequate retirement income for many people. One of the biggest challenges we have in the DC industry is simply getting participants to save more, and there are some simple, yet effective, ways to ac-complish this. For example, some plan sponsors are implementing higher contri-bution defaults and steeper escalations—

while giving participants the option to contribute less through an active election if they choose to do so. Others are looking at a “stretch match,” where an employee has to contribute at a higher rate to re-

ceive the full company contribution.

One trend we’ve ob-served is the growing use of re-enrollment to improve overall partic-ipant asset allocation in the plan. Recently, half of our new clients at J.P. Morgan Retire-

ment Plan Services who work with an advisor engaged in a plan re-enroll-ment. Another handful of clients con-ducted a re-enrollment even without a major catalyst, simply to improve their participants’ asset allocation by placing them in a professionally managed asset allocation solution. Re- enrollment is attractive because of the potential fiduciary protection granted by the Pension Protection Act of 2006 for defaulted assets.

Going forward, you may begin to see companies ask recordkeepers for “guarantees” on achieving better in-come replacement. We’ve just begun building targets as part of our stan-dard offering and actually put fees at risk in order to achieve certain levels of income replacement for the plans we administer.

“It’s more than just offering more services: we want to deliver greater financial fitness as a benefit. ”

J.P. Morgan Asset Management JOURNEY 5

How are advisors and consultants partici-pating in driving outcomes, and is their role different from the past? There used to be a much stronger line differentiat-ing consultants and advisors, but that’s changing. Advisors are moving upmar-ket to serve the billion-dollar plans and are specializing in DC. And the way they’re helping is different, too. In the past, advisors were focused almost ex-clusively on the investment side. Now, sponsors are relying on broader, unbi-ased perspectives to help with decisions concerning design, administration and even governance.

You mentioned investments as an area that can lead to better outcomes. What trends do you see here? Plan sponsors are recog-nizing the need to simplify the plan’s in-vestment menu. We know that too many choices lead to inaction, and the multi-tiered, 20-option menu of the past hasn’t improved participant results. Many plan sponsors are looking at how they can fur-ther streamline their investment lineup. We have seen considerable interest in concepts such as our Core Menu Innova-tion (CMI) approach, which consolidates the entire core menu into three, easy-to-understand investment portfolios: diver-sified stocks, diversified bonds and diver-sified cash alternatives.

Another trend we are seeing is grow-ing interest in nontraditional asset classes such as real estate, commodities and emerging market debt and equities. These asset classes have been used by defined benefit (DB) investment man-agers, and they’re a major reason why DB plans have outperformed DC plans by 100 basis points per year on average.

retirement to 54% on track.1

What can plan sponsors expect in the fu-ture? I think we’ll see plan sponsors being even more aggressive in helping employees reach retirement with ad-equate resources. While few employ-ers are willing to be early adopters of new products, we will see more plan sponsors demanding creative ways to get participants on the right path to retirement income adequacy, and that will stretch the range of practices in DC plan management.

Another new direction is broadening the context for the DC conversation to encompass financial wellness: helping participants manage their retirement savings, as well as credit card debt or a home purchase. We know that par-ticipants need broader help. We’re look-ing for innovative ways to leverage J.P. Morgan’s data and resources to provide

that help. It’s more than just offering more services: we want to deliver greater financial fitness as a benefit. In that light, financial wellness services could be a significant source of value to employees, without adding cost to the plan sponsor. So it’s a perfect way to enhance a company’s benefit program.

Now, DC plan sponsors are saying, “We need to have that exposure,” typically within their target date funds.

What about communications? Can plan sponsors educate participants in a way that will improve outcomes? Frankly, millions of dollars are spent each year on communications that are unsuccess-ful in positively influencing participant behavior. That doesn’t mean the right communications can’t have an effect, and we’re proving that. The key is to engage with participants in a way that resonates with them through its sim-plicity and ability to get them to act. For example, a personalized approach, one that delivers customized messages based on where people are in their lives and how they’ve interacted with the plan in the past, improves engage-ment because it resonates at a personal level. And it is critical to simplify deci-sion-making, helping each participant

focus on the best next step, rather than overwhelming them with choices. Our results from using this approach are compelling. Between March 2005 and September 2012, participants exposed to our Audience of One® experience significantly increased their retirement readiness: from 34% of participants on track to receive 70% of their income at

1 Source: J.P. Morgan Retirement Plan Services Proprietary Research; as of December 31, 2012. TARGET DATE FUNDS: Generally, the asset allocation of each target date fund will change on an annual basis, with the asset allocation becoming more conservative as the fund nears the target retirement date. The target date is the approximate date when investors plan to start withdrawing their money. The principal value of the fund(s) in a plan’s lineup is not guaranteed at any time, including at the time of target date and/or withdrawal.

Active

InterestedDisengageD

6 JOURNEY Summer 2013

Stat life

A Missed OpportunityRe-enrollment may offer plan sponsors fiduciary protection

1 J.P. Morgan Plan Sponsor Study, January 2013.2 J.P. Morgan Retirement Plan Services.

During a re-enrollment, participants are notified that their existing assets and future contributions will be invested in the plan’s QDIA, usually a TDF, on a certain date unless they make a new investment election during a specified period.

P A R T I C I P A N T B E N E F I T S

• Potential for improved asset allocation

• Helps new and existing participants

P L A N S P O N S O R B E N E F I T S

• Potentially stronger protection from investing liability

• Better participant experience

More plan sponsors are considering re-enrollment strategies as part of their plan design, with the option of choosing target date funds (TDFs) as their qualified default investment alternative (QDIA). Yet 56% of plan sponsors are not aware of the potential to receive fiduciary protection for participant assets that are defaulted into their plan’s QDIA during a re-enrollment.1

Re-enrollment safe harbor requirements

Plan sponsors may elect to engage in a re-enrollment when:

• Converting to a new recordkeeper or staying with their current provider

• Making substantial changes to the plan’s investment menu

• Attempting to drive changes in invest-ment asset allocation

Regardless of when it is conducted, re-enrollment may offer plan sponsors fiduciary protection for participant assets defaulted into the plan’s QDIA. Keep in mind the following must be met:

• Initial opt-out notification: Participants must be given the opportunity to make a new investment election before they are defaulted into the plan’s QDIA. The initial notice must be provided at least 30 days before the date of first invest-ment in the QDIA. Reminder notices, although not required, are often sent before the re-enrollment window ends to remind participants to make affirma-tive investment elections.

• Annual notices: Annual notices must be provided every year to remind partici-pants that they were defaulted into the QDIA and that they have the right to direct the investment of their accounts.

Double benefitsBy meeting the requirements, plan sponsors who engage in a re-enrollment strategy not only provide a well-diver-sified investment experience for their participants, they also gain the potential for fiduciary safe harbor protection.

