ISSUE 3 WINTER 2010 Journey - J.P. Morgan · ISSUE 3 WINTER 2010 23 A ‘Freakonomics’...

JourneyRetirement Insights and Solutions from J.P. Morgan

ISSUE 3WINTER 2010

23 A ‘Freakonomics’Perspective on RetirementDr. Steven D. Levitt shares insights with Journey

11 Plan Sponsor RoundtableFive professionals talk about ‘Real World’ issues

3 Vision 2010‘Topic A’ in Retirement Plan Services

17 Day in the Life401(k) participant education: Up close and personal

PLUS> Best Practices

How one plan maximized participation

> Executive Perspective The institutional view

> Speaking InvestmentsInflation and the global outlook

> Ask BobOur own Bob Holcomb comments

on DC legislation

EDITOR-IN-CHIEF Daniel R. Darst

MANAGING EDITORS Chester C. Dawson Mark L. Sobolak Kirk L. Isenhour

SENIOR EDITORS Maria Cassisi

Connie G. Fish

ART DIRECTOR

Rachel Liu

GRAPHIC DESIGNERS Fred Jung

Naomi Rosenberg

CONTRIBUTORS

Jason I. Brown I Margaret E. Cox Diane M. Gallagher I Barbara M. Heubel

Bob A. Holcomb I John H. Moore Lloyd Swager I Gregory C. Walker

This magazine disTills currenT reTiremenT Thinking drawn from J.P. Morgan Asset Management, including Retirement Plan Services, Compensation and Benefit Strategies and Institutional Investment Management. Together these three units deliver insights into a full suite of administration, recordkeeping, benefits consulting and investment management solutions to the retirement market.

> JPmorgan.com/retirement

This document is intended solely to report on various investment views held by J.P. Morgan Asset Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. References to asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. In-dices do not include fees or operating expenses and are not available for actual investment. The information contained herein may employ proprietary projections of expected returns as well as estimates of their future volatility. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. Discussions presented should not be construed as legal opinions or advice. You should consult your own attorney, accountant, financial or tax advisor or other planner or consultant with regard to your own situ-ation or that of any entity which you represent or advise. Past performance is no guarantee of future results.

J.P. Morgan Compensation and Benefit Strategies is wholly owned by J.P. Morgan Retirement Plan Services LLC, an affiliate of J.P. Morgan Asset Management.

J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co., and its affiliates world wide.

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, market-ing or recommendation by anyone unaffiliated with JPMor-gan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

© 2010 JPMorgan Chase & Co. All rights reserved.

few months ago,we delivered the second issue of Journey with a close-

up photo of the road ahead on the cover, an intimate profile of J.P. Morgan government affairs expert Bob Holcomb and his views on Washington, D.C., and a range of articles on investing, Target Date Fund strategy, our Institutional Equity Investor Survey and a host of legislative updates.

With this issue, we expand our range in both the scope of content and page count. Our focus is ‘the participant’, not as a one-time theme, but rather as a central component of all discussions related to retirement planning.

We speak with plan sponsors and bring you their comments, insights and ideas from a recent roundtable discussion. Their experiences and approaches to working with participants highlight the challenges faced by the entire industry. We also sit down with Freakonomics’ Dr. Steven Levitt, to hear his perspective on the nature of retirement and how Americans are coping with and addressing it.

For a hands-on perspective, we tag along for a day in the life of a J.P. Morgan Financial Education Consultant as he travels from one plan facility to another on a mission to educate and inform employees. For an investments perspective, we chat with the head of our institutional business, John H. Hunt.

In addition, in this issue we debut Dear Journey and Ask Bob, two columns that let you, the reader, ask us questions about the retirement industry. What’s more, we broaden our review of legislative and regulatory issues, discuss the impact of inflation and give you the ‘numbers’ we see on our dashboard!

A deeper dive, a longer issue, a more complete snapshot of retirement. That’s the Journey we’re on together.

Keep the comments coming . . .

Daniel Darst Editor-In-Chief

[email protected]

J.P. Morgan JOURNEY 1

3 Vision 2010Pamela Popp, CEO of J.P. Morgan Retirement Plan Services on ‘Topic A’ for plan sponsors

7 Executive PerspectiveJohn H. Hunt, CEO of J.P. Morgan Institutional Americas, highlights key issues on the minds of institutional investors

10 Ask BobBob Holcomb answers your questions about legislative issues

11 Plan Sponsor RoundtableFive senior representatives from major corporations discuss ‘real world’ retirement issues and share their experiences dealing with participant engagement

16 Best PracticesHow one plan sponsor applied its commitment to innovation to maximize 401(k) plan participation

17 Day in the LifeTagging along with road warrior and educational consultant Dale Knowlton as he interacts with 401(k) plan participants in an up close and personal way

21 Mixing Science with Retirement PlanningBehavioral science and how its application can impact participant communications

23 A ‘Freakonomics’ Perspective on RetirementJourney talks to Dr. Steven D. Levitt about the changing dynamics of the retirement business

26 Long-term Capital Market ReturnsJ.P. Morgan Asset Management’s annual look ahead at the markets for equity, fixed income and other asset classes

VALUE-ADD & COLUMNS

4 Stat LifeWithdrawal Reflex? Updated participant data from our Ready! Fire! Aim? 2009 analysis

5 Speaking InvestmentsInflation and the Global Outlook: What history says about smoke detectors, a weaker dollar and the price of tea in China

8 Legislative CornerA quick look at benefit plans and deflation, pushing back retirement, new IRS regulations and an update on pension funding relief

25 Dear JourneyEverything you always wanted to know about retirement (but were afraid to ask)

28 Fast ForwardWhat’s to be done about participant inertia?

29 Did You KnowA round-up of data points from our recent Anything But Certain survey

the Contenti s s u e 3 W i n T e r 2 0 1 0

in This issue

2 JOURNEY Winter 2010

Change. Stasis. Unpredictability. Random acts of financial tumult. Longevity risk. Equity market rebound. Self-direct-ed versus delegated decision process. Target Date Fund glidepaths. Income protection. These phrases reflect some of the key terms and discussion topics in my conversations

This year’s retirement vocabulary

with plan sponsors of late. For the re-tirement industry, 2008 and 2009 have ushered in a new level of self-reflection and reassessment. These last two years have witnessed a remarkably sobering shake-up of many of the ideas (need I say myths?) of our industry and its mil-lions of participants. Entering a new decade, and with a renewed emphasis on succeeding on behalf of their employees, retirement professionals from all corners of the industry are looking at issues of em-ployee participation, saving, invest-ing, plan design and fiduciary con-cerns with a fresh focus. Participant

behavior, as an example, ranks near the top of the roster of critical topics for plan sponsors. The prevailing wis-dom has been to allow the participant as much self-direction as possible, to encourage an independence of per-spective, evaluation and execution. But still, we have found over the years that the various approaches deployed in an effort to move the needle were modest at best. When clients ask me what should be at the top of the list, I often ask them, “What outcome are you seek-ing?” Retirement readiness for their employees is what I hope they’ll say.

The participants need to be in the best possible financial shape as they approach retirement. The script is never the same; it might include DC and DB, and if they’re lucky, a medical plan too. For many, though, it includes only a DC plan and Social Security. At J.P. Morgan, we focus such a strong lens on participant behavior because we believe that making the right choices early on will help more participants achieve retirement readi-ness. We counsel our clients to effect plan design upgrades so that more employees gain the advantages inher-ent in a well-conceived plan. We seek to deliver the right tools so that more plan participants than ever will make it across the finish line. I am glad that I can share with you, in this issue of Journey, a range of thinking on the topic of participant behavior. All of us believe that tomor-row’s participant demands a more thoughtful, customized and sensitized approach to long-term investing and saving. Choice architecture, among other concepts, is at work when we offer our employees investment and participation opportunities. But how many in our industry have applied themselves to fine-tuning the process-es, questions and protocols for work-ing with their employees? Each of us wants to do what’s right for the participant, fulfill fiduciary obligations and offer retirement ser-vices that lead in the right direction. The last eight quarters have served as a wake-up call–let’s keep our focus on achieving the best outcome for the participant.

Pamela A. PoppCEO, Retirement Plan Services

a Word


So what is ‘Topic A’ for plan sponsors in 2010? Topic A is retirement readi-ness, but it’s really a deeper dive into wrestling with a plan’s DNA. Is the retirement plan structured to help the participant cross the finish line? Are the investment options properly con-sidered and effectively offered? Is there a strong fiduciary fiber running through the plan’s design? Are we taking care to deploy choice architecture in a man-ner that is powerfully supportive to the goals of America’s workforce? Topic A is underscoring that today’s DC plan needs to address the basic challenge of living and saving in 2010 and beyond.

