target date compass jp morgan white paper

Analysis of the J.P. Morgan

Target Date CompassSM

A W H I T E P A P E R B Y

Fred Reish & Bruce Ashton

Drinker Biddle & Reath LLP

1800 Century Park East, Suite 1400

Los Angeles, California 90067

(310) 203-4000

[email protected] / [email protected]

www.drinkerbiddle.com

The research contained in this white paper was compiled by Drinker Biddle & Reath LLP. The description of the Target Date CompassSM process set forth in this white

paper was based on information provided by J.P. Morgan Asset Management (“J.P. Morgan”). J.P. Morgan is a subsidiary of JPMorgan Chase & Co. and is not aWliated

with Drinker Biddle & Reath LLP. Drinker Biddle & Reath LLP is solely responsible for the information and content of this white paper. J.P. Morgan is not responsible

for conclusions of law set forth in this white paper. The research referred to in this white paper is current as of February 1, 2014. The reader should independently

determine whether the research set forth in this white paper is current after that date.

I I ANALYSIS OF THE J.P. MORGAN TARGET DATE COMPASS SM

Any and all information set forth herein and pertaining to the Target Date CompassSM and all

related technology, documentation and know-how (“information”) is proprietary to JPMorgan

Chase Bank, N.A. (“JPM”).

U.S. Patents No. 8,255,308; 8,386,361 and patent(s) pending.

Fred Reish and Bruce Ashton are Partners in the Employee Benefits & Executive Compensation

Practice Group of Drinker Biddle & Reath LLP. They have been compensated by J.P. Morgan Asset

Management to provide advice and to give an opinion regarding the Target Date CompassSM.

The law and Drinker Biddle’s analysis contained in this white paper are general in nature and

do not constitute a legal opinion or legal advice that may be relied on by third parties. Readers

should consult their own legal counsel for information on how these issues apply to their

individual circumstances. Further, the law and analysis in this white paper are current as of

February 2014. Changes may have occurred in the law since this paper was drafted. As a result,

readers may want to consult with their legal advisors to determine if there have been any

relevant developments since then.

Important Disclosure

The information within has been obtained from sources deemed to be reliable. The content

within the Target Date Compass is for informational purposes only and should not be construed

as investment advice.

The Target Date Compass is designed to provide a framework for identifying and evaluating

target date funds (TDF) that align most closely with a plan’s overall goals and its participants’

needs. The goal of the tool is to help plan sponsors assess their retirement plans’ desired

level of equity exposure for participants at the target date and asset class diversification—

two important characteristics of TDFs. The framework also encourages plan sponsors to

understand, and consider, the characteristics and behaviors of their workforce as part of the

target date selection process—factors that the Department of Labor (DOL) has also stated

fiduciaries should take into account when assessing the selection of a TDF and in designing

the investment menu for a defined contribution plan. The Target Date Compass is meant to

help in the due diligence process when evaluating TDFs for a plan. The Target Date Compass is

not meant to replace the fiduciary responsibilities that are inherent with all plan sponsors. If

the Target Date Compass is used, it should be used as part of a comprehensive due diligence

process. Exclusive reliance on the Target Date Compass to make investment decisions is not

recommended. The ultimate responsibility for choosing an investment option is that of the plan

sponsor. J.P. Morgan takes no responsibility for the final investment decision. It is important to

note: The intention of the tool is to help highlight the diferences between target date funds in

order to make informed comparisons.

BY FRED REISH & BRUCE ASHTON I I I

T A B L E O F C O N T E N T S

2Introduction

3 Summary

6 Description of the Target Date CompassSM

10Analysis and discussion

17 Conclusion

18 About the authors

20 Endnotes

IV ANALYSIS OF THE J.P. MORGAN TARGET DATE COMPASS SM

I n t r o d u c t i o n

BY FRED REISH & BRUCE ASHTON 2

I n r e c e n t y e a r s , t h e p r e v a l e n c e o f t a r g e t d a t e f u n d s ( T D F s ) in 401(k) plans

has more than doubled. According to an Investment Company Institute report released in December 2013, 41% of

401(k) participants held TDFs at the end of 2012 versus 19% as recently as 2006.1

This growth—as well as significant government scrutiny—has

changed the TDF landscape. It has heightened the need for

prudent decisions by plan sponsors in selecting TDFs and,

equally as important, in revisiting decisions they made only a

few years ago.

Recent regulatory scrutiny and guidance have largely been

helpful in clarifying issues that fiduciaries should consider.

They have included:

A joint Department of Labor (DOL)/Securities and Exchange

Commission (SEC) public hearing on TDFs in June 2009

A DOL/SEC investor bulletin in May 20102

Proposed amendments related to TDFs to the DOL

regulations on participant disclosures and qualified default

investment alternatives (QDIAs)3

Proposed amendments to SEC rules on investment company

advertising related to TDFs4

The DOL’s February 2013 bulletin, “Tips for ERISA Plan

Fiduciaries”5

The DOL’s announced intention to finalize its 2010 proposals

on TDF disclosure6

Fiduciaries have more guidance on what information to review in

selecting TDFs, but this greater clarity has brought with it a need

to review earlier decisions. Half a dozen years ago, fiduciaries

might have felt comfortable choosing a TDF family ofered by a

reputable provider. This is no longer the case.

To assist plan sponsors with the task of selecting (or replacing)

TDFs, this white paper evaluates the J.P. Morgan Target Date

CompassSM (“Target Date Compass”), a program designed to

help 401(k) fiduciaries satisfy their duties under the Employee

Retirement Income Security Act of 1974 (“ERISA”) for the selection

of TDFs. Our conclusion is that the Target Date Compass:

Provides a valuable—and unique—aid for assessing TDFs

available in the marketplace

Ofers material assistance to fiduciaries in fulfilling their

legal responsibilities under ERISA for the selection and

monitoring of TDFs

As context for our evaluation, we discuss the responsibilities

of fiduciaries (such as plan committee members and company

oWcers with discretion over plan investments) in managing

plan assets. Our focus is on the ERISA duties to:

Act for the exclusive purpose of providing benefits to

participants and beneficiaries

Engage in a prudent process to fulfill their duties, including the

obligation to evaluate the needs of the plan and its participants

This white paper analyzes these responsibilities for

participant-directed 401(k) plans and explains how the Target

Date Compass helps fiduciaries meet or exceed their legal

obligations by giving them a mechanism to: (1) prudently

evaluate the suitability of the TDF families available in the

marketplace, both as potential QDIAs and as investments to

be aWrmatively selected by participants; and (2) assist the

fiduciaries in prudently selecting a particular TDF family that

meets the needs of the plan and its participants.

3 ANALYSIS OF THE J.P. MORGAN TARGET DATE COMPASS SM

Summary

One solution is target date funds (TDFs). TDFs ofer what

might be referred to as the “snapshot and moving picture”

approach to investing. TDFs are typically “funds of funds”

(with the underlying funds representing distinct asset classes

and investment styles, collectively called “asset classes”

in this paper) that gradually adjust their asset allocations

along a “glide path.” That is, with the passage of time, TDFs

become more conservative (i.e., hold fewer investments in

equities). The snapshot is the asset allocation at a given point

in time; the moving picture is the changing asset allocation as

participants age. In this sense, TDFs address both aspects of

the diversification conundrum.

This creates a challenge for plan sponsors, because not all

TDFs are alike, and plan sponsors have a responsibility under

ERISA to select TDFs that are prudent for their plan. The

snapshot that is clear for one plan may be out of focus for

another; the moving picture may run too long or too short for

a specific group of participants.