— Visit jpmorganfunds.com/RI to read Understanding Re-enrollment and to learn more about the benefits for participants and plan sponsors.

plansponsorsof plan sponsors

are not aware of the potential to receive fiduciary

protection for participant assets that are defaulted into their plan’s QDIA

during a re-enrollment.1

56%Plan sponsors that conduct a re-enrollment typically see a

40% to 60% (and sometimes higher) adoption rate of

target date funds.2

40-60%

TakE IT Personally

PassiveActive

InterestedDisengageD

How persona-driven communications can increase participant engagement

8 JOURNEY Summer 2013

Is it the way the message is delivered, either “clear and to the point” or “the long and winding road”? Or whether the message strikes an emotional chord and speaks directly to you, versus not connecting with you at all and having nothing to do with your life? “To be truly effective,” says Donn Hess, managing director, head of prod-uct development at J.P. Morgan Retire-ment Plan Services, “retirement com-munications should take a cue from retail marketing. There should be a clear ‘what’s in it for me,’ it has to be easy to take action, and the whole thing must be packaged in a way that resonates emotionally at the individual level.” Hess should know. He is responsible for the research and development of com-munications programs at J.P. Morgan, including the award-winning Audience of One® experience (see sidebar below).

Improving your retirement communicationsHess notes that many companies in diverse industries have long used a broad range of tools to personalize and enhance their communications to pros-pects and/or clients. Online retailers, for example, often use buyer information to create specific offers for products that may appeal to consumers based on cost or convenience. The retirement industry, however, has been slow to adapt to this type of methodology, according to Hess. Instead, plan sponsors have tended to build their communications around certain “umbrella” messages, based on the indus-try’s four main groups of participants: • Thosewhodonotcontributetoaretire-

ment plan (eligible nonparticipants)• Thosewhoneedtoincreasetheircon-

tributions (participants who are not saving enough for retirement)

• Thosewhoneedtoreconsidertheirex-isting investment choices (participants who may need to consider diversifica-tion in their investment decisions)

• Those who need to consider theiroptions as they retire or change jobs, evaluating the implications of withdrawing money, leaving it in the plan or moving it to another qualified vehicle

While these messages are important in reinforcing overall themes, says Hess, they don’t always resonate with

the different types of individuals who belong to each of these broad groups. “The participants who receive your messages are most likely very different from one another,” Hess says, “despite the fact that, on the surface, they all have exactly the same need—to participate, to save, to diversify.”

Participant personasSo, how can plan sponsors create effec-tive communications programs that not only address the different needs of plan participants, but also encourage them to make smarter, better choices that will help them meet their long-range retire-ment goals? “Communications is an art, but there’s still a lot of science behind it,” Hess points out. Plan sponsors can benefit by using communications pro-grams that leverage the vast amounts of data the firm has collected on the investment activities and habits of plan participants. J.P. Morgan gathers information on the age and income of participants from a variety of sources, including its recordkeeping system, plan sponsor data and publicly available databases. It also uses information collected by its call center and website to assess an employee’s level of “engagement” in a plan. The level of engagement is classified in four ways: active (the em-ployee calls or goes online to take some

Audience of One® is J.P. Morgan’s overarching communications experience that asserts that pension plan participants are likelier to save more for their retirement if plan sponsors recognize their unique needs and challenges and communicate with them with this per-spective firmly in mind.

All of J.P. Morgan’s communications strate-gies, systems and reporting have been devel-oped with the goal of better understanding each individual participant’s unique perspec-tive so that plan sponsors can communicate more effectively with their participants.

Ultimately, Audience of One helps participants affirmatively answer the question: “Am I on track to live comfortably through retirement?” Its main tenets include:

• Makeitpersonal– We marry data with our messages to create a relevant, individual experience.

• Makeitsimple – We break messages down into manageable pieces at an eighth-grade reading level.

• Connectthemoneytotheemotion – We focus on the vision of the goal rather than a dollar amount.

• Diagnosebeforeyouprescribe – We start with the individual’s current situation to help drive behavior change.

• Cultivatealong-termrelationship – We pursue an ongoing dialogue with participants and not a onetime experience.

Why is it that certain pieces of communications—whether email, snail mail or web advertising—grab your attention, while others end up deleted or discarded?

J.P. Morgan Asset Management JOURNEY 9

type of action); passive (the employee isn’t involved but uses an automatic election decision); interested (the em-ployee calls or goes online but doesn’t take action); or disengaged (the employ-ee does nothing). J.P. Morgan then maps all of this data onto a multidimensional grid (see the Exhibit above), creating 36 dif-ferent combinations of demographic and behavioral information—called “personas”—that can be used to create more effective and targeted commu-nications. This methodology, the core of J.P. Morgan’s Audience of One com-munications experience, is continually refined through client input and the availability of new data. “Plan participants are the ultimate beneficiaries of this process,” says Hess. “By understanding an individual’s per-sona, it becomes much easier to create messages that can help participants better understand the benefits of plan sponsor recommendations, such as why a participant should consider increasing his or her plan contribution. This is be-cause these messages are created based on the plan participant’s actual behav-ior and characteristics, rather than on a broad set of assumptions.” The development of the personas was an evolving process that began with

three personas and grew to 36. “As we experimented, we learned things,” says Hess. “Income is a great example. We started by setting the mark at national levels. But, as we test-ed the idea, we recognized that median income in Kansas City is very different from median income in New York City, and we needed to adjust our practices accordingly. Engagement was the same way. Initially, we looked at anyone who went online or called. But then we saw very different patterns between those who looked and acted compared with those who only looked.”

Putting personas to workPersonas make a big difference when you consider framing an argument for a participant. Consider, for example, two participants with investment portfo-lios that are underperforming a bench-mark. The call to action for both might be exactly the same: consider a profes-sionally diversified program such as a target date fund or managed account. But the way that would be presented to the person who underperformed due to inattention would be very different than how it would be presented to the person trying to actively manage his or her portfolio and simply falling short. Another way in which persona-driven

communications can increase partici-pant engagement is through messages that feature individual account data or are based on past participant interac-tions. This often includes an estimate of the amount of money needed by participants at retirement to maintain their current lifestyle—their “retire-ment income replacement”—based on their current savings and rate of con-tributions. This measure can be used by participants to help assess whether they are on track to meet their retire-ment goals. Another example of persona-driven communications is in the use of special technology that can personalize certain web content viewed by participants to make it relevant to an individual user, based on implicit or explicit details about the user’s behavior. This content might feature examples and visuals relating directly to the individual’s per-sona, such as whether the participant is single or married with a family. “It’s important to note that the ways in which plan sponsors can communi-cate with plan participants are updated continually, based on the actual experi-ences of participants,” says Hess. “For example, assume you first send a print-ed communication to someone who has been classified as ‘disengaged.’ As a re-sult of that mailing, the individual calls our service center. That call means the person is no longer disengaged. Your next communication will be completely different because it will reflect the fact that the individual’s level of engage-ment has changed and, hence, so has his or her persona.” J.P. Morgan’s use of personas is truly innovative in the retirement industry, notes Hess. “It all boils down to help-ing plan sponsors be better communi-cators. Our goal is to help them more effectively ‘move the needle’ when it comes to encouraging their partici-pants to be more active in their retire-ment plans, thus ensuring more suc-cessful long-term results.”