How is the role of the plan sponsor evolving? From a plan sponsors’ stand-point, there’s a renewed interest in fi-duciary responsibility. That has led to more robust conversations about fees and value. At the same time, I see more involvement from management in the various aspects that comprise DC plans. Treasurers are paying more attention to participant outcomes, to communica-tions and enrollment programs. And on the benefits side, there is a greater ap-preciation and consideration of invest-ment options and the implications of a tumultuous marketplace. QDIA and Tar-get Date Funds have sharpened a lot of benefits professionals’ focus. Add to this a concern about longevity risk, and we have the investment side and the ben-efits side more entwined than ever.

Longevity risk? There is a growing real-ization that retirement could last 30 years or longer. Longevity risk refers to the amount of exposure a participant is will-

ing to assume. With people living to age 92, the proverbial age 75 as the ‘end point’ is inadequate. Participants and plan spon-sors alike are starting to ask: what are the implications of living so much longer? But the participant is realizing that longer life expectancy requires a sharper focus on their part. They need to take their investments seriously. And that in turn suggests more refined tools for participants that will help them achieve their retirement goals, for instance, par-ticipating so their assets will last much longer. Consider the second-lifers, people who have left their primary career but are re-engaging with the workforce as teach-ers or consultants. Consider too how the economic downturn has caused people to

delay retirement. The net effect of these factors is to focus the workforce on the actual monies they have invested. The re-sult of that focus is a deeper appreciation of their opportunities and choices.

Do you find that participants are more willing to accept advice? It’s too early to assert with great confidence that things have shifted, but my sense of the marketplace is that sponsors and participants are listening with open ears. Our call center volumes indicate a healthy interest in accessing tools that can help plan for a long life, pre- and post-retirement.

In the last eighteen months we’ve seen a sustained 25% increase over 2007 lev-els in the number of participants calling about some aspect of their retirement plans. A significant amount of that en-gagement came from people who had never accessed these tools before. From plan sponsors, we’ve seen a lot more in-terest in finding tools that allow partici-pants to access professional assistance in managing their DC plans. Advice comes in many forms, of course, from a licensed financial plan-ner developing a customized plan to a pre-defined glidepath in a Target Date Fund. In this respect, the rise in adoption of the Target Date Fund as-set class indicates that sponsors and their participants recognize the im-portance of accepting professional investment advice. One of the societal trends that has spilled over into the DC space is the awareness of non-cor-related returns. People recognize that real estate, for example, may perform differently than stocks or bonds. We’re starting to see more interest in varied

strategies and more interest in bal-ancing growth with long-term income strategies, generally referred to as re-tirement income. This reflects a broad-er minded population, one that is more comfortable with a wider lens on the world of investment opportunities.

Does this suggest that the partici-pant is reading the materials more closely? Taking a greater interest in the investment options? Not neces-sarily, in fact our research report, Any-thing But Certain, reaffirms that for the majority of participants, focusing on their DC investment program is still

Pamela Popp, CEO of J.P. Morgan Retirement Plan Services, on ‘Topic A’ in plan objectives and structure.

Vision for 2010


Stat life

100%

62%

33%19%

0

20

40

60

80

100

Dec 2005 Dec 2006 Dec 2007 Dec 2008

18.8%17.8% 17.6%

15

20

2006 2007 2008

5.5% 6.2% 7.3%

0

5

10

15

2006 2007 2008

Participant Withdrawal Behavior

We examined patterns of participants over the age of 65 who stopped working in 2006 and the vast majority—more than 80%—withdrew their entire balances within just three years. At the same time, pre-retirement cash withdrawals are on the rise and loans from retirement accounts are ebbing.

Withdrawal Reflex?Conventional wisdom has long held that retirees over age 65 consistently withdraw 4-5% annually from their retire-ment savings, but recent research has shown that actual levels of post-retirement distributions are dramatically

higher, 20% or more per year. Given this trend, we looked into the issue of retention. The results, published in our recent Ready! Fire! Aim? 2009 analysis, were revealing.

Source: Participants of J.P. Morgan Retirement Plan Services’ clients. Data from Jan. 2006 through Dec. 2008.

Pre-Retirement Withdrawals: Average percentage of participants with outstanding loans (left-hand chart) and cash withdrawals (right-hand chart)

Post-Retirement Withdrawals: Percentage of participants over age 65 who stopped working in 2006 and remained invested in their plan

not a priority, despite the outcomes they’re experiencing.

What is your take on labeling retire-ment planning as “investing” or “sav-ing”? I like them both. First of all, this is about investing. We’re trying to provide both the right mix of invest-ments and the tools to help people find their way to the right mix. Second, it’s also about the foundation of saving for the big picture. If we can reach some people via a savings strategy while we reach others via the concept of in-vesting, great! The goal is to help the workforce through the DC plan. Hav-ing said that, what’s most important is to understand behavior. I agree that it’s tough to get people focused on a goal that is 20 or more years down the road. And younger people seem to be more focused on the idea of both “saving” and “investments.” All totaled, we need to reach all participants, at any age and behavior bias, which is at the core of our Audience of OneSM approach.

How important is it to address the spend-down aspect of retirement? Over the last 30 years, we have been fo-cusing on saving and investing, but as we move into the core baby boomer re-tirement years, the question of spend-ing and ‘how long will my dollars last’ has become paramount. Plan sponsors are looking for tools that estimate how long their participants’ dollars will last. They want investments that provide lifetime income options but with the ability to capture upside in a market. Can we come up with a product that addresses these retirement income needs? A product that is portable yet cost effective for the participant? That’s the challenge for the industry. There is a mad race to develop this and we at J.P. Morgan are focused on solv-ing it for plan sponsors.

Vision for 2010 (cont.)


Stat life

ConCern about the prospeCts for higher rates of inflation is at the forefront of many investors’ minds amid growing uncertainty over the potential impact on global markets, the economy and real investment returns. Journey asked J.P. Morgan Global Markets Strategist Stu Schweitzer for his take on various inflation risk scenarios. With the economy still in recovery mode and joblessness at elevated levels, consumer prices remain depressed and for this reason inflationary pressures are likely to remain tightly bottled up in the near term. But 100 years of his-tory has shown that inflation typically bounces back after protracted periods of exceptionally low inflation—or even deflation. Why? More often than not it has been the result of policymakers taking their eye off the inflation ball by over-stimulating the economy in an effort to address high unemployment. Once unleashed, rates of inflation have fluctuated wildly; the ‘70s are a perfect example of this as the consumer price index (CPI) zigzagged throughout the decade before peaking in 1979. What comes after inflation can be painful.

Sparking InflationFollowing the credit crisis, worri-some signs—such as commodity price

gains and a weakening of the dollar—have begun to heighten inflationary concerns. As former Federal Reserve Board Chairman Alan Greenspan has pointed out, an abundance of reserves supplied by the Fed could become inflationary tinder if proper con-trols are not instituted by poli-cymakers (i.e., tighter fiscal and monetary policies). The situation clearly bears watching for signals that inflation may be heating up or that government leaders and market participants are not adequately responding to the sounds of their “smoke detectors.” In our view, wages are not likely to be a catalyst of sustained increases in prices. In the past, labor unions’ strong bargaining power kept wages growing rapidly, even as other price components rose and fell. Today, with wage inflation minimal and a two decade-long weakening of organized labors’ bargaining power, labor costs should remain a benign component of overall pricing trends. Commodities, we believe, are far more likely to lead on the inflation front. But the key question is whether price

Inflation and the Global OutlookWhat history says about smoke detectors, a weaker dollar and the price of tea in China

speaking Investments

Interest Rates vs. Inflationchange vs. year ago (%)

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

10-yr TreasuriesCore CPIFed Funds

20

1618

12

6

2

14

108

4

0

Financial Primer

Deciphering Pricing

INFLATION(ARY): An increase in the cost of goods and/or services over time. DEFLATION(ARY): A

decrease in the cost of goods and/or services over time. DISINFLATION: A reduction of the rate

at which prices are increasing from one time period to the next (i.e., year-over-year); in other

words, a slowing of the rate of inflation. CONSUMER PRICE INDEx (CPI): An index that measures

price changes of a basket of consumer goods, most often measured from one year to the next (or year-over-

year) and adjusted for seasonal increases or decreases, such as the winter holidays or summer vacation travel.