E R I S A c o n t e m p l a t e s t h a t p a r t i c i p a n t s will invest in a well-diversified way.7 Unfortunately,

many participants lack the skill, time or inclination to create appropriate portfolios for long-term investing

and to periodically adjust those portfolios to fit changing circumstances. This fact might be referred to as the

“diversification conundrum” because it creates risk for plan sponsors and fiduciaries. As a result, plan sponsors

and the retirement industry have developed solutions to achieve better outcomes for employees and to reduce the

risks faced by fiduciaries.

The Target Date CompassSM is designed to help plan sponsors

understand the snapshot and the moving picture in order to

narrow the large number of TDF families to a group that fits

the needs of the plan and its participants. Target Date Compass

looks at the number of asset classes available in a TDF and

the equity exposure at retirement. We describe this in more

detail later, but the point here is that, by giving plan sponsors

a sophisticated view of the TDF’s investment structure, the

Target Date Compass facilitates and documents the plan

sponsors’ decision about which TDF family to select.

The Pension Protection Act of 2006 (“PPA”) helped spur

the search for diversification solutions. The PPA provided

an incentive to 401(k) plan sponsors to automatically enroll

employees by limiting the liability of fiduciaries for investing

automatically enrolled participant accounts. Specifically,

fiduciaries are relieved of liability for the investment of the

accounts of defaulting participants so long as the accounts

are invested in Qualified Default Investment Alternatives


(QDIAs). In its QDIA regulation, the DOL lists TDFs as one form

of investment that may be used as a QDIA. Even though the

fiduciaries are relieved of responsibility for putting a defaulting

participant in a TDF, they still have the responsibility for

prudently selecting and monitoring the TDF.

Since passage of the PPA, the number of TDF families has

grown dramatically. The 401(k) dollars invested in TDFs have

grown almost eight-fold in roughly eight years. According to

an Investment Company Institute study, plan assets invested

in TDFs grew from about $51 billion in 2005 to slightly less

than $400 billion at the end of the third quarter of 2013.8 The

increase in the number of TDFs, the significant variation in

their approaches, the explosive growth in investment in them

and changes in the regulatory environment are all factors that

have increased the diWculty and importance of the fiduciary’s

job in selecting a suite of TDFs for use as a QDIA, as well as for

participants who aWrmatively decide to invest in those vehicles.

From a legal perspective, fiduciaries are charged with carrying

out their duties as would a person “familiar with such matters”

(i.e., familiar with the universe of TDFs and their diferences)

and familiar with then-prevailing circumstances.9 Therefore,

the manner in which fiduciaries go about their job is not

merely academic; while fiduciaries are not liable in connection

with the investment of a defaulted participant’s account in

a QDIA, they remain responsible—and therefore potentially

liable—for the proper selection and monitoring of the TDF

family that is used as the QDIA (as well as for participants

who direct their investments into the TDFs). A TDF family

that may be appropriate for one plan’s participants may be

inappropriate for the participants of another plan. In selecting

a TDF suite, fiduciaries must consider the needs of their

participants and select a TDF family that is appropriate for

those needs.

Given the variation among TDFs and the importance of the

selection, there have been a number of eforts to clarify the

information that fiduciaries should consider in selecting a

TDF family. These culminated in a piece issued by the DOL in

February 2013, called “Target Date Funds – Tips for ERISA Plan

Fiduciaries.”10 As the DOL pointed out:

“ [the] considerable diferences among TDFs ofered by

diferent providers, even among TDFs with the same

target date. For example TDFs may have diferent

S U M M A R Y

investment strategies, glide paths, and investment-

related fees. Because these diferences can significantly

afect the way a TDF performs, it is important that

fiduciaries understand these diferences when selecting a

TDF as an investment option for their plan.”

In the proposed amendments to the participant disclosure

regulation and the QDIA regulation, the DOL used almost

identical wording to describe the information that fiduciaries

need to provide to participants:

“ An explanation of the alternative’s asset allocation,

how the asset allocation will change over time, and the

point in time when the alternative will reach its most

conservative asset allocation….”

* * * *

“ If the alternative is named, or otherwise described, with

reference to a particular date (e.g., a target date), an

explanation of the age group for whom the alternative is

designed, the relevance of the date, and any assumptions

about a participant’s or beneficiary’s contribution and

withdrawal intentions on or after such date….”

The “tips” ofered by the DOL are intended to help fiduciaries

make a prudent selection; and, while directed at participant

disclosures, the proposed regulations suggest areas that

fiduciaries should consider. These are all helpful, but they do

nothing to simplify the job of assessing TDF variables. The Target

Date Compass is intended to do just that.

In the February 2013 bulletin, the DOL pointed out that

fiduciaries need to take various steps, including the following:

Establish a process for comparing and selecting TDFs. The

DOL indicates that fiduciaries must engage in an objective

process to obtain information needed to evaluate the

prudence of their decision

Establish a process for the periodic review of selected TDFs.

The DOL points out that, at a minimum, the review process

should include an examination of whether there have been

changes in the information reviewed at the time of selection

Understand the fund’s investments including the allocation

in diferent asset classes (stocks, bonds, cash), individual

investments and how they change over time. Among other

things, the DOL says fiduciaries must make sure they

understand the fund’s glide path


Take advantage of available sources of information to

evaluate the TDF and recommendations they received

regarding the TDF selection

To assist plan fiduciaries in satisfying their obligations

to prudently select and monitor TDFs, J.P. Morgan Asset

Management (“J.P. Morgan”) has developed the Target Date

Compass. By using this tool, fiduciaries are following the

tips outlined in the DOL Bulletin: establishing a comparison

process, understanding the allocation in diferent asset classes

and how they change over time, and taking advantage of an

available source of information. The Target Date Compass is

more than just an information source, however, in that it is a

process that can be used by fiduciaries and their advisors in:

Clarifying plan goals and identifying the behaviors and

needs of their participants

Relating these needs and goals to a particular type of target

date fund philosophy

Assessing and comparing the diferences among the wide

range of TDF families available in the market

Narrowing the number of TDFs to a smaller list that is more

closely aligned with the particular needs and goals of the

plan and its participants

Documenting the process they used in their analysis

Using the Target Date Compass, fiduciaries, along with their

advisors, are able to follow the steps outlined by the DOL and

are able to select a particular suite of TDFs that is appropriate

for the needs of the plan and its participants.

The Target Date CompassSM involves four steps:

Step One

Focuses the fiduciaries on the plan’s optimal level of exposure

to equity investments as of the targeted retirement date. To

accomplish that, the Target Date Compass materials pose a

series of questions to fiduciaries that are designed to elicit

their beliefs and philosophies regarding the needs of their

plan; the behavior of participants relative to savings, deferrals,

loans and distributions; and their perceived risk tolerance.

Step Two

Involves a process whereby the fiduciaries and their advisors

assess the plan’s optimal level of asset diversification. This is

accomplished through questions relating to the fiduciaries’

beliefs about: (1) the extent to which heightened diversification

increases risk adjusted returns; and (2) the appropriateness of

including investments in asset classes that are not otherwise

included in their plan.

Step Three

Involves determining the plan’s “Target Date TypeSM” by

compiling the answers to the questions and plotting the plan

on the Target Date Compass’ four-quadrant grid.

Step Four

Involves the fiduciaries and their advisors analyzing and

comparing the specific families of TDFs in the quadrant on the

Target Date Compass in which the plan is placed, based on

the plan goals as identified by the fiduciaries. The fiduciaries

and advisors can then determine which TDF families are most

appropriate to meet the needs of the plan and its participants.

Once those four steps are completed, the fiduciaries may

engage, along with their advisors, in a quantitative and

qualitative analysis of the TDFs within the applicable quadrant

of the Target Date Compass to select an appropriate TDF family

for the plan.