Active

$115k +Median to $115k

Less than regional median

Over 50

30-49

Under 30

INCOME

ENGAGEMENTAGE

Passive

Interested

Disengaged

Participants are multifaceted when it comes to planning for retirement

ExhIBIT: DEvELOPING PERSONAS

10 JOURNEY Summer 2013

RETIREMENT ADvISOR

ROUNDTABLE

Trends, techniques and tools in

today’s DC business

J.P. Morgan Asset Management JOURNEY 11

For the first time, Journey brings together a group of retirement advisors who work with plans of varying types and sizes to share their experiences and thoughts on the current state of the defined contribution business, as well as their opinions on how advisors can work more effectively with plan sponsors to help participants meet their retirement goals.

Panelists include Barbara Best, cofounder and prin-cipal of Capital Strategies Investment Group, an independent investment and retirement advisory firm based in Oakbrook Terrace, Illinois; Jim O’Shaughnessy, manag-ing partner of Sheridan Road Financial, an investment consulting and advisory firm based in Northbrook, Illinois; and Don Stone, cofounder and chief in-vestment officer of Plan

Sponsor Advisors, a retire-ment benefit consulting

firm based in Chicago.

Journey: What are some of the big shifts you’ve observed in

the last decade or so?

Jim: Many of the changes in our industry over the past ten years have

been in response to the economic cri-sis. It was only when we came out of the recession of 2001 and 2002, and the overall environment started to slowly improve, that many clients began to work proactively to evaluate their over-all plan design. This focus shifted with the introduc-tion of the Pension Protection Act of 2006, which encouraged companies to use auto-enrollment to help plan par-

ticipants save for retirement. It shifted again with the recession of 2008 and 2009 and its aftermath, when compa-nies were consumed by legislative and regulatory issues. We’re now at a time when, assuming the economy continues to grow slowly and we’re not sideswiped by new eco-nomic events, clients are again willing to take a broader, more holistic look at their plans to evaluate how they can bet-ter ensure more successful retirement outcomes for their participants.

Journey: What do you mean by a ho-listic approach? And how does it benefit plan sponsors?

Barbara: While it’s critical for retire-ment advisors to work as they always have with companies to help them choose and monitor the investments in their plans, it’s even more impor-tant to bring new ideas and solutions to the table. This requires a multidisci-plinary, holistic approach that consid-ers a number of elements, including plan design, governance, participant communications and other resources and tools. A holistic approach can be helpful for many reasons. First, many compa-nies are concerned that their employ-ees are reaching retirement age but may not be able to retire if they don’t have sufficient savings. This makes it more important than ever for us to work with them to develop solutions

to help their employees reach their re-tirement goals.

Don: Companies also want to make sure the money they are spending on these benefits is working. As consultants, we can help them track and measure their progress. In many respects, a company needs to treat its retirement plan as if it were its own business, and run it in a

Barbara Best, cofounder and principal of Capital Strategies Investment Group

RETIREMENT ADvISOR

“Plan design is just as important as effective communications to drive participant engagement.”–Barbara

12 JOURNEY Summer 2013

Don Stone is a cofounder and chief invest-ment officer of Plan Sponsor Advisors, a retirement benefit consulting firm based in

Chicago. The firm works with retirement plans ranging in size from family-owned businesses to not-for-profit health-care organizations to Fortune 50 companies. It addresses plan spon-sors’ complete ERISA requirements, including investments, fees, plan administration and design, communication strategy and compliance.

Barbara Best is a cofounder and principal of Capital Strategies Investment Group, an independent investment and

retirement advisory firm based in Oakbrook Terrace, Illinois. The firm provides its institutional clients with unbiased advice on fiduciary issues; plan governance; investments and fees; plan design, administration and operational compliance; participant engagement; and provider management.

way in which it earns some sort of return on the company’s investment.

Jim: I agree with Don’s point, and I believe most employers are trying to figure out how they can use their retire-ment benefits to earn a greater return on their investment, such as recruiting and retaining quality employees. At the same time, I believe most employers re-ally want their employees to achieve a successful retirement. We’re at a time right now when tech-nology has caught up with many of our industry’s needs, giving us greater flex-ibility in plan design, investments and other tools. So we now need to educate our clients on all of these new oppor-tunities and help them to implement positive changes. This will take some effort and perhaps some out-of-the-box thinking, but I believe it will ultimately help plan sponsors improve the success of their retirement plans.

Journey: You describe your role as help-ing plan sponsors drive better outcomes for participants. How well do you think this theme resonates with your clients?

Barbara: I believe our clients have be-gun to truly understand the broader, stra-tegic value we can provide. I also think we have improved how we deliver this value with stronger and more compel-ling analytics that link the investment se-lection and tools to outcome differences, show costs/benefits and illustrate how better participant outcomes are aligned with plan sponsor and committee goals. We are seeing that clients are more receptive to this broader vision, because the extreme pressures of cutting staff and benefits have lessened with the eco-nomic recovery. Now they can refocus on workforce management issues, in-cluding the effectiveness of their benefit programs.

Jim: Over the years, our industry has been very focused on things like perfor-mance and quarterly reviews. It’s our responsibility to help the participants achieve successful outcomes.

Don: Yes, this is a whole new way of thinking for many of them. Many of our clients don’t know how to put the pieces of this jigsaw puzzle together,

and this can lead to some very impor-tant discussions. For example, we’re asking every one of our clients to review their plan’s target date strategy and analyze all aspects of the program, including demographics, to determine whether all of these things are achieving their intended goals. Our conversations on this subject are likely to be very different from what our clients are accustomed to, because they may be forced to think about their re-tirement plan in a broader sense—for example, how it can be used to better manage their workforce. As we said be-fore, employees who are 65 years old are not going to retire if they can’t af-ford to do so. And this can create other issues, such as how companies are go-ing to pay health-care costs for an aging workforce. So a company may have a problem if it can’t help guide its employees into a somewhat secure retirement. That’s a big issue, and it’s one with which a retire-ment advisor can help.

Journey: What do your clients think about re-enrollment? Are they embrac-

Jim O’Shaughnessy is a managing partner of Sheridan Road Financial, an investment consulting and advisory

firm based in Northbrook, Illinois. The firm provides retirement, wealth management and executive benefits services to corporate, not-for-profit and individual clients. Its retirement clients range from start ups to businesses with assets of up to $1 billion or more.

T R e n D s , T e C h n I Q U e s A n D TO O L s I n TO DAY ’s D C B U s I n e s s

MEET ThE PANELISTS

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J.P. Morgan Asset Management JOURNEY 13

ing it? If not, how are you handling any objections?