CORE CPI: A CPI-based measure that removes two categories that are most commonly affected by temporary

price shocks: food and energy. Core CPI is considered a better long-term measure of underlying inflation

as it focuses on less volatile inflation components that are easily measured for average consumers, such as

housing, clothing and entertainment. TIGHT VS. LOOSE POLICY: “Tight” policy refers to more restrictive fiscal or

monetary stimulus, which effectively means lower government spending and higher interest rates. “Loose”

policy is the opposite—less restrictive fiscal or monetary policy, which means higher government spending and

lower interest rates. REAL (RATE OF) RETURN: The return on an inflation-adjusted investment; in other words, the

payback after removing the effect of inflation.


speaking Investments

increases for energy, foodstuffs and precious metal commodities will feed through to continued, more generalized inflation (as occurred in the ‘70s, but has not happened in more recent decades).

Keeping Inflation in Check

Whether commodities’ leading edge is translated into continued high-er inflation will depend largely on two factors—currency and inter-est rates, with rates likely to be the ultimate determinant. In the case of currencies, history makes it clear that when the dol-lar trends higher, inflation generally moves down (and vice-versa). It’s not clear which is the chicken or the egg, but one thing is apparent: If inflation is allowed to take root, it won’t be good for the dollar and, if the dollar weakens, it won’t help keep the lid on inflation. It is interest rates, however, that can keep everything in check. Consider the relationship among inflation (Core

CPI), monetary policy and bond yields, seen in the exhibit below. In the 70’s, in-flation led the way, with Fed policy too slow to head it off and the bond market even further behind the curve. It was not until former Fed Chairman Paul Volcker aggressively tightened mon-etary policy in late ’79 that the bond market “woke up” and began to price in higher interest rates. Since then, bond investors have been more sensi-tive to inflationary risks and more de-manding of premiums over equities to

compensate for taking them on—per-haps until now. In our view, if we are going to contain potential inflation, then bond yields will have to rise as the inflation risks grow in line with the recovery of the broader economy. This will be essential to maintaining global investor confidence in the dol-lar and the potential for real return on invested capital. We believe that may be critical for allowing the U.S. to continue to finance its mega deficits and sustain long-term economic growth.

Source: J.P. Morgan


Is there a natural convergence between DC and DB plans? When I hear the term ‘DB/DC convergence,’ I think of it in terms of two areas: First, investment options, or the fund line-up offered to participants, and, second, how that money is managed. The beauty of a DB plan is that professional managers in-vest money for participants who may not necessarily have the skills to run a complex investment portfolio on their own—after all, that’s not their job. The problem is that many companies have frozen their DB plans and I doubt they’ll be re-opened. If that’s the case, then you need to offer a broader array of choices inside DC plans. That’s the reason people are talking about DB/DC convergence: A lot of plan sponsors are thinking about choosing options from a DB environment and bringing them to DC plans.

What are the advantages of opening DC plans to extended asset classes? There’s definitely more near-term risk involved,

but not necessarily when taking a long-term approach to investing. Over the long run, we believe the risk profile of extended asset classes such as hedge funds and real estate isn’t appreciably different from equities. But instead of not offering extended asset classes at all to avoid volatility, risk profiles could be managed by setting limits on exposure to more volatile assets. Are actively managed strategies more risky than passive management? There is a misperception that pas-sively managed funds, or indexing, means less risk and that’s simply not true. Top ranked active managers have outperformed benchmarks—in down markets as well as during rebounds. My view on indexing is that too many people tend to put their investments on auto-pilot and forget about them. That is a mistake.

What does the future hold for Target Date Funds? I think you’ll see Target

Date Funds reassess their allocations and objectives depending on whether their goal is getting participants to re-tirement or through retirement. That means there needs to be a reassess-ment of the underlying risk assump-tions in these funds in terms of how—and when—they are allocating into various asset classes. And my guess is that these assumptions will need to be

subject to better disclosure rules.

What can DC plans learn from DB plans in terms of coping with the risk of inflation? Most DB plan sponsors are looking into

the types of funds or strategies that can help manage or mitigate the impact of inflation. They include investments in such strategies as infrastructure, com-modities and TIPS. If a DC plan spon-sor is worried about the inflationary impact, then these may be the type of strategies that should be considered for their plan participants in order to pro-vide options to help mitigate that risk.

Should participants think about DC and DB plans in terms of ‘retirement’ or ‘savings’? I think in some ways this debate gets to the core of the issue on the difference between DB plans and DC plans. A DB plan is like a forced savings plan for retirement. That in-flexibility was resolved by the advent of the DC plan. But re-labeling a DC plan as a “savings” vehicle instead of a “retirement” vehicle could have a real positive impact on peoples’ thinking. The central question is: How much self-discipline can participants exercise in a long-term “savings” vehicle?

This month Journey spoke with John H. Hunt, CEO of Institutional Americas at J.P. Morgan, about the

investment issues that institutions are focused on in 2010. John brings his unique insight to the challenges and

opportunities on both sides of the DC/DB divide.

Emerging ConvergenceE x E C U T I V E P E R S P E C T I V E

KEY BENEFIT PLAN LIMITATIONS

2009 & 2010 ROUNDED

THRESHOLD ($)

2009 UNROUNDED

THRESHOLD ($)

2010 UNROUNDED ESTIMATED

THRESHOLD ($)NExT

THRESHOLD ($)

INFLATION NEEDED TO

INCREASE (%)

Defined benefit dollar limit 415(b) 195,000 197,360 194,156 200,000 3.0

Defined contribution dollar limit 415(c) 49,000 49,340 48,539 50,000 3.0

401(k) deferral limit 402(g) 16,500 16,707 16,436 17,000 3.4

Catch up contribution limit 414(v) 5,500 5,569 5,479 6,000 9.5

Qualified plan compensation limit 401(a)(17) 245,000 246,700 242,695 250,000 3.0

Highly compensated employee threshold 414(q) 110,000 111,472 109,662 115,000 4.9


Legislative corner

Coping with DeflationThe Phantom “Bonus”

many benefiT Plans (including Social Security) are indexed to inflation, as measured from the third quarter of one year to the next. But only increases, not decreases, are automatic. So when the Consumer Price Index (CPI) declined roughly 2% from 2008 to 2009, Social Security benefits and most every benefit plan limit remained unchanged in 2010. While there was a popular outcry about this, it actually represented a 2% net in-crease in benefits over the previous year on an inflation-adjusted basis. But what one hand giveth, the other taketh away. These Social Security and other ben-efits plan “bonuses” will be clawed back because any net gains must be accounted for—i.e., taken out of—future increases due to higher rates of inflation. How this works is relatively simple. Since 2009 the CPI for Urban Wage Earners and Cleri-cal Workers (CPI-W) went down, while benefits remained unchanged for 2010. Any change in benefits for 2011 will be based on CPI-W for 2010 relative to 2008 (not 2009). Thus, it will take roughly a 2% inflation level over the course of the next year to break even. For example, if there is 3% growth in CPI-W from the third quarter 2009 to the third quarter 2010, Social Security benefits for 2011

will increase only by the excess 1%. The longer CPI remains negative (which is to say, deflationary), the longer it will take on the back end to make up for that in-flation-adjusted “increase” in unchanged benefits payments. A similar automatic adjustment basis is used for various IRS benefit plan lim-its, such as the maximum 401(k) con-tribution. (However, CPI for All Urban Consumers (CPI-U) is used instead of CPI-W.) In addition, it’s important to remember that these limits have round-ed thresholds that have to be crossed before a change is realized. The chart below shows some key limits and the inflation needed over this year to gener-ate a change. A slightly trickier indexed amount is the Social Security Taxable Wage Base ($106,800 for 2009), which limits wages subject to the 6.2% Social Security por-tion of the Federal Insurance Contribu-tions Act (FICA) tax and moves with changes in national average wages. Be-cause of reporting lags, the most recent wage index is for 2008, but this is used in determining the 2010 taxable wage base. While 2008 shows an increase of 2.3% over 2007, the taxable wage base for 2010 did not increase since there is

no cost-of-living adjustment in Social Security benefits for 2010. Thus, the 2010 taxable wage base will continue to be $106,800. For 2011, the taxable wage base in-crease will be based on the increase in 2009 average wages over 2007 (not 2008, since there was not an adjust-ment in this year’s wage base). As long as there is any cost-of-living adjustment in Social Security benefits (recall, that means inflation will have to exceed 2%), then the full two years of wage growth between 2007 and 2009 will in-crease the 2011 taxable wage base.