Our conclusion is that the Target Date Compass program

provides material assistance to plan fiduciaries in fulfilling

their legal responsibilities and providing a way for them to

engage in a procedurally and substantively prudent process

in connection with their selection of the QDIA for their plan. It

also satisfies ERISA’s requirement to document the selection

and monitoring process.11 As a result, the Target Date Compass

increases the likelihood that plan fiduciaries will meet or

exceed their obligations under ERISA.

S U M M A R Y


The Target Date Compass is a program developed by J.P. Morgan

that is designed to assist 401(k) fiduciaries in analyzing the

needs of their plans and participants and providing a process

for those fiduciaries to comply with ERISA’s legal requirements

in the selection of TDFs for participant-directed plans, such as

401(k) plans. This issue is particularly important because of the

obligation of fiduciaries to engage in a prudent process when

selecting and monitoring the investment(s) to be ofered under

the plan or used as the plan’s QDIA under the DOL’s fiduciary

safe harbor regulation.12 It is important as well because of the

rapid growth in the popularity of TDFs,13 and the relatively

recent release of guidance by the DOL on steps fiduciaries can

take for the prudent selection and monitoring of TDFs.14

While the process for the prudent selection of TDFs is similar

in some ways to the process generally used for mutual funds,

there are also material diferences. For example, while

ordinary mutual funds maintain their investment strategy/

T h i s d e s c r i p t i o n o f t h e Ta r g e t D a t e C o m p a s s S M is based on our review of the materials

provided to us by J.P. Morgan.

asset allocations over time, a TDF gradually adjusts its asset

allocation along a “glide path,” such that the TDF holds a lower

percentage of relatively volatile equity investments as time

passes. Generally speaking, as a TDF approaches its “target

date” (that is, the participants’ anticipated retirement date),

its focus shifts away from a growth strategy toward a more

stable, less volatile strategy, and the TDF reduces its exposure

to equity investments. There are currently many line-ups

(sometimes called “suites” or “families”) of TDFs available to

the market. The glide paths and asset allocation strategies

of those families of TDFs vary widely. Consequently, selection

of an appropriate suite of TDFs for use as a plan’s QDIA or

as a participant-directed investment presents a significant

challenge to fiduciaries.

The Target Date Compass is designed to provide a process

to be engaged in by plan fiduciaries (and the advisors with

whom they consult) to help them: (1) clarify plan goals and

Description of the Target Date CompassSM


identify the behaviors and needs of their participants; (2)

relate these needs and goals to a particular type of target

date fund philosophy; (3) assess and compare the diferences

among the wide range of TDF families available in the market;

and (4) narrow the number of TDFs to a smaller list that is

more closely aligned with the particular needs and goals of

the plan and its participants. Then, having used the Target

Date Compass, the fiduciaries and their advisors, engaging in

traditional quantitative and qualitative investment analysis

of those TDFs whose approaches most closely align with

the fiduciaries’ preferences, are better prepared to select a

particular suite of TDFs.

The Target Date Compass was created based on the premise

that the manner in which a TDF is designed, and the

implementation of that design, can significantly impact the

TDF’s level of risk and return and the degree of its volatility.

Consequently, the Target Date Compass questionnaire focuses

on assisting fiduciaries and their advisors in assessing the level

of volatility that is most appropriate for the plan.

According to J.P. Morgan’s research, two factors have a

significant impact on the extent of a TDF’s potential volatility

and its relative ability to produce investment returns

over time: (1) the fund’s exposure to equity investments

at the participants’ retirement dates; and (2) the level of

diversification of the fund’s assets. Considered together, these

two factors reflect the trade-of between the long-term growth

of participant account balances and the relative volatility of

those participant balances, particularly within 5–10 years

before or immediately after the retirement date.

The Target Date Compass consists of four steps:

Step One includes a series of questions (to be answered by

the plan fiduciaries) designed to ascertain a plan’s preferred

level of exposure to equity investments at the participants’

retirement date

Step Two includes a series of questions designed to ascertain

the fiduciaries’ philosophy regarding asset class diversification

Step Three involves analyzing the answers to the questions

raised in Steps One and Two in order to place the plan on

a grid consisting of four quadrants, each of which reflects

a distinct philosophy regarding TDF investing. The plan is

placed in a specific quadrant corresponding to the plan’s

TDF philosophy

Step Four involves the fiduciaries and their advisors

analyzing and comparing the specific suites of TDFs in the

quadrant in which the plan is placed, based on the plan

goals as identified by the fiduciaries

The Target Date Compass is a two-dimensional grid with

four quadrants. Each quadrant of the Target Date Compass

corresponds to a particular Target Date TypeSM. Plans plotted

within any one quadrant have similar goals and expressed

preferences with respect to levels of equity as of the

retirement date and extent of asset class diversification. For

instance, relative to the plans plotted in other quadrants of

the Target Date Compass, the TDF families in the “northwest”

(or upper left) quadrant seek a lower level of equity as of the

target retirement date, but a higher number of asset classes.

Conversely, plans plotted in the “southeast” (or lower right)

quadrant are characterized by a preference for relatively

higher levels of equity at retirement, but relatively fewer asset

classes.

STEP ONE:

Determine the plan’s desired level of equity exposure at retirement

The first step is for the fiduciaries, working with their advisors,

to assess the plan’s desired level of equity exposure at the

retirement date. In this regard, the Target Date Compass

questionnaire sets forth issues to be considered by fiduciaries

in analyzing the plan’s optimal exposure to equity investments

and poses questions designed to elicit the fiduciaries’ opinions

relative to those considerations. The answers to those

questions are assigned numerical scores.

Equity exposure factor one: Define the plan’s goal

The Target Date Compass questionnaire first asks whether

the plan’s goal should be to help meet participants’ income

replacement goals as of their retirement dates or, alternatively,

D E S C R I P T I O N O F T H E T A R G E T D A T E C O M P A S S S M


to maximize participants’ savings throughout their lifetimes.

Those fiduciaries who believe their focus should be on helping

meet income replacement goals at retirement date would

favor funds that manage the impact of volatility in the years

leading up to retirement. For those focused on maximizing

account balances throughout their participants’ lifetimes, the

level of volatility in the years leading up to the retirement

date will not be as significant a consideration. The fiduciaries

are asked to answer a question, using a scoring system from

one to five, eliciting the fiduciaries’ preferences between

increasing the likelihood that participants achieve their

income replacement goals at retirement versus increasing

the likelihood that participants maximize total capital

appreciation over their lifetimes.

Equity exposure factor two: Assess participant

behavior

Participants’ saving and investment behavior—including the

frequency with which they take loans, the amount of their

contributions and the levels of their distributions—can also

impact the volatility their investments experience. Fiduciaries

should take these issues into account, since a plan may

experience a higher level of less desirable outcomes if a TDF’s

assumptions are not in line with actual participant behavior.

The Target Date Compass questionnaire asks fiduciaries to

consider the plan’s participant behavior, based on information

from the plan recordkeeper.

Equity exposure factor three: Define risk tolerance

There are two ends of the spectrum relative to a plan’s

approach to risk management: maximizing upside return

potential and minimizing downside risk. With respect to

each phase of the participants’ work lives, the plan sponsor

needs to consider the trade-of between seeking upside

growth potential and minimizing downside risk, taking into

account their employees’ ages, investment experience and

sophistication, all of which bear on participants’ abilities to

tolerate risk. The fiduciaries then score their preferences

for providing downside risk protection versus achieving high

levels of participant returns.

STEP TWO:

Determine the plan’s perspective on the role of diversification

Step Two of the Target Date Compass program calls for

fiduciaries to assess their philosophy regarding asset

diversification.