Don: There are actually two types of re-enrollments. The first is when em-ployers automatically enroll workers in their 401(k) and defer a certain percent-age of their salary into qualified default investment accounts such as target date funds. The second is when plan spon-sors shift employees’ 401(k) dollars out of their current investment allocations and into a default option. This second option is often viewed a bit more warily by plan sponsors because of perceived fiduciary issues. Many of our clients are using these programs, and there are several ways in which we try to make clients feel com-fortable about how they work. First, we highlight certain statistics that illustrate how these options can help employees reach better retirement outcomes.

Barbara: Yes, our experience is similar. It really comes down to projecting out the impact of taking these actions for the client, as well as sharing other client successes. Clients often have that “Aha!” moment in discovering how these kinds of programs can really help participants. Some clients might be concerned that this is overreaching and too paternalistic— they are giving employees a benefit and it is up to the employees to take action. But we all have seen that this just doesn’t happen. Using these auto features is pru-dent. It’s good business if better outcomes help you manage your workforce and have a more “successful” plan.

Journey: So we’ve talked about a num-ber of tools and resources you use to help participants get better outcomes. How are you measuring the results of these programs? And how do you demonstrate the value of these efforts to your clients?

Don: We’ve developed a number of tools, including target date analysis, that can help us complete a gap analysis be-tween the plan’s current situation and

its desired goals. Most of our work tends to focus on those employees who have been with the company for ten years or more, because they are the individuals who probably have most of their assets in their employer’s retirement plan. We take all of this information and go back to the plan sponsor and say, “Here’s what’s happening: You’ve got X% of your people who are on track and the rest aren’t.” We walk them through our analysis using factors such as age and job tenure. The challenge with using vendor tools to do this type of work is that not all of our clients work with the same vendor, and so normalization of analysis is required. For the most part, we conduct proprietary and custom analysis, incorporating relevant vendor and industry data as needed.

Barbara: We have developed our own proprietary tools to formulate the ana-lytics that Don is describing so that we can evaluate the data ourselves. We also partner with our providers who can report other metrics to track improve-ments in participant engagement. But we team together with service providers and help manage the discussion jointly.

Jim: To Barbara’s point, a service pro-vider can provide a wealth of informa-tion these days. It’s important to part-ner with our service providers—the recordkeepers, administrators, invest-ment managers and others—and work together collectively to be able to de-liver better outcomes. I would also say that we’re at a period, finally, where we can get the data from most recordkeepers and either propri-etary or third-party resources so that we are able to deliver meaningful informa-tion to clients that can help them set goals and monitor results.

Journey: If you were able to start from scratch, how would you create a menu of investments for a 401(k) plan?

Jim: I’d like to see us go back in time to when we offered only three or four invest-ment options. But there are now many investment committee members who are ingrained with the attitude that it’s better to have more choices and greater flexibil-ity. So, if a plan sponsor is steadfast in wanting more choices, we suggest that as long as they offer a well-thought-out default option—in most cases, either a custom or professionally managed target date solution—they should use a core menu of three to five options, with a max-imum of seven to eleven funds in total.

Don: In my opinion, when you talk about designing an “ideal” investment menu, you need to first consider how to boost the level of engagement of your employees. One way to accomplish this is by offering a “goal-oriented” menu of

Don Stone, cofounder and chief investment officer of Plan Sponsor Advisors

“Companies also want to make sure the money they are spending on these benefits is working. As consultants, we can help them track and measure their progress.”–Don

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14 JOURNEY Summer 2013

funds designed to meet a person’s basic needs, such as income or growth. For example, why not offer one pro-fessionally managed “income fund” that invests in emerging market debt, Treasury Inflation-Protection Securities, intermediate- and long-term bonds and/or even high yield? In that way, the only choice the participant needs to make is to decide this is the way he or she seeks to earn income. With this approach, there’s no need to offer specialty funds that people don’t understand or use. If I’m a participant, for example, I may not know the differ-ence between value and growth, large from small from mid, and, heaven knows, I don’t know SMID. But I do know my goal is income.

Barbara: We really believe that target date funds or model portfolios are the foundation of every menu. But we also believe that some participants want and need access to broader asset classes to construct their own portfolios. We are concerned about overloading partici-pants with too many choices. But if most participants are using target date funds, we also want to have a strong menu for the other participants. Again, it’s not just about the menu. It’s about having the right plan design and investment tools. This is what drives prudent asset allocation for the vast majority of participants.

Journey: How has participant com-munications changed over the past ten

years or so? And what are some of your recommended best practices?

Don: The biggest change is undoubted-ly the way in which companies use data to communicate with their participants. If you have the data, you can now easily customize your messages, and the pro-cess isn’t as complicated or expensive as it was in the past because of changes in technology. Back in the late 1990s, I was in the recordkeeping business, and I kept ask-ing why no one was using all of this data. Recordkeepers have access to more data than anyone on the planet, and the way in which all of us use this information is going to be an important part of how we communicate with par-ticipants over the next five to ten years.

Barbara: I totally agree, and I’m often surprised at how poorly some people in our industry communicate with partici-pants. I think we shouldn’t always use the word “retirement” in our materials. What we’re really talking about is “free-dom” and “reaching goals.” And making dreams come true. We can’t keep sending letters with lots of text and a half page of footnotes. This isn’t working, and it’s not a good use of anyone’s money or time. Participants need visuals to illustrate a simple, rel-evant message with a call-to-action. Plan design is just as important as ef-fective communications to drive partici-pant engagement. Helping to develop a custom communications and education plan is also a good way for retirement advisors to promote best practices that can be used to drive better participant outcomes. This is also an important as-pect of the strategic value advisors can offer their clients.

Jim: Regrettably, some people view com-

munications as something they simply want to check off their to-do lists. It’s a step they take to protect themselves as fiduciaries to their plans. But it’s some-thing they should take the time to reeval-uate, since good communications can help bring participants one step closer to meeting their retirement goals.

Journey: Is there anything else you’d like to mention that you think plan sponsors should know about the work of retirement advisors?

Barbara: I think all plan sponsors should expect more from their advisors, and that the “new norm” should be the use of an integrated, holistic approach. There are still a lot of advisors who sim-ply show up to deliver a quarterly invest-ment report. But that’s only the begin-ning of what an advisor can do. A plan sponsor’s success as a fiduciary goes well beyond investment excellence, and a re-tirement advisor can play a major role in that success.

Jim: A holistic approach to working with clients is a more effective business model. This is a great time to be in our industry, and to make a difference in the way we help clients assist plan partici-pants. By working together with our cli-ents and our service providers, we can absolutely help participants better meet their retirement goals.

Don: It’s vital that plan sponsors look for an advisor who employs a well-thought-out and prudent process. Not only should your advisor be able to help reduce overall costs and improve performance through design, he or she should have the expertise to understand and effect change in participant behav-ior that can ultimately lead to a more dignified retirement.