Source: J.P. Morgan Compensation and Benefit Strategies


In August 2006, Congress passed the Pension Protection Act. In October 2009, over three years later, the IRS finalized regulations, 319 pages worth, on DB funding and benefit restrictions. What’s new? In short, not much. Since the proposed regulations were first released, updated guidance has crept out in various forms. For example, the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) already settled the asset “averag-ing vs. smoothing” debate, and an IRS news-letter in late September allowed plans to make a fresh interest rate election for 2010, which meant they could take advantage of the unusually high spot yield curve for 2009 funding. The final regulations formalize such changes, and clarify some other items:

The use of a “standing election” to apply credit balances against mini-mum funding requirements.

Allowing sponsors that apply a credit balance to minimum funding

requirements and then “over-contribute” for the year to use the excess to replenish their credit balances.

Elimination of a requirement in the proposed regulations that plans offer

participants the right to defer payment of the restricted portion of a prohibited pay-ment beyond normal retirement age where the plan did not otherwise provide for such a deferral.

Clarification of rules for calculating the prohibited portion of an acceler-

ated payment that will allow payment of Social Security level income benefits in many cases.

Legislative corner

According to recent J.P. Morgan analysis, the 2008 market decline increased the retirement age for a typical employee by as much as four years. When potential employer actions like a 401(k) match sus-pension and/or pension plan freeze were added, the retirement age increased by as much as seven years.

By considering an analytic frame-work built around a participant’s determination of retirement sup-ply, demand and optimal retirement,

it is possible to establish a preferred dis-tribution strategy. From this framework, we have determined that: • A lump sum distribution from a pension plan can increase a participant’s

optimal retirement age by as much as two years (longevity risk significantly increases). • 401(k) match suspensions have a relatively small impact on optimal retirement age (less than six months). • Failure to incorporate assumptions on assets outside of corporate retirement plans can have a large impact on assessing retirement readiness (availability of out-side assets can reduce retirement age by three to four years for a typical employee). Given the large boomer cohort and retirement planning stress of the last 18 months, monitoring employee retire-ment readiness has become a critical component in corporate talent and succession planning. Bureau of La-bor Statistics data shows that over 40 percent of the American workforce will be eligible to retire in the next 10 to 15 years. Arguably, managing the orderly progression of boomer retirements may be the most important task facing HR executives in the next decade.

Implicit Impact? Considering longevity risk

IRS final regulations on funding and benefit restrictions

PENSION FUNDING RELIEF

house rep. earl Pomeroy (d-nd) continued his efforts to help db plans weather the financial storm. On October 27, 2009, he and representative Patrick Tiberi (r-Oh) intro-duced the Preserve benefits and Jobs act of 2009 (h.r. 3936). The major provisions of the bill follow close-ly rep. Pomeroy’s earlier discussion draft that we summarized in our last edition, in-cluding extended amortization of 2008 investment losses, expansion of the “asset smoothing” corridor, and “lookbacks” to 2008 pre-loss funded ratios for benefit restric-tions and credit balance purposes. The primary goal of these provi-sions is to help sponsors save cash by delaying contribution requirements. What’s changed? as before, if a sponsor takes advantage of the extended amortization option, a “maintenance of effort” will be re-quired—e.g., maintain the db plan or, if it is already frozen, provide a 3% allocation in the dc plan, or freeze all non-qualified benefits. however, the maintenance periods have been cut in half in the bill as introduced. further, the final bill removed the ability to make a fresh interest rate selection for 2010 since the recently released final irs regulations now provide that ability. finally, the new ver-sion tightens up the “Pbgc 4010” reporting required for under- funded db plans.


“I’m just a bill Yes, I’m only a bill And I’m sitting here on Capitol Hill…” Sorry, I had a brief childhood flashback of watching Schoolhouse Rock between Saturday morning cartoons. As has become clear from the ongo-ing healthcare debate, moving legisla-tion forward can be a laborious process, which isn’t necessarily a bad thing. While any member of Congress can introduce a bill, once submitted, the bill is referred to the appropriate congressional commit-tee. When we think of pension reform, there are four congressional committees that we are primarily concerned with. On the Senate side the Health, Education, Labor and Pension Committee, chaired

by Senator Tom Harkins (D-IA), has jurisdiction over private pension plans through ERISA. The Senate Finance Committee, chaired by Senator Max Baucus (D-MT), also has jurisdiction over pension reform through its oversight of the Treasury Department and the IRS. In the House of Representatives, the cor-responding committees are the Educa-tion and Labor Committee, chaired by Rep. George Miller (D-CA) and the Ways and Means Committee chaired by Rep. Charlie Rangel (D-NY). With regard to fee disclosure legislation, the bill that has moved the furthest is Rep. Miller’s 401(k) Fair Disclosure and Pension Security Act, which was reported out of committee in June. Of course there are other bills. Rep. Richard Neal (D-MA) has introduced a bill in the Ways and Means Committee, the Defined Contribution Fee Transpar-ency Act. And in the Finance Committee, Chairman Harkins has introduced the Defined Contribution Fee Disclosure Act co-sponsored by Senator Herb Kohl (D-WI), who chairs the Senate Special committee on Aging. The latter two bills are still in committee. While the two House bills have similarities, there are several differ-ences that would have to be reconciled before a floor vote. Most notable is the provision in Rep. Miller’s bill that would

require plans seeking 404(c) protection to offer an

index fund as one of the investment options, a provi-sion not found in either Rep.

Neal’s bill nor the Senate bill. It should also be noted that Rep. Miller has com-bined DB funding relief and investment advice reform with his fee disclosure bill, issues that Ways and Means would prefer to address separately. Even assuming that the Education and Labor and Ways and Means commit-tees are able to come to an agreement and a bill is voted on by the House and passes, the Senate would need to consid-er and vote on the matter as well. If both houses of Congress pass legislation, the bills would then go to a joint conference where differences would be reconciled before gaining final approval and being sent to the President for his signature. It should also be noted that should a bill be signed into law, we would then look to the regulatory agencies, the Department of Labor and IRS, to issue regulations interpreting the legislation. As noted above, the legislative process is laborious and time consum-ing, which explains why only a small percentage of bills ever make it all the way to the President’s desk. Throughout the process, interested parties have op-portunities to weigh in with suggestions and concerns, hopefully resulting in an end product that meets congressional goals while avoiding undue burdens or unintended consequences.

Ask Bob A conversation with Bob Holcomb on federal matters large and small

In a recent webcast you mentioned multiple fee disclosure bills that are currently under consideration in Congress. Can you describe the process of how these are reconciled and who decides what moves forward?

Each issue, Bob answers a question he receives from readers. Please send your questions to: [email protected]


Plan Sponsors Discuss Their ‘Real-World’ Retirement Issues

PlanSponsor

R O u n D T A B L E

J.P. MORGAN ASSET MANAGEMENT FOREST LABORATORIES, INC. THE INTERPUBLIC GROUP

HITACHI AMERICA, LTD. VIACOM INC.

FINANCIA

L

TIMES

PEARSON


haT are The key challenges to reaching retirement plan participants? Ask five different plan sponsors and you are likely to get five different answers. So that’s just what Journey did at a roundtable discussion held on November 4 at J.P. Morgan’s New York City headquarters hosted by Editor-in-Chief, Daniel Darst. The group of five veteran benefit executives shared their experiences and found a surprising degree of convergence on key issues. Among the common themes: combating participant inertia, dealing with demographic diversity in a plan and crafting more effective communication strategies. While the assembled plan sponsors’ approaches to these and other topics differed as often as they overlapped, the roundtable produced a dialogue rich with scenarios, solutions and suggestions for the wider plan sponsor community. Excerpts of that conversation follow.

MODERATOR: DANIEL DARST, Head of Institutional Marketing

J.P. MORGAN ASSET MANAGEMENT

CAROL FARMER, Director of Benefits HITACHI AMERICA, LTD.

WARREN SALERNO, Director of Benefits

THE INTERPUBLIC GROUP

BERNARD MCGOVERN, Vice President, Human Resources

FOREST LABORATORIES, INC.