To assist fiduciaries in making this assessment, the Target

Date Compass questionnaire poses two questions designed to

help fiduciaries determine their preferences regarding equity

exposure and diversification.

Diversification factor one: Assessing how

diversification affects returns

Some asset managers believe that risk-adjusted return

potential increases as the asset classes making up a portfolio

are more broadly diversified. Others suggest that while

broader diversification may mitigate risk and manage volatility,

it does not necessarily enhance risk-adjusted returns. The

Target Date Compass questionnaire asks fiduciaries to state

their beliefs regarding the extent to which broad diversification

improves a portfolio’s outcome. Plan sponsors may rank

their views on whether they agree or disagree that broad

diversification may improve portfolio outcomes.

Diversification factor two: Determining the

fiduciaries’ preferences regarding the scope of asset

classes in the target date fund

This question assesses the fiduciaries’ level of comfort with

various underlying asset classes contained in TDFs. It illustrates

the notion that diferent investment managers use diferent

types of asset classes in order to satisfy DOL regulations that

QDIAs be adequately diversified in order to minimize the risk

of large losses. Some managers rely only on “traditional” asset

classes (such as stocks, bonds and cash), while others include

extended asset classes in their funds (such as real estate, high-

yield income funds, commodities and emerging market debt

funds). The fiduciaries score their relative preference for using

traditional asset classes versus including extended asset classes.



STEP THREE:

Identify the Target Date TypeSM

After the fiduciaries answer the questions posed in the Target

Date Compass questionnaire, the cumulative scores of those

answers are compiled. The answers to the first three questions

yield an “equity exposure score” that determines where the

plan is plotted on the “east-west” (or “x”) axis on the Target

Date Compass. The answers to the fourth and fifth questions

yield a “diversification score” and determine where the plan

is plotted on the “north-south” (or “y”) axis. The greater the

equity exposure score, the further to the right on the grid

the plan will be placed; the greater the diversification score,

the further “north” the plan will be plotted. Using the equity

exposure score and the diversification score, the plan is placed

in the appropriate quadrant on the Target Date Compass

Quadrant Map.

STEP FOUR:

Compare and select the most appropriate target date funds

Once the plan has been plotted onto a particular quadrant

of the Target Date Compass, the fiduciaries, working with

their advisors, are in a position to compare TDF families that

correspond to the plan’s Target Date Type and to select the TDF

family that they believe to be most suited to accomplishing the

fiduciaries’ goals and to meeting the needs of the participants.

In this regard, advisors will have available to them a version of

the Target Date Compass on which J.P. Morgan has plotted the

various TDF strategies, using publicly available and third-party

sourced information from Morningstar.

Once the plan is plotted on the Target Date Compass, and the

fiduciaries and their advisors have identified a range of TDF

strategies (in the particular quadrant) that is more suitable to

the specified needs and goals of the plan and its participants,

the advisors and fiduciaries may engage in a process of

selecting an appropriate TDF from that quadrant for use as the

plan’s QDIA.



We begin with a discussion of the ways in which the law has

changed to encourage the inclusion of TDFs in plans, while

reducing the fiduciary’s potential liability exposure. Then,

we explain the legal obligations imposed on plan fiduciaries

in connection with the selection and monitoring of TDFs and

describe how the Target Date CompassSM assists fiduciaries in

meeting those obligations.

The importance of 401(k) plans in meeting the needs of workers

As the U.S. Supreme Court has noted, “[d]efined contribution

plans dominate the retirement plan scene today.”15

Consequently, the retirement security of American workers is

largely dependent on those defined contribution plans—most

T h i s s e c t i o n d i s c u s s e s t h e l a w as it applies to the selection and monitoring of TDF families.

ERISA requires fiduciaries to act prudently in selecting all investments ofered by a plan. This requirement applies

as well to a plan’s TDF suite, whether it is presented as an investment ofered to participants or as the plan’s QDIA.

However, fiduciaries now need to enhance their scrutiny of TDFs because of the increase in automatic enrollment

and the use of TDFs as the plans’ QDIA, the expansion of the use of TDFs by participants in their accounts and

heightened regulatory focus on TDFs.

often 401(k) plans. Though plan sponsors may provide some

funding for 401(k) plans in the form of matching and profit

sharing contributions, participants bear most of the cost of

funding 401(k) plans. Moreover, in the context of participant-

directed 401(k) plans, participants are primarily responsible

for investing the assets in their plan accounts.

Unfortunately, this responsibility poses a challenge to many

participants, because of lack of knowledge or experience, a

perceived lack of time or a failure to understand the importance

of the decisions they need to make. And these challenges may

lead to inadequate retirement income caused by a failure to

participate in their plan, failure to contribute at a significant

enough level or an inadequate job of investing their 401(k)

plan assets.16 Fortunately, legal developments and marketplace

trends may help address these deficiencies. These include:

Analysis and discussion


A N A L Y S I S A N D D I S C U S S I O N

The increased use of automatic enrollment. While the

Employee Benefit Security Administration of the DOL

concluded that approximately one-third of eligible workers

do not participate in their employers’ plans,17 studies

suggest that most workers who are automatically enrolled

chose to remain participants18

The adoption of the QDIA safe harbor. We discuss this in

more detail later, but the safe harbor has given comfort

to fiduciaries who may have been reluctant to make the

“default investment” decision for automatically enrolled

participants rooted in fear of the potential liability that

might result. The safe harbor has also provided an implicit

endorsement of TDFs

Release of regulatory guidance on the selection and

monitoring of TDFs. This guidance, also discussed later in

this section, provides helpful tips to fiduciaries on the steps

they can take to make the selection

How QDIAs enable plan sponsors to increase plan participation without taking on greater liability

The Pension Protection Act of 2006 (PPA) made it easier for

plan sponsors to increase participation in their plans without

exposing themselves to commensurately greater liability

associated with making default investments. It did so by adding

to ERISA a new fiduciary protection for default investments.

Specifically, the PPA added ERISA §404(c)(5) (the “QDIA rule”).

The QDIA rule provides that, for default investments made in

accordance with regulations issued by the DOL, the fiduciaries

are entitled to a statutory defense (sometimes called a fiduciary

“safe harbor”) against any claims by participants that they were

improperly invested.19 A fiduciary of a plan that complies with

this final regulation will not be liable for any loss, or by reason of

any breach, that occurs as a result of such investments.20

The DOL regulation describes the types of investments that

may constitute a QDIA. The preamble to the regulation explains

the DOL’s reasoning and its conclusion that TDFs qualify for the

safe harbor protection:

“ It is the view of the Department that investments made

on behalf of default participants ought to and often

will be long-term investments and that investment of

defaulted participants’ contributions and earnings in

money market and stable value funds will not over the

long term produce rates of return as favorable as those

generated by products, portfolios, and services included

as qualified default investment alternatives; thereby

decreasing the likelihood that participants invested

in capital preservation products will have adequate

retirement savings.”21

TDFs are one type of investment product specifically identified

by the DOL as a type of product that may be used as a QDIA:

“ [A]n investment fund product or model portfolio that

applies generally accepted investment theories, is

diversified so as to minimize the risk of large losses, and

that is designed to provide varying degrees of long-

term appreciation and capital preservation through a

mix of equity and fixed income exposures based on that

participant’s age, target retirement date (such as normal

retirement age under the plan) or life expectancy. Such

products and portfolios change their asset allocations

and associated risk levels over time with the objective

of becoming more conservative (i.e., decreasing risk of

losses) with increasing age.”22

While fiduciaries are protected from liability in connection with

their participants’ investment in a QDIA, the fiduciaries remain

subject to ERISA’s requirements for selecting and subsequently

monitoring the investments (for our purposes, a suite of TDFs)

to be used as a QDIA.23 As the DOL stated in the preamble to its

QDIA regulation:

“ [n]othing in [the regulation] shall relieve a fiduciary from his

or her duties under … ERISA to prudently select and monitor

any qualified default investment alternative under the plan

or from any liability that results from a failure to satisfy

these duties, including liability for any resulting losses.”24

However, the preamble to the QDIA regulation goes on to

point out that, among other things, fiduciaries must consider

competing TDF families before making a selection:

“ The selection of a particular qualified default investment

alternative (i.e., a specific product, portfolio or service) is

a fiduciary act and, therefore, ERISA obligates fiduciaries

to act prudently and solely in the interest of the plan’s

participants and beneficiaries. A fiduciary must engage



in an objective, thorough, and analytical process that

involves consideration of the quality of competing

providers and investment products, as appropriate.”25

(emphasis added)

As a result, it is clear that:

The QDIA protection can be lost if the investments are not

prudently selected and monitored

A prudent process requires the comparison of competing

investments, for example, competing families of TDFs

Plan sponsors and participants have responded favorably to

the safe harbor status conferred upon TDFs in connection

with the DOL’s QDIA regulation. A recent study shows that

43% of plans now ofer automatic enrollment; the inclusion

of this feature in larger plans (over $250 million) exceeds

60%.26 Also, the number of TDFs available in the marketplace

has expanded dramatically, from 19 in 2005 to 37 in 2014.27

However, the fiduciary job of selecting TDFs has become more

diWcult because the diferences among the growing number

of TDFs are significant. Among other diferences, TDFs can

be structured to be invested aggressively, moderately or

conservatively, based on their asset allocation percentages,

glide paths and “landing points” (i.e., the date at which the

asset allocation becomes static), the composition of their

underlying investments and active or passive management.28

As a result, it is apparent even to the mainstream financial

press that “… finding the appropriate family of TDFs can be

incredibly complicated for plan sponsors.”29

Thus, fiduciaries must familiarize themselves with:

The unique standards that relate to selection of TDFs

as QDIAs

The traditional rules generally applicable to the selection

of plan investments

And conduct themselves according to these rules.

Recent guidance on selecting TDFs

Three elements, consideration of the asset allocation, glide

path and needs of participants, have been identified as key to

the TDF selection process, most recently in the DOL’s February

2013 bulletin. The bulletin provides “tips” for fiduciaries for

the prudent selection and monitoring of TDFs,30 including

the following:

1. Establish a process for comparing and selecting TDFs.

This tip contains a number of important elements:

It reflects the DOL’s emphasis on considering competing

providers and investment products, discussed in the

preamble to the QDIA regulation mentioned earlier

It reminds fiduciaries that they should consider, among other

factors, performance (investment returns) and investment

fees and expenses

It also tells fiduciaries that they should consider the needs

of their participants. In this context, the DOL says fiduciaries

should consider how well the TDF’s characteristics align

with eligible employees’ ages and likely retirement dates, as

well as other characteristics of the participant population,

such as participation in a traditional defined benefit pension

plan ofered by the employer, salary levels, turnover rates,

contribution rates and withdrawal patterns

2. Establish a process for the periodic review of selected

TDFs. First, the DOL reminds fiduciaries that they are

required to periodically review the plan’s investment options

to ensure that they should continue to be ofered. This is

especially important in the context of TDFs, given the growth

in the number of funds, their popularity as an investment

alternative and the expansion of regulatory scrutiny and

guidance. What may have been appropriate several years

ago may no longer be suitable for a plan’s demographics.

Specifically, the DOL says that fiduciaries should consider

replacing the TDFs if the investment strategy or

management team changes significantly, if the fund’s

manager is not efectively carrying out the fund’s stated

investment strategy or if the plan’s objectives in ofering a

TDF change.

3. Understand the TDFs’ investments including the

allocation in diberent asset classes (stocks, bonds, cash),

individual investments and how these will change over

time. The DOL recommends reviewing the fund’s prospectus

or ofering materials in order to understand the principal

strategies and risks of the fund, or of any underlying asset

allocation, and whether the glide path will become most

conservative at or after the target date. It points out that

when a TDF keeps a sizable investment in equities past the

“target” retirement date, participant retirement savings may



continue to have some investment risk after they retire. The

DOL suggests that:

“ These funds are generally for employees who

don’t expect to withdraw all of their 401(k) account

savings immediately upon retirement, but would

rather make periodic withdrawals over the span of

their retirement years. Other TDFs are concentrated

in more conservative and less volatile investments at

the target date, assuming that employees will want

to cash out of the plan on the day they retire.”

And, again, the DOL stresses the importance of

considering the needs of the participants. It states:

“ If the employees don’t understand the fund’s glide

path assumptions when they invest, they may be

surprised later if it turns out not to be a good fit for

them.”

4. Take advantage of available sources of information to

evaluate the TDF and recommendations you received

regarding the TDF selection. The DOL notes that there are

an increasing number of commercially available sources

for information and services to assist fiduciaries in their

decision-making and review process.

5. Document the process. Finally, the DOL observes that, as

with any decision, fiduciaries should document the selection

and review process, including how they reached decisions

about individual investment options.

These “tips” are the most definitive guidance from the DOL

on selecting TDFs. As a result, they are helpful in reminding

plan sponsors of the steps they should be taking in selecting

and monitoring TDFs for their plans. That said, they provide

an outline that must be filled in, as the DOL notes, by

“commercially available sources for information and

services to assist plan fiduciaries in their decision-making

and review process.” (emphasis added)

Specific analysis of the needs of the plan and its participants

The demographics, educational background, experience and

sophistication—particularly about finance and investments—of

participants vary widely. To meet ERISA’s general obligation to

engage in a procedurally and substantively prudent process,

when selecting a TDF family fiduciaries must analyze the needs

and goals of the plan and its participants and evaluate the

appropriateness of a particular TDF family in light of those

particular needs and goals.

The focus on the purposes of the plan—the provision of retirement

income—is an indispensable element of the fiduciary’s analysis:

“ In other words, in deciding whether and to what extent to

invest in a particular investment, or to make a particular

fund available as a designated investment alternative, a

fiduciary must ordinarily consider only factors related to

the interests of participants in their retirement income.31”

The courts have embraced the need for fiduciaries to assess the

needs of a plan in making decisions regarding plan investments:

“ Failure to investigate the needs of a plan or to ascertain

the particular requirements or restrictions of a plan,

and failure to invest in accordance with the best interest

of plan participants … constitutes a breach of fiduciary

duties imposed by ERISA.”32 (Emphasis added.)

The participants’ needs must also be considered:

“ At the very least, [fiduciaries] have an obligation to (i)

determine the needs of a fund’s participants, (ii) review

the services provided and fees charged by a number of

diferent providers, and (iii) select the provider whose

service level, quality and fees best matches the fund’s

needs and financial situation.”33

As one court has noted:

“ Indeed, it has been held that [a fiduciary] has a duty

to inquire of the particular needs of the plan vis-à-vis

its participants.”34

Emerging guidance from the DOL and the SEC also point out

the need for fiduciaries to consider TDF asset allocation. In

May 2010, the DOL and SEC jointly issued a document directed

to individual investors (which, in the case of 401(k) plans,

would be the participants) titled “Investor Bulletin: Target Date

Retirement Funds.” In this document, the agencies advised

individual investors that in evaluating TDFs, they should “…

consider the fund’s asset allocation over the whole life of the



fund and at its most conservative investment mix, as well as

the fund’s risk level, performance and fees.”35 As noted earlier,

this point is reiterated in the February 2013 “Tips” bulletin.