Jim O’Shaughnessy, managing partner of Sheridan Road Financial

“Clients are again willing to take a broader, more holistic look at their plans to evaluate how they can better ensure more successful retirement outcomes for their participants.”–Jim

Reevaluating the large- cap equity options in a defined contribution plan

U.S. equities have long played a dominant role in the lineups of most companies’ defined contribution (DC) plans, with large-cap equity strategies being among the most widely used. For many DC plans, large-cap core portfolios are the most common choice for providing participants with broad exposure to large-cap stocks. But many plans also offer large-cap value and large-cap growth strategies that are particularly popular with investors who wish to di-versify their portfolios in ways they believe are likelier to profit from changing markets and economic conditions. As plan sponsors continue to seek out the best invest-

ment options for their participants, it’s wise to look first at the types and number of large-cap options in their DC line-ups, suggests John Galateria, managing director and head of defined contribution investment solutions at J.P. Morgan Asset Management.

Reevaluating your current large-cap optionsOne important reason plan sponsors may want to reevaluate their large-cap fund lineups is to reduce unnecessary clutter and eliminate any potential strategy overlaps and redundancies. While fiduciaries have an obligation to provide plan par-ticipants with sufficient options and appropriate diversifica-

Think OUTSIDEthe Box

SPEAKING INvESTMENTS

J.P. Morgan Asset Management JOURNEY 15

16 JOURNEY Summer 2013

tion, research shows that too many choices can create participant confusion, often resulting in in-ertia.

“Large-cap is the one area of the investment lineup where

we see the greatest redundancy,” says Galateria. “And our research at J.P. Morgan Asset Management supports widespread industry findings that when individuals face too many choices, they often make poor decisions. Plan spon-sors can often provide better choices for their participants, as well as optimize the overall benefits of their core lineup, by providing fewer, more focused funds and/or replacing existing large-cap value funds with other options such as an eq-uity income strategy.” Plan sponsors may also want to prune their fund lineups because certain op-tions may no longer deliver the kind of diversification or investment perfor-mance participants need to meet their long-term retirement goals. As markets change, the investment characteristics of the funds in an invest-ment lineup can also change, which may affect how well a plan is both diversi-fied and suited to the needs of its par-ticipants. And even when a plan offers a three-pronged approach to large-cap —core, value and growth—it may still provide less diversification than desired. “Even in the best-case scenario, when an investor allocates his or her portfo-lio appropriately between value and growth, we see time and time again when we map portfolio returns that the two strategies may not actually offer in-vestors the intended level of diversifica-tion,” says Galateria.

more redundancy in your plan, which can cause greater confusion for your participants.” Time to think outside the Morningstar boxGalateria also notes that fund selec-tion has been greatly influenced by the use of certain investment tools, such as Morningstar’s Style Box methodology, that categorize the style of investment strategies ac-cording to market cap and growth and value factors.

“Many consultants and advisors take the approach that a fund has to be ‘pure’ large-cap value or ‘pure’ large-cap growth to be considered for their plans,” he says. While these tools can provide com-fort to plan sponsors that they are pro-viding their participants with a variety of choices across different styles, this simple categorization has become less applicable with changes in the market and as the correlations of different as-set classes grow closer to each other. For example, Connolly notes that the investment characteristics of certain large-cap funds have ‘drifted’ over the years so that the distinctions between

Adds Mariana Connolly, client portfolio manager for JPMorgan Equity Income Fund, “Investors should also avoid making knee-jerk decisions about strategies that demonstrate high volatility in ex-treme market conditions.” An investment lineup may also need a tune-up when it suffers from what Galateria calls “large-cap equity creep,” or the tendency of some plan sponsors to add one or more new funds without replacing the suboptimal ones. “When selecting funds, there’s often an element of chasing performance, especially when it comes to choosing large-cap growth managers,” says Gala-teria. “The end result is that you often end up with a larger variety of invest-ment strategies, many of which have the same objectives. This can create even

“Investors should also avoid making knee-jerk decisions about strategies that

demonstrate high volatility in extreme market conditions.”—Mariana Connolly

9.5

7.2

-0.3

1.6

-3

-1

1

3

5

7

9

11

Dividend growers and initiators

Dividend payers with no change in dividend

Dividend cutters or eliminators

Non-dividend-paying stocks

Perc

ent

Depend on dividends: Over the last 40 years, the S&P 500’s dividend payers grew significantly faster than non-dividend payers.

source: ned Davis Research, Inc. Returns based on monthly equal-weighted geometric average of total returns of s&P 500 component stocks, with components reconstituted monthly; data as of December 31, 2012. The above chart is shown for illustrative and discussion purposes only. Past performance is no guarantee of future results.

ExhIBIT 1: RETURNS OF S&P 500 DIvIDEND-PAYING STOCKS hAvE SIGNIFICANTLY OUTPERFORMED ThOSE OF NON-DIvIDEND-PAYING STOCKS (JANUARY 31, 1972–DECEMBER 31, 2012)

J.P. Morgan Asset Management JOURNEY 17

“We’ve got to get people away from the conventional box approach to in-vesting,” says Galateria. “The potential benefits of investing in equity in-come are the same benefits inves-tors want and need, especially those individuals saving for their retirement.”

• Consistency of returns/solid track record: Equity income strategies have delivered attractive, consistent results over long periods of time, with div-idend-paying stocks outperforming non-dividend-paying stocks (Exhibit 1). • Relatively low volatility: Equity income strategies tend to weather eco-nomic downturns better than deeper value strategies, while still giving par-ticipants significant participation in the upside during bull markets. Dividend-paying stocks have also historically exhibited lower vola-tility than that of the broader mar-ket (Exhibit 2). • Good portfolio diversifier: Equity income strategies can complement certain investment strategies, such as large-cap growth, and may also be a better choice than other large-cap value funds. They are also gener-ally less volatile than other types of large-cap value funds.

different strategies are no longer as clear-cut as the style boxes may indi-cate. She also notes that many large-cap equity options have become much more highly correlated with each other. “We believe plan sponsors and their advisors need to take a broader view of all of the large-cap options available to them and reevaluate which options are best suited for the needs of their participants,” says Galateria.

Why equity income may belong in your DC planBecause an equity income strategy isn’t categorized by Morningstar as its own distinct investment style, and its invest-ment characteristics may not always position it as “pure” large-cap value, Galateria notes that it is often ignored by many plan sponsors. But typically, equity income strategies fall within the large-cap value style box. Connolly feels strongly that eq-uity income can serve as an attractive large-cap value option, although it may also be used as a unique, stand-alone option with its own differentiating investment characteristics. In her view, there are three primary reasons why plan sponsors should consider equity income strategies:

-2-10123456789

1011

50 10 15 20 25 30Annualized standard deviation

Aver

age

annu

aliz

ed r

etur

n (%

) Dividend growers and initiators(9.5%, 16.2)

All dividend payers(8.8%, 17.0)

Dividend payers with no change(7.2%, 18.4)

Zero dividend stocks(1.6%, 25.6)

Dividend cutters or eliminators(-0.3%, 25.6)

The dividend effect: Dividend-paying and dividend-growing stocks offer strong returns with low volatility.

source: ned Davis Research, Inc.; data as of December 31, 2012. Past performance is no guarantee of future results.