VIACOM INC. SCOTT RUNKLE,

Director of Benefits (MTV)

PEARSON JIM O’CONNOR, Vice President

of Retirement Benefits


DARST: Inertia seems to be a buzzword for plan sponsors. How big of a problem is it? MCGOVERN: We put in an auto enrollment program—at a 1% contribution level—a few years ago and for the most part those contributions are still stuck at 1%. The market can go to hell in a hand basket, but there’s still a ton of inertia. We have seen increased website activity, but it’s mostly administrative in nature—checking balances or getting a new password. We still need to move the ball forward to better engage our employees. FARMER: A lot of the inertia has to do with people thinking they don’t have the knowledge to plan for their own retire-ment. Employees tell me they’re afraid. They actually come up to me and say that in the hallway: “I’m afraid. Please. Tell me what to do.” Even though we’ve experienced a lot of market turmoil, our employees didn’t touch their retirement plans because they were just too scared to do anything. Our goal is to alleviate that fear factor. O’CONNOR: Our Investment Committee has also realized that inertia has set in among our employees. We went to 401(k) auto enrollment six years ago and began to automatically increase contributions last year. We’ve also had J.P. Morgan Retirement Plan Services people visiting our offices across the country. Those meetings are voluntary and we get about 15% partici-pation rates. But that means the 85% who don’t come to the meetings aren’t getting the message on retirement planning. Our chief concern is that people tend to move into safer invest-ments during bad times for the market but then miss out on the positive swings during the good times due to inertia. One big problem is that employees say they don’t know how to make

their money last through retirement—or how to get a handle on retirement needs as their personal finances change. RUNKLE: We have a lot of creative types and we puzzle over how best to engage them and keep their interest. Our biggest challenge right now is the communications aspect. How do we get the message out without inundating employees? SALERNO: We, too, have seen inertia set in. That’s one rea-son why we’ve tried to change our communications strategy to deal with the issue. DARST: So how do you penetrate ‘the wall’ around inertia-bound participants? SALERNO: A recent survey I saw showed that most people seem to take advice from close friends, or a trusted doctor or

lawyer. And who did it say they trust least? Their employer. So that’s what we’re up against. FARMER: In my experience, you’ve got to send someone to each facility to explain it to employees face-to-face—and keep at it until they understand. I heard about a case

where at one of our educational sessions there was a young employee in his twenties and he said: ‘You know what, I’m going to put 1% of my paycheck into the plan.’ And then his friend said: ‘Oh yeah? Then put me down for 2%.’ So the first guy says: ‘Make mine 3%.’ I try to stress that the match is like free money, like money on the table—so why walk away from it? SALERNO: In my prior firm, it was a very unionized shop. But I found that if you could just convince the four or five key motivational drivers in their group, then almost everyone would sign on. DARST: Do sexier labels like “saving” work better than the plain vanilla term “retirement” when it comes to engaging participants? MCGOVERN: A 33-year old doesn’t care about retirement. For them, the issue is saving. So we focus our communications

on the issue of financial security in retirement by saving, which is a more user-friendly term. Once they’re in the plan, of course, you can do something to move them to the next level. But the message to 75% of my company’s employ-

ees can’t be about “retirement” per se. It has to be about where you are in your career. SALERNO: Instead of talking about retirement, we talk about 401(k) plans as a means of “saving.” We don’t use the “r-word” because the whole concept of retirement just seems too distant for our relatively young and mobile employee demographic. But it’s not just an age issue. What I hear from our employees is that they like the term “investment.” That’s true no matter if you’re 20 or 50 years old. RUNKLE: I’m very interested in this issue of terming it “sav-ing” vs. “retirement.” We have gone back and forth on that one. Should we be blunt with people—and tell them you have to save for retirement? Or do we go to a more “savings”-based approach by telling them that life is a series of events, and this

There are too many messages. The end result is that people are not any smarter about what they need to know–and how

to act on that knowledge. –McGovern

You’ve got to send someone to each facility to

explain it to employees face- to-face–and keep at it until they understand. –Farmer


is just one point on a map? We have to figure out the best way to communicate with our participants about this. FARMER: We focus on both “saving” and “investing” in our communications. But a bigger issue for us is that a lot of people consider their 401(k) plan as their only savings ve-hicle. We need to do a better job teaching people how much they should be investing in their retirement accounts so it can stay in there and grow for them over time. Of course, there will be times they need to take a loan. But that should be the exception rather than the rule. DARST: How do you respond to the challenge of meeting the needs of widely different demographics among participants under the single umbrella of your plans? RUNKLE: Our general population skews pretty young—the average age is 33-35. A few years ago, we split from CBS so we became a much smaller and leaner company. That gave us an opportunity to look at our retirement plans from a fresh perspective. For one thing, we have decided to change our DB plan to a lump sum program. On the DC side, we increased the 401(k) corporate match recently. We were able to do that at a time when the econ-omy was deteriorating, which won us some plaudits inter-nally. While most of our employees are young, we do have some near retirement. So as a plan sponsor we do wrestle with how best to target those two different populations. Right now, we are reviewing our fund line-up. We’d like to get into Target Date Funds as a possible solution. MCGOVERN: Our young salespeople are buying houses and diapers. The middle-aged group is busy paying for all that. It’s only once you consider your own mortality—that comes later, near retirement—that you focus on things like outliv-ing retirement funds as a real issue. SALERNO: Our employees’ average age is 36-37. We have high turnover as well. That presents some problems and solves oth-ers. Our 401(k) plan’s employee participation rate has increased because many of the employees affected by our reduction of force were young and not participating in the plan, which effec-tively brings up the overall rate of participation. So can we call that increase a ‘success’? It just goes to show how misleading statistics can be when viewed without context. FARMER: It’s not only about reaching the two demographic extremes—youngest and oldest—it’s also about reaching all the people in between. DARST: Are there too many investment choices for partici-pants–or not enough? SALERNO: Yes, the problem is that there are just too many options. It’s overwhelming for most people. A decade or two ago, people used to want more choice, but now I won-der about that.

MCGOVERN: I agree the chief problem is that participants just don’t know enough about what the product choice represents. O’CONNOR: We use Target Date Funds for our auto enroll-ment. In that respect, we use employees’ inertia to their own advantage. We’re up to 50% of our participants in some form of managed program. But you always have to keep saying: ‘Does everybody get it?’ Some people come to us and say: ‘Gee—I haven’t touched my retirement savings in three years.’ We need to teach them core skills like how to rebalance.

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RUNKLE: We have a lot of people who sign up for retirement planning educational sessions, but then they tend to tune out once they are there. They tend to think: ‘Investments are boring.’ FARMER: So that’s why it’s up to us as plan sponsors to make it more interesting. RUNKLE: But how do you do that? I mean, does the average employee really need to know about P/E ratios? Maybe they just need to understand more basic concepts like diversifica-tion. That may be enough. DARST: What are your thoughts on DB vs. DC? In other words, will future DC plans morph into something more like traditional DB plans? SALERNO: Being a long-time benefits guy, I am a big fan of DB as the best way to deliver on retirement. If our investment pros can’t beat the market, then how can we ask employees to do it for themselves? Somewhere along the line, there is going to be a shift back toward a requirement for employers to reinstate DB plans. Then 401(k)s will go back to what they used to be: a supplement to DBs—not the end-all, be-all. With the government getting into healthcare, that might prompt some discussion of this next. O’CONNOR: DB plans reward careers at one company. So by default, we’ve shifted the responsibility to employees as the la-bor force has grown more mobile. DB is just not in the picture anymore, not with careers spanning multiple companies. FARMER:Younger people don’t understand DB plans. That’s not their thing. Plus, the 401(k) is portable—that’s very im-portant in today’s world. MCGOVERN: You can’t compete for talent unless you have a 401(k). It’s essential that you have it and that it performs well. You need the materials to show it. We have people who come to us from venture capital firms without DC plans. It becomes a bottom line criteria like healthcare. It doesn’t change the

inertia factor, of course. But the companies that withdraw DC plans are going to find it difficult to hire good people.

DARST: Communications seems to be a common denomina-tor. What are your most effective strategies for getting the message out to participants?