The DOL and SEC have issued proposed guidance that

emphasizes the issues that fiduciaries should consider, asset

allocation and glide path – the same elements analyzed in

the Target Date Compass.36 Since the SEC and the DOL both

recommend that prospective TDF investors (including retirement

plan participants) focus on asset allocation in deciding whether

to invest in TDFs (and, if so, which TDF to invest in), fiduciaries

should similarly focus attention on that information in deciding

among TDFs as a QDIA and as an investment option for non-

defaulting participants.

Common sense, moreover, suggests that in selecting a suite

of TDFs, fiduciaries should consider (among other things)

the age of their workforce, the relative sophistication of the

workforce relative to investing and retirement planning and

the participants’ access to retirement assets outside the 401(k)

plan (such as other plans sponsored by the employer; e.g., a

defined benefit plan or an employer stock ownership plan and

Social Security). A TDF that falls into the “conservative” end of

the spectrum, while arguably appropriate for a workforce that

would be significantly harmed by losses near retirement, may

be less well-suited to a younger, more avuent workforce of

largely “white collar” investment professionals. However, the

approach is not formulaic; it is the fiduciaries’ job to evaluate

the covered workforce and its needs.

The rules generally applicable to ERISA fiduciaries

ERISA imposes high standards on fiduciaries responsible for

investing plan assets—the courts refer to those duties as “the

highest known to law.”37 The fundamental obligations of ERISA

fiduciaries are set forth in ERISA §404 (29 U.S.C. §1104). The

first of these is the so-called “exclusive purpose rule” of ERISA

§404(a)(1)(A).

The Exclusive Purpose Rule

“ [A] fiduciary shall discharge his duties with respect

to a plan solely in the interest of the participants and

beneficiaries and—

(A) for the exclusive purpose of:

(i) providing benefits to participants and their

beneficiaries; and

(ii) defraying reasonable expenses of administering

the plan …”

Thus, the exclusive purpose of any decision by a plan fiduciary—

including decisions about which investment products to include,

retain or remove as investment options for participants—must

be to provide retirement benefits to participants.

The Prudent Person Rule

ERISA also requires plan fiduciaries to act prudently and in a

manner consistent with the standard applicable to persons

knowledgeable about the functions they are performing:

“ [A] fiduciary shall discharge his duties … with the

care, skill, prudence, and diligence under the

circumstances then prevailing that a prudent man

acting in a like capacity and familiar with such

matters would use in the context of an enterprise of

a like character and with like aims ...”38

This is not a “prudent layperson” standard. Rather, it is an

objective standard that efectively requires that the conduct of

plan fiduciaries “… be measured against the standards in the

investment industry.”39 Stated another way, a fiduciary’s “lack

of familiarity with investments is no excuse …”40

The focus of the analysis is on the fiduciary’s conduct.

Specifically, a fiduciary is obligated to undertake an

independent investigation of the merits of a particular

investment and to use appropriate, prudent methods

in conducting the investigation.41 Moreover, in those

circumstances where fiduciaries “…lack the requisite

knowledge, experience and expertise to make the necessary

decisions with respect to investments, their fiduciary obligations

require them to hire independent professional advisors.”42

Substantive and Procedural Prudence

The DOL and the federal courts agree that prudent fiduciary

conduct requires that the fiduciary engage in a prudent

process. A prudent process, in turn, requires both that the

fiduciary engage in procedural prudence (i.e., act prudently in



obtaining and reviewing the information necessary to make an

investment decision) and substantive prudence. Substantive

prudence requires fiduciaries to use the information obtained

during their investigation to make a reasoned investment

decision. As one court explained:

“ Courts have articulated two ways in which to measure

a fiduciary’s use of prudence in carrying out their

duties. The first is whether the fiduciary employed

the appropriate methods to diligently investigate the

transaction and the second is whether the decision

ultimately made was reasonable based on the

information resulting from the investigation.”43

The part of the prudence requirement that looks at the process

used by the fiduciaries is referred to as procedural prudence.

In order for a fiduciary to engage in a prudent process, the

fiduciary must perform an independent investigation of

the merits of an investment.44 This requires that fiduciaries

understand and apply generally accepted investment theories

and evaluate the investments using prevailing practices in the

investment industry.45

Substantive prudence requires fiduciaries to give appropriate

consideration to the factors outlined in the DOL regulation

relative to ERISA §404(a). According to the DOL, the fiduciary

satisfies his obligation:

“ if the fiduciary (A) has given appropriate consideration to

those facts and circumstances that … the fiduciary knows

or should know are relevant to the particular investment

or investment course of action involved, including the

role the investment or investment course of action plays

in that portion of the plan’s investment portfolio with

respect to which the fiduciary has investment duties; and

(B) has acted accordingly.”46

This regulation contains a number of important elements:

The fiduciary must know what information is relevant to the

decision; i.e., the information that needs to be evaluated to

make a prudent and informed decision

The fiduciary must accumulate the information relevant to

making the specific decision

The fiduciary must evaluate and make appropriate judgments

about the relevant information. That is, having accumulated

the information, fiduciaries must decide how to act upon it.

“ Under ERISA, a fiduciary’s failure to exercise his or her

discretion - i.e., to balance the relevant factors and

make a reasoned decision as to the preferred course of

action - under circumstances in which a prudent fiduciary

would have done so, is a breach of the prudent man

standard of care”47

From a risk-management standpoint, however, engaging in a

prudent process and using the information obtained during that

process is not enough. Plan fiduciaries should also document the

process. This is because if the fiduciary’s conduct is ever questioned

or the subject of litigation, the issue of whether the fiduciary

engaged in a prudent process will be scrutinized based on the facts

that existed at the time the fiduciary made the investment decision.

As one court stated, determinations regarding the fiduciary’s

investment decision “require factual findings and are usually

made on the basis of expert testimony after trial.”48 Moreover,

DOL regulations suggest that complying with a fiduciary’s duties

requires documenting the steps taken in the process of doing so:

“It is the view of the Department that compliance with the duty to

monitor necessitates proper documentation of the activities that

are subject to monitoring.”49 The Target Date Compass provides

material assistance for the obligation.

Evaluation of the Target Date CompassSM relative to the general rules applicable to ERISA fiduciaries

The Target Date CompassSM helps plan fiduciaries meet their

obligations to engage in a procedurally and substantively prudent

process and to efectively document that process. It provides a

methodical framework for carrying out the fundamental duties

under the Exclusive Purpose Rule and the Prudent Person

Rule. As noted earlier, fiduciaries are obligated to consider

“the circumstances then prevailing” and act as would a person

“familiar with such matters” (in this case, familiar with TDFs)

in making their selection. In order to fulfill their obligation to

consider the “circumstances then prevailing,” fiduciaries must

periodically monitor the plan’s existing investments.

With respect to TDFs, the duty to monitor has become

particularly challenging given the significant increase in the



number of TDFs available in the marketplace and the changes

in regulatory guidance. For example, plans that selected a

TDF family in 2006 will find many new TDF options available

to them in 2014. Given the evolving needs of the plan and its

participants, fiduciaries may conclude that a suite of TDFs that

was not available at the time of that earlier selection is now a

more prudent investment alternative for their plan.