ExhIBIT 2: S&P 500 INDEx: RISK vS. RETURN BASED ON DIvIDEND POLICY (MONThLY DATA, JANUARY 31, 1972–DECEMBER 31, 2012)

“We’ve got to get people

away from the conventional box

approach.” —John Galateria

Investing with Clare Hart

Clare, why has the JPMorgan Equity Income Fund done so well over the past few years? When it comes to picking stocks, qual-ity trumps timing. In selecting a qual-ity company, a lot of times people will say, ‘That’s interesting, but I don’t know what the catalyst is. How are you going to make money on the stock?’ In my mind, when it comes to investing in quality companies, it’s worth the wait for the earnings to come.

Do you think this philosophy will hold up in today’s market?A lot of people may think high-yielding stocks aren’t real ‘cheap’ anymore, es-pecially given the focus of the past few years on these stocks. And that may be true now for certain sectors such as REITs and utilities. But I believe investing in high-quali-

ty, dividend-paying stocks makes more sense now than ever. For one, compa-nies have more cash on hand now than they’ve had in many years, and they’re going to be under increasing pressure to use some, if not lots, of this cash to increase dividends. Second, corporate executives have more of an incentive to return cash to shareholders through div-idends instead of, say, share repurchase plans because they’re getting more of their compensation paid in stock than they have in the past.

What are some of the reasons plan sponsors may wish to consider using your Fund to replace other large-cap options in a core lineup?Unlike many other equity income man-agers who use a variety of approaches —some invest in international mar-kets, some use derivatives, some invest

in fixed income instruments—ours is a ‘style-pure’ U.S. equity strategy. We don’t invest in convertibles, preferred stocks or derivatives. And we don’t invest in international equities like some of our competitors, some of whom invest as much as 30% of their assets overseas.

Why might the Fund appeal to indi-vidual investors?Perhaps most importantly, the JPMorgan Equity Income Fund generated strong returns with much lower volatility than the average large-cap value fund. The Fund’s standard deviation is gener-ally 300-400 basis points below that of the average large-cap value fund (see Exhibit 2 on previous page). This is important because it can help motivate investors to stay the course, since they are less likely to lose money in difficult markets.

Meet the lead portfolio manager of the JPMorgan Equity Income Fund

Clare hart is a managing director at J.P. Morgan Asset Management, where she serves as lead portfolio man-ager of the JPMorgan equity Income Fund, which seeks current income and capital appreciation by investing in the equity securities of high-quality companies. The equity Income Fund select shares ranked in the second percentile of the Morningstar Large Cap Value peer group for the three-year period ending March 31, 2013.1

SPEAKING INvESTMENTS

1 The JPMorgan equity Income Fund select shares was ranked against the following number of funds in the Morningstar Large Cap Value category: for a one-year period, 50th percentile out of 1,203 funds; for a three-year period, 2nd percentile out of 1,045 funds; for a five-year period, 4th percentile out of 927 funds; for a ten-year period, 19th percentile out of 589 funds. Past performance is no guarantee of future results. Rankings are calculated upon total returns. Different share classes may have different rankings.

The price of equity securities may rise or fall because of changes in the broad market or changes in a company’s financial condition, sometimes rapidly or unpredictably. These price movements may result from factors affecting individual companies, sectors or industries selected for the Fund’s portfolio or the securities market as a whole, such as changes in economic or political conditions. equity securities are subject to “stock market risk,” meaning that stock prices in general (or, in particular, the prices of the types of securities in which a fund invests) may decline over short or extended periods of time. When the value of a fund’s securities goes down, an investment in a fund decreases in value.

There is no guarantee that companies that can issue dividends will declare, continue to pay, or increase dividends.

18 JOURNEY Summer 2013

A savings checkpoint provides a valuable guidepost to gauge retirement readiness

20 JOURNEY Summer 2013

Introducing J.P. Morgan’s Guide to Retirementnavigate the ever-changing road to retirement with our informative Guide. It’s your one resource that identifies common myths and seeks to deliver strategies for handling them, backed by powerful charts, facts and stats.

How to put the Guide to work for you:

Tailor your retirement education discussions with plan participants by using information on the changing landscape for entitlements, longevity, inflation and taxes.

share behaviors and practices for saving, investing and spending with plan sponsors.

Inform investment committees of potential strategies for improving diversification and growth potential for portfolios currently overexposed to bonds and cash alternatives in a low-yield environment.

1

2

3

Perhaps the most difficult part is answer-ing the key question: How much money do I need to save for retirement (a life chapter that could last 30-plus years)? The most complete answer will emerge as part of a thorough financial plan, based on family circumstances, hopes and goals, created with the help of a capable, trusted financial advisor. Making such a plan requires a wide range of inputs and assumptions to tai-lor the analysis to reflect an individual’s particular situation. This can be over-whelming. But there is also real value in consulting a basic savings checkpoint, a quick assessment of whether someone is on track to amass adequate savings for retirement.

Rigorous researchTo help individuals answer this question, J.P. Morgan Asset Management used a rigorous, research-based process to de-velop a simple, straightforward savings

checkpoint. “Working with our Global Multi-Asset Management Group, we de-rived an analysis that helps to assess the amount of assets individuals at different ages and different salaries would need to have saved to be on target, assuming they save 5% a year until they retire at age 65,” says Katherine Roy, J.P. Morgan’s chief retirement strategist. Our approach makes reasonable as-sumptions for the most important vari-ables and provides a helpful starting point. Using the savings checkpoint is as easy as matching an individual’s age with current salary and finding the in-tersection of the two—the checkpoint. The individual multiplies the current salary by the checkpoint. The result is the suggested amount that the individu-al should have set aside at this point in order to be on track for retirement. In just a few seconds, individuals can see a guidepost for their retirement savings. Once people have a sense of where they

are, they should revisit our assumptions and reexamine their plan in consultation with their financial advisor. For example, using the savings check-point Exhibit on the following page, you can see that a 40-year-old making $100,000 a year would multiply $100,000 by 2.2 and see that he should have $220,000 in savings in order to be on track to fund his retirement needs. If he were earning $150,000 a year he would multiply his salary by 3.2 and see a cur-rent suggested savings total of $480,000.

Reasonable assumptionsThe checkpoint assumes a continued contribution rate of 5% a year, a 2.5% annual wage growth, a pre-retirement investment return of 7% and a post-retirement return of 5%. It projects a 30-year stretch of retirement that be-gins at age 65. The model also assumes that people will receive Social Security payments in retirement. Because Social Security provides a lower income replacement rate the more one earns, savings re-quirements increase with salary. Given the current level of Social Security pay-ments, an individual earning $50,000 a year at retirement will need to replace at least 30% of pre-retirement income from his or her retirement plan or other assets. But someone earning $150,000 will need to replace at least 61% of pre-retirement

Contemplating retirement is never easy. For a 35-year-old enrolling his son in kindergarten, the prospect of retirement seems like a distant dream. But for a 50-year-old paying her daugh-ter’s college tuition, the subject may be fraught with anxiety.