SALERNO: How do you know you’re not just reaching the same group of employees that least need it? These are the people who read the business pages of the paper and financial websites. Most of the people who tend to show up for retire-ment education seminars seem to be those who are the most active plan participants. How do you reach the others? MCGOVERN: We have spent a lot of time and money on the “one percenters” instead of creating a message that is going to be informative for all participants broadly. One pe-riod we went to diversification, then age-based, then match-

ing. There are too many messages—and I’m proud to say we’ve done each very skillfully! [laughs] The end result is that people are not any smarter about what they need to know–and how to act on that knowledge. O’CONNOR: We focus on one big message a year. But

we really should have more messages on topical issues in my view. We have a quarterly newsletter and other occasional e-mails. You need to have timely messages: during tax sea-son, for example. We put out an e-health communication for health screenings and such. But we also have an ‘e-financial health’ communication series to inform our employees about retirement planning. SALERNO: Instead of one 12-page letter, do 12 one-page let-ters. That’s much more effective. MCGOVERN: A lot of these communications tend to come at the wrong time of year—the end—which is just when people are busiest and most easily distracted. And there’s a tendency to treat people like idiots. They don’t take the time to read materials, so we dumb it down. But that doesn’t help. We need to treat employees like educated adults, but time the communications better. So we’ve struggled to re-shape things along those lines, but it’s not easy. FARMER: I don’t agree with that—sometimes it helps to ‘dumb down.’ I have found that the employees you think would be the most astute are often the ones who you wind up spending the most time on. Believe me, most employees think that retirement planning is more complex than we do as plan sponsors because we deal with it every day. We have to spend so much time explaining that I think some ‘dumbing down’ can help!

If you could just convince the four or five key motivational drivers

in [the participants] group, then almost everyone

would sign on. –Salerno

We use employees’ inertia to their own advantage.

–O’Connor

Or do we go to a more “savings”- based approach by telling them that

life is a series of events, and this is just one point on a map? –Runkle


leading-edge TechnOlOgy and custom-er-focused product innovation are two core competencies heralded by Bemis Company, a multi-national supplier of flexible packaging materials. These pro-ficiencies reverberate throughout the company’s lines of businesses and depart-ments—right down to their 401(k) plan. So when Bemis considered changes to its DB pension plan and 401(k) plan back in 2006, they began with the plan’s structure to ensure it donned the latest in-novations in 401(k) plan design. Once the changes and enhancements were agreed upon, a strong communications strategy was developed and implemented. “We saw this as an opportune moment to promote the benefits of the changes to participants and educate them on sav-ing wisely for retirement,” says Melanie Higgins, Retirement Plans Manager for Bemis. “We are committed in our strategy to motivate employees to not only partici-pate in the plan but to remain engaged.” Bemis demonstrates a profound

commitment to help employees achieve their retirement goals by offering attrac-tive employer contributions coupled with an aggressive plan design that features ‘auto-enroll’ and ‘auto-increase’. The result is a salaried and non-union hourly employee plan participation rate of over 96%.

Show Me the MoneyIn general, all new employees are auto-matically enrolled in the 401(k) plan at a 3% deferral rate. The company offers a matching contribution to its salaried and non-union hourly employees of 50 cents on the dollar up to the first 2% and then 25 cents on the dollar up to 8%. This is complemented with a profit sharing contribution of a minimum 2% and potentially as high as 5% (for partic-ipants that defer at least 3%) depending on yearly corporate profitability. This profit sharing contribution replac-es the DB plan benefit that was frozen for most existing employees in 2006. New employees are eligible for the employer match and profit sharing contributions.

Flipping Inertia on Its HeadOffering attractive employer contribu-tions, including an employer match and profit sharing, can greatly incent em-ployees to participate in the plan. But it may not be enough to win the battle against employee inertia. That’s why an aggressive mixture of ‘auto-enroll’ and ‘auto-increase’ could help a plan to achieve and maintain a high rate of

employee participation. “We take ‘auto-enroll’ and ‘auto-in-crease’ a step further” explains Higgins. “Annually, we re-enroll employees who opt-out of the plan during the course of the year but remind them of their option to contact their recordkeeper if they choose not to participate.” Not sur-prisingly, many employees choose not to contact their recordkeeper to opt-out—a good case where inertia works in favor of the employer and the employee. Just Do It!Implementing plan changes can be a frighteningly complex task, and there’s much to consider for the plan sponsor: employee morale, cost, plan design, communications, ongoing education, etc. “Yes, you may encounter some push-back from employees but it won’t be as bad as you think,” says Higgins, who was tasked with overseeing plan imple-mentation at dozens of offices through-out the U.S. Even with the implemen-tation of ‘auto-increase’, Higgins was surprised by how little pushback there was from employees. “What worked here was giving employees advance notice of the changes, clearly explain-ing the benefits and providing multiple opportunities to ask questions.” Deep down inside, many employees recognize they should be saving more for retirement. Perhaps that’s why they won’t mind some poking and prod-ding from their company to help them achieve their retirement goals.

How a packaging technologies manufacturer applied its commitment to innovation in an effort to maximize 401(k) plan participation

Shrink Wrapped

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

NAME: Bemis Company, Inc

HEADqUARTERS: Neenah, Wisconsin

BUSINESS: Multinational manufacturer of flexible packaging and pressure sensitive materials with sales of over $3.5 billion

EMPLOYEES: More than 15,000 employed in manufacturing plants and offices throughout North and South America, Europe and Asia

U.S. 401(K) PLAN ELIGIBILITY: Approximately 8,000 employees (of which 6,000 are salaried and non-union hourly)

PLAN HIGHLIGHTS: Auto-enroll; auto-increase; discretionary and employer matches; ‘total rewards’ statement

PLAN STATISTICS: 96% participation rate; average deferral 7.75% [as of September 30, 2009]

2010 OBJECTIVES: Pending integration of nearly 2,500 new employees from an acquisition

401(k) INDUSTRY AWARDS: "Game, Set, Match" Deferral Increase Campaign (July 2008)—Bronze quill, Gold quill, First Place Eddy Award (P&I Magazine), Silver Signature Award (PSCA); "Join the Team" Conversion Campaign (Oct 2006-Jan 2006)—Bronze quill, Silver quill, First Place Eddy Award (P&I Magazine), Gold Signature Award (PSCA)

GREATEST PLAN CONCERN: Meeting requirements from pending government regulatory decisions around employee education


For thousands of participants enrolled in 401(k) plans, the face of J.P. Morgan sports white whiskers, twinkling blue eyes and a gentle smile.

INSTEAD OF AN ASCOT, THREE-PIECE SUIT AND BLACK WINGTIPS, HE FAVORS OPEN-COLLARED pink button-downs, khaki slacks and a pair of brown leather loafers. Meet Dale Knowlton, one of 16 Financial Education Consultants (FECs) whose never-ending mission is to demystify retirement benefits plans by engaging with plan participants—up close and personal—in all 50 states. “Often we’re the only people from the plan administrator that participants come into

contact with,” says Dale, a three-and-a-half year veteran of the client education circuit. “I take it as a grave responsibility to provide clear information and suggest how they can make the most of it.”

DALEKNOWLTON

D AY I N T H E

L I F E O F

10:00


FEC road warriors work outside their home office up to five days a week, lugging compact projectors, sleek laptops and thick briefing books. They conduct meetings starting as early as five o’clock a.m. to as late as midnight, and in conditions ranging from unheated garages in the field to richly appoint-ed conference rooms at corporate headquarters. Though they range far and wide, the FEC corps is supported by a dedicated team of internal staffers in Kansas City, Missouri a network of Communication Strategists, Consultants and Design and Delivery team members who work closely with them to co-ordinate and customize visits. For Dale and his fellow FECs, breaking down complex asset management philosophies and strategies into easy-to-digest action plans and tackling questions from both invest-ment novices and sophisticates alike is all part of a day’s work. We recently caught up with Dale between bookend appointments at facilities in several Northeastern work sites. HIS AGENDA: conduct educational seminars for four separate clients as part of a four-day visit. OUR OBJECTIVE: tag along for a day to see the front lines of an ongoing battle to inform and update participants about their company’s DC plans and new developments in the overall investment environment. What follows is a compilation of a ‘typical’ day for a FEC based on actual itineraries. Some of the dates, locations and times have been modified to conform to a hypothetical 24 hour window...