The Target Date Compass provides material assistance to

fiduciaries by:

Making available to fiduciaries an analysis of the TDFs that

reside in the same quadrant of the Target Date Compass as

the plan’s Target Date Type

Providing them with a framework to refine the list of TDFs

from the broader universe of those in the marketplace to a

more appropriate subset of TDFs

Identifying TDFS whose approach to equity exposure at

retirement and asset class diversification is more in line with

the needs of the plan and its participants

How the Target Date CompassSM assists plan fiduciaries in satisfying their obligations to assess the needs of the plan and its participants

The Target Date CompassSM provides material assistance to

fiduciaries. It helps them fulfill their obligations to consider

the needs of the plan and its participants, to select a TDF

family that is consistent with those needs, and to document

their process. The Target Date Compass first helps fiduciaries

determine the Target Date Type best aligned with their plan’s

goals and participant needs. It then helps them evaluate the

strategies of the TDFs within that type in order to select the

TDF family most suitable for their plan.

A plan may have evolved over time by ofering additional

investment options. The demographics of the participants

continually evolve, as do their needs. Without a methodology

for assessing those needs and goals, it would be diWcult for

the typical plan fiduciary to: (1) satisfy the obligations imposed

by ERISA for evaluating the needs of the participants and

the goals of the plan; and (2) identify a Target Date Type and

the TDF families that respond to those needs. To answer the

questions posed by the Target Date Compass questionnaire,

fiduciaries will consider the relative sophistication of their

workforce about the appropriate percentage of equity

investments at the participants’ retirement age and the

participants’ willingness to accept greater risk (i.e., volatility).

By engaging in the process presented by the Target Date

Compass, fiduciaries are more likely to satisfy the obligations

imposed on them by ERISA, the DOL and the courts, which

mandate consideration of the participants’ needs.

Where an employer also sponsors a defined benefit plan, the

fiduciaries most likely will consider the efect those additional

benefits have on the needs of the 401(k) participants in

answering the questions posed by the Target Date Compass

questionnaire. They may conclude that, in light of the

additional “cushion” provided by the defined benefit plan, the

participants are in a better position to weather greater risk

in the volatility of the TDFs. Conversely, the fiduciaries may

conclude that the enhanced retirement income provided by

the defined benefit plan makes it unnecessary and unwise to

accept more than minimal risk in the TDF. That decision is, at

its essence, the fiduciaries’ job. In either case, the Target Date

Compass provides material assistance to plan fiduciaries by

providing: (1) a framework for consideration of these issues; (2)

an opportunity to prudently select a TDF family that is aligned

with the goals and needs of the plan and its participants; and

(3) a mechanism that documents the process.

By answering the questions posed by the Target Date Compass

questionnaire (which requires an analysis of the goals of the

plan and the needs of its participants) and plotting the plan’s

location on the Target Date Compass, the fiduciaries engage

in a process that fulfills their fiduciary obligation to select an

asset allocation that is appropriate for their participants and

documents that step in the process.


Conclusion

Fiduciaries are responsible for making a prudent selection

and for monitoring the suite of TDFs to be used in the plan.

This process is complicated by the number of TDF families and

the diversity of their investment philosophies. The needs of

participants difer significantly from plan to plan. Fiduciaries

must take these factors into account and must continually

monitor the TDFs selected for their plan in order to fulfill their

ERISA duties.

ERISA’s legal requirements present a challenge to fiduciaries,

but the challenge is heightened in connection with the

selection and monitoring of TDFs because of the complexity of

those investments and the increasing government scrutiny.

T h e o b l i g a t i o n i m p o s e d o n p l a n s p o n s o r s a n d f i d u c i a r i e s to act prudently in

making a prudent TDF choice has become more important than ever. This is due to the growth in the number and

popularity of TDFs and the increased regulatory scrutiny surrounding the selection of TDFs for 401(k) plans.

The Target Date CompassSM provides fiduciaries material help

to meet or exceed those requirements. This is accomplished by

providing a framework for the analysis of the needs of a plan’s

participants, a mechanism by which to match those needs with

a prudently selected family of TDFs and a tool for documenting

their process.


About the authors

Fred Reish

[email protected]

Fred Reish is a partner in the Drinker Biddle & Reath Employee

Benefits & Executive Compensation Practice Group and Chair

of the Financial Services ERISA Team. He has specialized in

employee benefits law since 1973 and works with both private

and public sector plans and fiduciaries; represents plans,

employers and fiduciaries before the IRS and the DOL; consults

with banks, trust companies, insurance companies and mutual

fund management companies on 401(k) investment products

and issues related to plan investments; and represents broker-

dealers and registered investment advisers on compliance

issues. Fred serves as a consultant and expert witness for

ERISA litigation.

Fred received a J.D. from the University of Arizona James E.

Rogers College of Law and B.S. from Arizona State University.

Professional recognition and awards

Fred has received a number of awards for his contributions to

benefits education, communication and service, including:

In 2011, selection by PLANADVISER magazine as one of the

5 Legends of the retirement industry and with retirement

advisors

The 2009 American Society of Pension Professionals &

Actuaries (ASPPA)/Morningstar 401(k) Leadership Award for

directly and positively influencing the ability of Americans to

build successful retirements

Selection by PLANSPONSOR magazine as one of the 15

Legends in the development of retirement plans

Recognition by 401kWire as the 401(k) Industry’s Most

Influential Person for 2007 (and has, for every year of that

survey, been in the top 10)

The IRS Director’s Award and the IRS Commissioner’s Award

for his contributions to employee benefits education

The 2006 Lifetime Achievement Award from PLANSPONSOR

magazine

The 2006 Lifetime Achievement Award from Institutional

Investor for his contributions to the benefits community

The 2004 Eidson Founder’s Award from ASPPA for his

significant contributions to that organization and to the

benefits community

On behalf of ASPPA, he has co-authored amicus curiae briefs

with the Supreme Court of the United States in the case of

Patterson v. Shumate and with the Tax Court in the case of

Citrus Valley Estates v. Commissioner of Internal Revenue

Service.

Publications

Fred has written four books and more than 350 articles. He

authors a monthly column on 401(k) fiduciary responsibility for

PLANSPONSOR magazine.

As an experienced lawyer on benefits matters, Fred is

frequently quoted by both professional and public publications,

including The Wall Street Journal, Fortune, Forbes, Inc., CFO

Magazine, New York Times, Washington Post, Los Angeles Times,

USA Today, Institutional Investor, PLANSPONSOR and Pensions &

Investments.

Speaking engagements

Fred is a nationally known speaker on fiduciary responsibility.

He has spoken at the annual conferences of the American Bar

Association, the American Society of Pension Professionals

and Actuaries, the Western Pension and Benefits Conference,

the Enrolled Actuaries Conference and the International

Foundation of Employee Benefit Plans.


About the authors

Bruce Ashton

[email protected]

Bruce Ashton is a partner in the Drinker Biddle & Reath

Employee Benefits & Executive Compensation Practice Group.

He has specialized in employee benefits law since 1986 and

works with private and public sector plans; advises and

represents plans, employers and fiduciaries before the IRS and

DOL; consults with financial institutions, including banks, trust

companies and insurance companies on 401(k) compliance

issue; and represents registered investment advisers on

issues related to fiduciary status and compliance, prohibited

transactions and internal procedures. Prior to focusing

on employee benefits, Bruce practiced as a corporate and

securities lawyer.

Bruce received a J.D. from the Southern Methodist University

School of Law, where he was selected to the Order of the Coif,

and his B.A. from Rice University.

Professional recognition and awards

Bruce has received a number of awards for his contributions to

the employee benefits community, including:

The 2011 Eidson Founder’s Award from ASPPA for his

significant contributions to that organization and to the

benefits community

Recognition by 401kWire as one of the 401(k) Industry’s Most

Influential People

Recognition as an outstanding lawyer in The Best Lawyers

in America®

Publications

Bruce has co-authored four books (with Fred Reish) and more

than 150 articles on employee benefits issues, including

fiduciary issues, prohibited transactions, IRS and DOL

correction programs, audits and investigations and plan

design. He has also been widely quoted in various benefits

publications.