J.P. Morgan Asset Management JOURNEY 21

AGE: 60SALARY: $200,000RETIREMENT SAvINGS:

Amount Needed: $2,100,000*

Actual Amount Saved: $1,700,000Savings Gap: -$400,000

By using the savings checkpoint, you can see that this individual may fall short of achieving a secure retirement. Raising her annual savings rate by only a modest amount could help close the savings gap.

*based on savings checkpoint for a 60-year-old of 10.4 x $200k salary

Model assumptions:Pre-retirement investment return: (60% S&P 500/40% BarCap Agg)

7.0%

Post-retirement investment return: (30% S&P 500/70% BarCap Agg)

5.0%

Retirement age: 65

Years in retirement: 30

Wage growth rate (inflation): 2.5%

Confidence level represented: 80%

Assumed annual contribution rate: 5%

Visit jpmorganfunds.com/guidetoretirement to access

the Guide and additional resources.

income from his or her assets. A 60-year-old earning $200,000 a year who has set aside $1.7 million for her retirement may feel relatively secure. But as you can see in the Exhibit, J.P. Morgan’s retirement savings checkpoint shows that this amount may be a little short, suggesting a current savings port-folio of roughly $2.1 million. Raising the annual savings rate by only a modest amount for the next six years of planned employment could bring our saver safe-ly to where she needs to be. Roy says the checkpoint is “a good rule of thumb to use as a guidepost for retirement of whether investment assets set aside for retirement are on track or keeping pace with where they need to be longer term to replace their current standard of living.” Many variables will impact some-one’s required retirement savings. Sav-ing more and retiring later will improve the picture, while a late savings start can be difficult to overcome. Asset al-location choices and investment returns can make a tremendous difference, for better or worse. A basic retirement sav-ings checkpoint does not try to precisely account for all of these variables. But what it does do is give a quick yet per-sonalized answer to that often uncom-fortable question: “Am I on track with my retirement savings?”

This chart is for illustrative purposes only and must not be used, or relied upon, to make investment decisions. J.P. Morgan’s model is based on J.P. Morgan Asset Management’s (JPMAM) proprietary long-term capital markets assumptions (10 – 15 years). The resulting projections include only the benchmark return associated with the portfolio and do not include alpha from the underlying product strategies within each asset class. Post-retirement volatility assumption is 6.3%. salary replacement rates are derived from Aon Consulting’s 2008 Replacement Ratio study data, which assumes individuals receive social security payments in retirement. Calculations assume an individual earning $50,000 at retirement will need to replace at least 30% of their pre-retirement income; individuals earning $75,000 will need to replace at least 37%; individuals earning $100,000 will need to replace at least 45%; individuals earning $150,000 will need to replace at least 61%; individuals earning $200,000 will need to replace at least 69%; individuals earning $250,000 will need to replace at least 74%; individuals earning $300,000 will need to replace at least 79%; and those earning $400,000 will need to replace 87%. Allocations, assumptions and expected returns are not meant to represent JPMAM performance. Given the complex risk/reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. References to future returns for either asset allocation strategies or asset classes are not promises or even estimates of actual returns a client portfolio may achieve.

$50,000 $75,000 $100,000 $150,000 $200,000 $250,000 $300,000 $400,000

Check-point(x Current salary)

Check-point(x Current salary)

Check-point(x Current salary)

Check-point(x Current salary)

Check-point(x Current salary)

Check-point(x Current salary)

Check-point(x Current salary)

Check-point(x Current salary)

30 0.4 0.6 1.0 1.7 2.0 2.2 2.4 2.835 0.7 1.1 1.5 2.3 2.8 3.0 3.3 3.740 1.2 1.6 2.2 3.2 3.7 4.0 4.3 4.945 1.7 2.3 3.0 4.2 4.9 5.3 5.7 6.350 2.4 3.1 3.9 5.5 6.3 6.8 7.3 8.155 3.3 4.2 5.2 7.2 8.1 8.8 9.4 10.460 4.4 5.5 6.7 9.2 10.4 11.2 11.9 13.165 5.7 7.1 8.6 11.6 13.2 14.1 15.0 16.6

ExhIBIT: RETIREMENT SAvINGS ChECKPOINTS

1

Guide to Retirement2013 Edition

RETIREMENTINSIGHTS

22 JOURNEY Summer 2013

To select a target date strategy that can best meet participants’ needs, plan sponsors need to understand the realities of how their participants actually behave and interact with their 401(k) plans.

Reality Sh w

J.P. Morgan Asset Management JOURNEY 23

In developing successful target date strategies, investment managers make a series of as-sumptions about participant

behavior, including contribution rates, withdrawal amounts and loan activity, all of which play an important role in creating a reasonable glide path.

But what happens when these as-sumptions turn out to be optimistic—and sometimes very optimistic—when it comes to actual participant choices and actions? What impact do the reali-ties of participant behavior have on the results generated by the design of the target date strategy?

Ready! Fire! Aim?First released in 2007 and recently up-dated with new findings, J.P. Morgan’s landmark “Ready! Fire! Aim?” series examines the effectiveness of various target date strategies in helping 401(k) participants meet their retirement funding needs.

In the series’ latest study, released in late 2012, the firm’s research confirms earlier findings that actual participant behavior is consistently much more varied and volatile than many standard industry assumptions on participant investment and saving patterns. In particular, it illustrates how many par-ticipants, when left to their own devices, continue to exhibit consistently “subop-timal” saving and withdrawal behaviors that may put them at risk of failing to meet their retirement savings goals.

“These recent findings, which focus on the research we conducted from 2009 to 2011, support the conclusions we’ve drawn using a decade’s worth of data,” says Daniel Oldroyd, executive director, portfolio manager, Smart-Retirement Funds. “This information not only helps us to better inform the design of our target date fund glide path, it also enables us to analyze how the construction of other target date

portfolios compares with the actions of real-world plan participants.”

how 401(k) withdrawals affect target date resultsAlthough many industry profession-als assume that participants will not borrow against their 401(k) holdings, research shows that 19% of partici-pants actually do take out loans, which total, on average, 22% of their account balances (Exhibit 1). This means that a sizable portion of participant assets is not actually invested in any given year, which is a significant drag on long-term participant savings.

Industry projections also estimate that participants will withdraw a steady and consistent 4% to 5% a year in retirement. Research tells a different story, however. The average participant withdraws more than 20% per year at or soon after retirement. And just three years after retirement, a mere 17% of participants remain in the plan, defy-ing industry expectations that most participants will stay invested for many years after retirement.

how to make automatic enrollment even betterEven the most carefully constructed target date strategy can fail to deliver

SALARY RAISES

LOANS

CONTRIBUTIONS

PRE-RETIREMENT DISTRIBUTIONS

POST-RETIREMENTDISTRIBUTIONS

REMAIN IN ThE PLAN ThREE YEARS AFTER RETIREMENT

Participants receive raises every year. On average, participants receive raises every year.