Dale springs out of bed everyday before sunrise—a vestige dating from his career as a public high school teacher prior to joining J.P. Morgan. After washing

up, downing a cup (or two) of coffee and checking overnight e-mails via his ever-present Blackberry, he hits the road…

Most days dawn for Dale with a 45-minute commute to the Kansas City airport from home, or a drive to a client meeting from an airport hotel. Today, after

checking out from his room, a hotel near Newark Liberty International Airport in northern New Jersey, Dale aims to reach his destination by…

After braving the Garden State Parkway, Dale pulls into the parking lot of a manufacturing plant located in an industrial park on the outermost edge of a

major metropolitan area. Inside, his first meeting of the day awaits at the 24-hour facility. Guided to a cafeteria ringed with vending machines just off the factory floor, Dale sets up his projector on table and unfurls his indispensable 9-foot extension cord in search of an outlet. Next, he briefly reviews his notes for the presentation at…

A collegial crowd of shift workers wearing forest green company uniforms and steel-toed boots slowly files into the room, some carrying Styrofoam coffee

cups and others with hard hats and goggles tucked under one arm. The group is split fairly equally between men and wom-en, ranging in age from their early 20s to late 50s. Amid the din of unfolding chairs and loud conversations, Dale clears his throat. “I’ll have to use my teacher’s voice,” he determines. But once everyone is seated, the room quiets down and Dale kicks things off by asking an open-ended question: “What do you think are the five major sources of income in retire-ment?” He tells them to take five minutes and come up with some possible answers. The room starts to buzz with conver-sation and gradually a consensus emerges: Social Security, pensions and 401(k) plans, other investment income (such as home ownership), supplemental earnings and inheritance or gifts. Dale has succeeded in his first task by getting partici-pants to relate to the ‘big picture’ of retirement. In another exercise, Dale works the room with a game. He

tells everyone to stand up and then poses a series of probing questions. Have you looked at your 401(k) balance in the past six months? Do you know what your current asset allocation is? When do you start receiving Social Security benefits? What year do you plan to retire? Have you calculated how much you will need to retire comfortably? Those who don’t know the answer after each question are asked to sit

down. After the five questions only one of the 25 participants is left standing, thereby winning the game by default. Dale looks at the room and says: “Most of you don’t know the answers. And you know what? You’re in good company. The majority of Americans don’t either. That’s why I’m here.”

T HE GIST OF DALE’S 45-MINUTE PRESENTATION deals with basic topics such as asset classes, risk vs. return, short-term vs. long-term investing and website

tools for rebalancing. By half-way through, most of the par-ticipants are nodding in acknowledgment or voicing their assent with a “yes,” “uh-huh” or “si.” Dale scans the room for what he calls the “local champion” or key influencer, typically a veteran employee who has earned the respect and trust of his or her colleagues. If an influencer can be won over to, say, recommend that co-workers increase their 401(k) contri-butions, Dale knows that his job becomes that much easier.

05:00

07:00

09:00

Most of you don't know the answers. The majority of Americans don't either. That's why I'm here.


Participants are more likely to pay attention and follow up on the session by taking action once “Big Bill” or “Sister Sally” is on-board with the retirement plan’s goals.

DALE STRESSES THE IMPORTANCE OF MAKING reassessment of evolving retirement planning needs a fundamental part of their routine. “It’s very impor-

tant that you don’t ‘Set and Forget’ your allocation,” he says. Instead, Dale advises them to rebalance their asset allocations regularly at least once a year. “You don’t have control over a lot when it comes to the financial markets,” he tells them. “But you do have control over your allocations.” By all accounts, he succeeds in focusing the plant workers on the topic—if only for part of their busy day. It will likely have been their only chance this year to hear about their retirement needs directly from the plan administrator. Indeed, most partici-pants appear to have learned something new. Some stop by afterwards to ask questions one-on-one with Dale. At one session, a young man with an athletic build and sweat-drenched ban-dana tied around his head asks sheepishly: “Can I talk to you for a minute?” After con-fessing that he has no idea how much he contributes to his 401(k), Dale hits a speed dial key on his cell phone and says: “Let’s find out now.” The worker hems and haws a bit, but finally agrees to take the handset. “He seemed a bit intimidated at first, but once connected to a service rep he became downright chatty,” says Dale. “I could see his comfort level change right before my eyes.” Another participant, a middle-aged administrative worker with a big personality, asks Dale how she can take advantage of the company match without slashing her take-home pay. He explains how she can plan ahead by picking one day each year—her birthday, he suggests—when she will

increase her contribution by just 1%. That, Dale says, would ease her into the plan in a way that progressively raises her contributions over several years. His work done, Dale un-plugs his extension cord and packs up his things. Next on his agenda is…

A quick bite from a fast food chain’s drive-thru win-dow is all Dale has time for en route to a meeting 56.3 miles away scheduled for…

Dale cruises through the town of Norwalk, Connecti-cut and turns off a suburban thoroughfare into a con-temporary, five-story office complex. After parking

and checking in at the security desk, he heads up to the fourth floor of Hitachi Capital America Corp. Ushered into a plush conference room, Dale sets up for his second presentation of the day. The session begins promptly at…

A hushed group of two dozen business profession-als rings the blond wood conference room table in front of Dale. They have come well prepared for

the briefing—many tote yellow legal pads, small laptops or steaming cups of cafe latte. Dale clears his throat, says ‘Good afternoon” and then starts out the session with a matter-of-fact question: “How many people here go online to access their account?” Almost everyone in the room raises his or her hand. “I thought so,” he says with a grin, pressing a button

Meetings “There is a real sense of satisfaction, when you deliver a good meeting and people walk out knowing a lot more than when you started. That gives you a warm, fuzzy feeling inside. Of all the many people who work at J.P. Morgan Retirement Plan Services, very few ever get to meet a participant first hand. We FECs feel privileged to be able to carry out that role.”

Participants “I’m pretty good at identifying difficult content and breaking it down into easy-to-understand terms. I also have developed a sense for assessing whether or not an audience is getting the intended message. It’s not unusual for people to apologize to me for their ignorance about investing for retirement. But I always stop them and ask: “When were you ever taught this?” Of course, they say they were never taught it. And I say: “You’re absolutely right. That’s my job!”

Business Travel “I’m on the road 4-5 days a week. The upside is that I get to see a lot of the country. One thing I’ve learned is that there are good, hard working people all across this country. I get to see that everyday. We hear about bad people all the time in the news, but what I see is the good side of human nature. People helping other people. I’ve also been able to see some pretty cool things—niagara Falls, the fields of Valley Forge and the Henry Ford Museum. Side trips are always a special treat.”

DALE ON

12:00

14:00

15:00

You don’t have control over a lot when it comes to the financial markets... But you do

have control over your allocations.


on a handheld remote that launches a PowerPoint presenta-tion onto the wall behind him. At that point, the two-way conversation is already well underway. The early slides cover investing fundamentals and fly by like tracer bullets as the participants race ahead of Dale at every juncture. Topics jump from a discussion on the value of compound returns to IRS plan contribution limits. Much of the presentation has been tailored in advance to specific ar-eas of the Hitachi Capital plan, such as the employer match, a supplemental retirement savings account and the company’s vesting policy. The participants seem to appreciate the level of detail. Dale is continuously sidetracked by questions and the discussion strays from his talking points. One participant wants to know: “Is it possible to transfer 401(k)s?” (Yes.) Another asks: “Are Target Date Fund fees different from non-Target Date Fund fees?” (Yes.) A third query is: “Did the government’s stimulus plan alleviate the cost of taking out a 401(k) loan?” Dale answers simply: “Not that I’m aware of, but I can look into that.” While the questions are tough in some cases, the questioners are unfailingly courteous. Dale has found that is almost always the case—no matter if the market is up, down or sideways. De-spite the zigzag nature of the conversation, Dale keeps circling back to a central theme: “Time is a very important tool when planning for retirement. A 1% increase in your contributions has a minimal impact on your monthly take home pay, but it may have a significant impact on your long-term retirement savings,” he says. “Remember: you’ll never again be as far from retirement as you are today.” That seems to resonate with the assembled participants, many of whom scribble down notes throughout the presenta-tion. At the end of the hour, Dale volunteers to stay on and answer any questions individually. Half a dozen participants take advantage of the offer and confer with him for another 30 minutes or so before the room clears. One of those partici-pants, Mary Wynn, 59, an AVP in the collections department, says she learned something new. “I wanted to ask him about age group analysis for getting on track for retirement,” she says. “Dale is very user-friendly. He explains things so sim-ply.” Having gotten some positive feedback from Mary and others, Dale packs up his things and makes his way back to his car. Next up, it’s dinnertime at…

A local restaurant is where you can find Dale on many a weekday. Often, he will treat the HR folks at his last client meeting of the day to dinner. Then

it’s back to the hotel by…

The final chapter of Dale’s daily routine is to confirm the next day’s appointments and travel itinerary.