Speaking engagements

Bruce is a frequent speaker on various employee benefits

issues and has spoken at the annual conferences of the

American Society of Pension Professionals and Actuaries,

the Western Pension and Benefits Conference, the Enrolled

Actuaries Conference, the International Foundation of

Employee Benefit Plans and the National Institute of Pension

Administrators.


Endnotes1 See, e.g., Holden, Sarah, Jack VanDerhei, Luis Alonso and Steven Bass, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2012,” ICI Research

Perspective 19, no. 12 (December 2013), available at www.ici.org/pdf/per19-12.pdf. (Referred to as the “ICI Study”).

2 U.S. Department of Labor and Securities and Exchange Commission, “Investor Bulletin: Target Date Retirement Funds,” May 2010, available at http://www.dol.gov/ebsa/pdf/TDFInvestorBulletin.pdf.

3 Release on Target Date Disclosure, 75 Fed. Reg. 229 (November 30, 2010), 73987-73995 (referred to as the “Proposed TDF Regulations”).

4 Securities Act Release No. 9126 (June 16, 2010) [75 FR 35920 (June 23, 2010)], comment period re-opened April 2012.

5 U.S. Department of Labor, Employee Benefits Security Administration, “Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries,” February 2013, available at http://www.dol.gov/ebsa/newsroom/fsTDF.html (referred to as the “DOL TDF Tips”).

6 See DOL regulatory agenda for Fall 2013, available at http://resources.regulations.gov/public/custom/jsp/navigation/main.jsp.

7 See, e.g., ERISA Regulation Sections 2550.404c-1(b)(3)(i)(B) and 2550.404c-5(d)(4).

8 See the ICI Study referred to in footnote 1.

9 ERISA Section 404(a)(1)(B).

10 See DOL TDF Tips referred to in footnote 5.

11 See, e.g., 29 C.F.R. §2509.08-2, in which the DOL states: “It is the view of the Department that compliance with the duty to monitor necessitates proper documentation of the activities that are subject to monitoring.”

12 29 C.F.R. §2550.404c-5(e)(4)(i). Note that, in order for fiduciaries to obtain the protections provided by the QDIA rule, the requirements and conditions of the regulation must be satisfied, including certain notice and information requirements. See 29 C.F.R. §2550.404c-5(c)(1)-(6).

13 Id.

14 See the DOL TDF Tips referred to in footnote 3.

15 LaRue v. DeWolQ, Boberg & Associates, 522 U.S. 248, 255, 128 S.Ct. 1020, 1025, 169 L.Ed.2d 847 (2008).

16 See JP Morgan Asset Management, “Retirement Insights: Ready! Fire! Aim? 2012,” August 2013; see also Samuel Estreicher & Laurence Gold, The Shift From Defined Benefit Plans to Defined Contribution Plans, 11 Lewis & Clark L. Rev. 331, 333 (2007), available at http://law.lclark.edu/org/lclr.

17 See, http://www.dol.gov/ebsa/newsroom/ fsdefaultoptionproposalrevision.html.

18 Id.

19 29 C.F.R. §2550.404c-5(b)(1).

20 72 F.R. 60452.

21 72 F.R. 60452, 60463.

22 29 C.F.R. §2550.404c-5(e)(4)(i).

23 29 C.F.R. §2550.404c-5(b)(2).

24 72 F.R. 60452, 60453.

25 Id.

26 See J.P. Morgan 2013 Defined Contribution Plan Sponsor Survey.

27 Strategic Insight target date assets analysis, 2010 and 2013. See, also, Special Report: Retirement Benefits, Five Questions For Picking a Target Date Fund, by Mark Bruno, Financial Week, June 23, 2008, available at http://www.financialweek.com/apps/pbcs.dll/ article?AID=/20080623/REG/276976064.

28 Id.

29 Id.

30 See the DOL TDF Tips referred to in footnote 3.

31 DOL Advisory Opinion 98-04A (May 28, 1998).

32 GIW Industries, Inc. v. Trevor, Stewart, Burton & Jacobsen, Inc., 10 EBC 2290, 2301 (S.D.Ga 1989).

33 Liss v. Smith, 991 F.Supp. 278, 300 (S.D.N.Y. 1998); see also, Whitfield v.

Tomasso, 682 F.Supp.1287, 1304 (E.D.N.Y. 1988): “In providing ... benefits, in order to fulfill their fiduciary duties, the [fiduciaries] should have considered the needs of the ... participants and an appropriate level of benefits, and then should have solicited multiple proposals and completely evaluated the proposals before entering into an agreement.”

34 Lanka v. O’Higgins, 810 F.Supp. 379, 388 (N.D.N.Y. 1992).

35 DOL/SEC “Investor Bulletin: Target Date Retirement Funds,” issued May 6, 2010.

36 75 F.R. 73987, 73994. Proposed amendments to rule 482 under the Securities Act of 1933 and rule 34b-1 under the Investment Company Act of 1940, available at http://www.sec.gov/rules/proposed/2010/33-9126.pdf. See DOL regulatory agenda for Fall 2013, available at http://resources.regulations.gov/public/custom/jsp/navigation/main.jsp.

37 Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan, 793 F.2d 1456, 1468 (5th Cir. 1986); Donovan v. Bierwirth, 680 F.2d 263, 272 n. 8 (2d Cir.), cert. denied, 459 U.S. 1069, 103 S.Ct. 488, 34 L.Ed.2d 631 (1982).

38 ERISA Section 404(a)(1)(B).

39 Ulico Casualty Co. v. Clover Capital Management, Inc., 217 F.Supp.2d 311, 315-316 (N.D.NY 2002), citing Lanka v. O’Higgins, supra, 810 F.Supp. at 387.

40 Katsaros v. Cody, 744 F.2d 270, 279 (2nd Cir. 1984).

41 Harley v. Minnesota Mining & Mfg. Co., 42 F.Supp.2d 898, 906 (D. Minn. 1999), citing In re Unisys Savings Plan Litigation, 74 F.3d 420, 435 (3rd Cir. 1996).

42 Liss v. Smith, supra, 991 F.Supp. at 297.

43 Riley v. Murdock, 890 F.Supp. 444, 458 (E.D.N.C. 1995).

44 In re Unisys Savings Plan Litig., 74 F.3d 420, 435 (3rd Cir. 1996).

45 Lanka v. O’Higgins, supra, 810 F.Supp. at 387.

46 29 C.F.R. §2550.404a-1.

47 George v. Kraft Foods Global, Inc., 641 F.3d 786, 796 (7th Cir. 2011).

48 Liss v. Smith, supra. 991 F.Supp. at 301.

49 29 C.F.R. §2509.02-2.

J . P. M O R G A N A S S E T M A N A G E M E N T

270 Park Avenue I New York, NY 10017

TARGET DATE FUNDS: Target date funds are funds with the target date being the approximate date when investors plan to start withdrawing their money. Generally, the asset allocation of each fund will change on an annual basis, with the asset allocation becoming more conservative as the fund nears the target retirement date. The principal value of the fund(s) is not guaranteed at any time, including at the target date.

Certain underlying funds of 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 diferences. 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. There may be additional fees associated with investing in a Fund of Fund strategy.

Fred Reish and Bruce Ashton are partners in the Employee Benefits & Executive Compensation Practice Group of Drinker Biddle & Reath LLP. They have been compensated by J.P. Morgan Asset Management to provide advice and to give an opinion regarding the Target Date Compass.

IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its agliates 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 unagliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

Opinions and estimates ofered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an ofer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

J.P. Morgan 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., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc.

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