Rates start at 6% and increase year by year, reaching 10% of salary by age 35.

On average, contribution rates start at 5% and increase slowly, reaching 8% of salary by age 44 and 10% by age 59.

Participants do not borrow. 19% of participants borrow, on average, 22% of their account balances.

Premature distributions do not happen. 12% of participants over the age of 591/2 withdraw, on average, 18% of their assets.

Participants withdraw a consistent 4%–5% annually.

The average participant withdraws more than 20% per year at or soon after retirement.

Most participants stay invested. Only 17% of participants remain in the plan.

ExhIBIT 1: COMMON INDUSTRY PARTICIPANT BEhAvIOR ASSUMPTIONS COMPARED TO ACTUAL INvESTMENT PATTERNS

Source: AllianceBernstein, “Target-date Retirement Funds: A Blueprint for Effective Portfolio Construction,” October 2005; J.P. Morgan Retirement Plan Services participant database, 2009-2011.

Simplified Industry Assumptions Real-world Behaviors (2009-2011 Trends) Compared to Prior Findings

vS.

24 JOURNEY Summer 2013

if participants do not save enough during their working years. One finding of the new report that vali-dates this point concerns the impact of increased adoption of automatic enrollment.

Automatic enrollment is a positive development in many ways, because it encourages saving by employees who might otherwise neglect to ‘opt in’ to a 401(k). Across a wide range of compa-nies and industries, the practice has significantly increased the rate of plan participation.

The problem arises when automatic enrollment at a standard initial contri-bution rate (such as 3% or 4%) is not accompanied by automatic contribu-tion escalation. This results in most auto-enrolled participants saving at that initial rate for many years.

The result? Because many com-panies do not couple automatic contribution escalation with their automatic enrollment programs, auto-enrolled participants are contributing considerably less than other 401(k) participants—an average of 4% of their salary versus an average of 7.7% for those who enroll on their own (Exhibit 2).

The key decision: choosing the ap-propriate asset allocationThese findings on realistic participant behavior, along with the impact of increased adoption of automatic enroll-ment, provide vital information for plan sponsors as they wrestle with an important issue: the appropriate asset allocation strategy to maximize the number of participants able to reach their retirement goals.

As history has shown, maintain-ing outsized equity allocations in the years leading up to retirement subjects many participants to unnecessary and dangerous risks at a time when they are most likely to withdraw their assets. A dramatic case in point are those 401(k) participants who cashed out their bal-ances after markets cratered in the most recent financial crisis of 2008-2009.

At the same time, undersized equity allocations can also be problematic. “It’s risky for target date funds to rely heav-ily on equities, but long-term returns can also be curtailed if the strategies are too conservative,” says Oldroyd.

“We think the solution is to increase risk efficiency through broader asset class diversification, such as incorporat-ing high yield, direct real estate, emerg-

ing market equity and debt and other asset classes,” Oldroyd says. “We believe this will lower expected volatility with-out sacrificing return potential.”

A roadmap for retirement successThe latest issue of J.P. Morgan’s “Ready! Fire! Aim?” highlights the key areas that plan sponsors should consider when selecting a target date solution, taking careful note of misconceptions about contribution rates and loans and a lack of understanding of participants’ behavior after retirement. Setting au-tomatic enrollment contribution rates higher and implementing automatic contribution escalation programs can also help to better position participants for retirement success.

Says Anne Lester, managing director, J.P. Morgan Asset Management Global Multi-Asset Group, “Plan sponsors run the risk of falling short in best position-ing participants to achieve retirement security if they aren’t assessing whether their target date portfolio design stands up to the stresses of real-life saving, withdrawing and investing.”

Visit jpmorganfunds.com/RI to read the complete

"Ready! Fire! Aim? 2012" and watch a video

on the latest findings.

ExhIBIT 2: CONTRIBUTION TRENDS

2006 2008 2011

source: J.P.Morgan Retirement Plan services participant database, 2011.

Average Contribution Rate Auto-enrolled Participants

(3.5% of population)

Non-auto-enrolled Participants

(96.5% of population)

7.4%

4.0%

7.7%7.9% 8.0%

J.P. M

orga

n 20

12 P

artic

ipan

t Att

itudi

nal S

urve

y

Retirement plans by the numbers

Approximately 75%

of participants want some

sort of financial advice.

Four in ten participants believe they only need

50-74% of their pre-retirement

income to live comfortably in retirement.

Eight in ten participants consider it important for their employer to offer target date funds.

When it comes to

retirement decisions,

50% of participants

would like to just hit

an easy

button.

More than 50% of participants realize they do not have the knowledge and talent to plan for their own retirement.

33% OF PARTICIPANTS SUGGEST ThAT FINANCIAL PRESSURES

CONSUME ThEM AT WORK OFTEN, IF NOT ALL , OF ThE TIME .

Only a quarter of participants are highly

confident they know how much to contribute to their

retirement plan to be financially on track for retirement.

J.P. Morgan Asset Management 270 Park Avenue new York, nY 10017-2014

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

Contact JPMorgan Distribution Services at 800-338-4345 for a fund prospectus. You can also visit us at www.jpmorganfunds.com. Investors should carefully consider the investment objectives, risks, charges and expenses of the mutual funds before investing. The prospectus contains this and other information about the mutual fund. Read the prospectus carefully before investing.

This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for investment, accounting, legal or tax advice.Diversification does not assure a profit nor does it protect against loss of principal. Diversification among investment options and asset classes may help to reduce overall volatility. Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than original cost. Past performance is no guarantee of future results.Certain underlying Funds of the Target Date Funds may have unique risks associated with investments in foreign/emerging market securities, and/or fixed income instruments. International investing involves increased risk and volatility due to currency exchange rate changes, political, social or economic instability, and accounting or other financial standards differences. Fixed income securities generally decline in price when interest rates rise. Real estate funds may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector, including but not limited to, declines in the value of real estate, risk related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by the borrower. The fund may invest in futures contracts and other derivatives. This may make the Fund more volatile. The gross expense ratio of the fund includes the estimated fees and expenses of the underlying funds.J.P. Morgan Asset Management is the marketing name for the investment management businesses of JPMorgan Chase & Co. and its affiliates worldwide. Those businesses include, but are not limited to JP Morgan Chase Bank, N.A., J.P. Morgan Investment Management Inc., Security Capital Research and Management Incorporated and J.P. Morgan Alternative Asset Management, Inc.J.P. Morgan Funds are distributed by J.P. Morgan Distribution Services, Inc. (JPMDS) and offered by J.P. Morgan Institutional Investments, Inc. (JPMII); both affiliates of JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees for providing various services to the funds. JPMDS and JPMII are both members of FINRA/SIPC.IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.