Tomorrow, he is headed north to New Hampshire for another outreach meeting. Once his morning outbound flight from Newark has been re-confirmed, it’s close to…

After the laptop is stored away and tomorrow’s clothes are laid out on the other twin bed in his hotel room, Dale’s eyelids grow heavy, the digital

clock on the bedside table reads…

It’s lights-out time for Dale, who has another busy day ahead of him, starting at 05:00.

17:30

19:30

21:00

22:00


Mixing Science

with Retirement PlanningBehavioral science and how

it can impact communications

PEOPLE BEHAVE IRRATIONALLY. Social scien-tists know this and are continuing to explore ways to get us to make better decisions in spite of ourselves. The study of behavioral science is growing in popularity as a way to help explain

why people make the choices they do—whether they are at the grocery store or planning for their retirement. The fundamentals of behavioral science are simple. People try to make rational financial decisions based on economic needs and information available to them. They struggle to do what is best for them and their families. But preconceived notions can interfere when people have to make decisions. Often they take actions that defy traditional economic the-ory. For example, many people do not save for retirement, although they know they should. Others have unrealistic expectations about market returns and their ability to make effective investment decisions. Behavioral research has revealed flaws in some assump-tions made in the retirement industry. Behavioral economics

challenges many of the assumptions that are underlying a DC plan design, communication and education. Inertia con-tinues to be a significant issue and is often the reason why individuals don’t take advantage of the savings opportunity offered by their DC plan. We see this in low participation levels, below-the-match contribution rates and skewed asset allocations. While some people think they are savvy inves-tors, they are unable to exercise impartial judgment in their savings behavior. By understanding and effectively using choice architecture, a concept developed by behavioral economists Richard Thaler and Cass Sunstein, communications can be better targeted to encour-age behavior that results in improving a long-term outcome.

Choice ArchitectureWe are all choice architects. According to Thaler and Sun-stein, a choice architect is anyone who helps shape situations in which people encounter choices—for example, people who arrange displays in a grocery store are choice architects.


Decisions can be influenced by how choices are presented, and this can be utilized in retirement plan communica-tions as well. If choice architecture is used in structuring a communications program and the preferred choice (e.g., a 10% contribution rate) is at the top of the list, often participants will select the preferred choice simply because of its location. Choice architecture consists of sev-eral key principles including hyperbol-ic discounting, hedonic arbitrage and social norms.

Now or Later?Hyperbolic discounting is a technique often used in behavioral science to help explain how people save for retirement. We tend to take smaller payoffs now over larger payoffs later. Also, if people have to make sacrifices in the present, they will avoid preparing for the future. Often if the choice is between $50 now and $100 in a year, many would ask for the $50 now. However, given the choice between $50 in nine years or $100 in 10 years, many would likely choose the $100 in 10 year option. For example, an indi-vidual might be willing to trade a com-fortable retirement in the distant future for a $500 a month car payment now. Based on the hyperbolic discounting the-ory, some people would choose the new car because of the quicker gratification instead of saving for retirement.

Breaking it downHedonic arbitrage is breaking infor-mation into smaller chunks, dividing a complex or daunting task into more manageable pieces. Examples of hedo-nic arbitrage include:> putting away “mad” money or saving

for a “rainy day”> a 401(k) plan with a brokerage

option> separate accounts to save for some-

thing specific (college, healthcare or retirement)

A retirement plan example of hedo-nic arbitrage is when a new employee enrolls in a 401(k) plan, a task that can be less overwhelming with a quick en-rollment form at a designated contri-bution rate into an appropriate Target Date Fund. Changes can be made by the employee to their contribution rate and asset allocation at a later date.

Everybody’s Doing ItPeople are powerfully influenced by others around them. Values, beliefs, at-titudes and behaviors are determined by social norms, which are the behav-ioral expectations and cues within a society. Awareness of a group’s social norms can bring acceptance and popu-larity and minimize the effects of go-ing against the status quo. They help us “get along.” Research has consistently shown peers to be one of the strongest influ-ences on behavior. In 1995 and 1996, the Minnesota Department of Research conducted experiments about tax eva-sion through direct mail campaigns. If taxpayers overestimated the preva-lence of tax evasion, their compliance improved once they were told the true rate of cheating. The experiment re-sults confirmed that tax compliance is influenced partly by social conformity. Similarly, considering the social norm theory, participants in retirement plans can be positively influenced by know-ing their co-workers are participating in the retirement plan.

ConclusionWe sometimes fail to make the best de-cision if we are given total freedom of choice and, as a result, we may regret our choice later. Integrating behavioral science theories into communication approaches can more effectively guide participants into making more rational decisions and help them have enough money to live comfortably through their retirement.

Have It (y)Our WayThe Case for Choice in Retirement Communications

“Choice architecture describes how decisions are influenced by how choices are presented,” says Diane Gallagher, Head of Participant Communications at J.P. Morgan Retirement Plan Services. “There is no such thing as neutral design.” Choice architecture is being ap-plied everywhere every day from green initiatives to food item placement in cafeterias to legislation and social policy. Even in retirement planning? “We continue to deepen our under-standing of why people behave the way they do,” Gallagher says. “By applying choice architecture into how we commu-nicate with participants we can help them make better decisions about retirement.” It seems to be working. For a large energy company’s “Finan-cial Health Week” campaign, J.P. Morgan applied an integrated marketing approach with social norms and a pledge/reward strategy that resulted in a 45% response rate, a significant increase over the aver-age direct mail rate of 3% to 5%. “People are heavily influenced by those around them,” Gallagher says. “We showed participants results of the retire-ment survey they were taking in real time. They could actually see what their colleagues were saying, and more than 34% of them pledged to complete some type of action—increase contributions, at-tend a retirement plan seminar or simply join the plan.” While the term choice architecture may seem vague, Gallagher says its ap-plication is very simple. For a recent campaign for a retail food chain, designed to offer non-participants an easy way to join their retirement plan, J.P. Morgan modified a standard quick enrollment form by adding two contribution rate options and placing them in descending order. Twenty-nine percent of respondents en-rolled at an 8% contribution rate while the remaining 71% split their contribu-tions between 5% and 3%. “That’s the kind of behavior change we look for every time we communicate with our participants,” Gallagher says.


A ‘Freakonomics’ Perspective on

RetirementJourney talks to Dr. Steven D. Levitt

Journey: Over the years, the retirement industry has often used images about

the “ideal retirement,” a sedentary por-trait of people in rocking chairs. What

does retirement really look like, or how would you change those pictures?

Dr. Levitt: Ideas about retirement were developed decades ago, specifically the

idea of retirement age. Since ‘retirement’ was introduced as a concept, life expec-

tancies have increased, and the health of the elderly has increased dramatically.

The average 75-year-old is at least as healthy as the average 60-year-old was

40 years ago. The idea that a rocking chair will keep people satisfied is probably not a very accurate one.

Go back to the 1920s and look at the sorts of jobs people did. They worked

brutal six-day weeks; they were broken down by hard manual labor by the

Recently, Dr. Levitt, the acclaimed Freakonomics author, shared his

thoughts about retirement in American society with Journey.


Freakonomics 101What is Freakonomics anyway?

A better question might be: what isn’t? The term comes from the title of a bestselling 2005 book by noted university of Chicago economist Dr. Steven Levitt. His book, Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, is an attempt to make neoclassical economics—a field often described as “the dismal science”—into something

approaching a breezy beach blanket read.

Levitt and his writing partner, New York Times reporter Stephen Dubner, succeeded in that by using real world examples bringing sleepy academic theory to life—and in high definition. For instance, they analyze data on sumo wrestler bouts to discover patterns indicating cheating and examine socioeconomic outcomes based on naming conventions for children (“A boy named Winner and brother named Loser.”) After the success of that debut

effort—which sold more than three million copies worldwide—a sequel was published earlier this year entitled, SuperFreakonomics: Global Cooling, Patriotic Prostitutes and Why Suicide Bombers Should Buy Life Insurance.

A 1989 Harvard university graduate, Levitt earned his PhD. in economics from MIT in 1994, and has taught at Chicago since 1997. In 2004, he was recognized as one of the most influential economists in America under the age of 40 by being awarded the prestigious John Bates Clark Medal.

time they retired. The modern workforce has a different expe-rience. They might be worn down emotionally but not physi-cally the way people used to be. The physicality of manual labor has been lessened by technology. Not many 30-year-olds today will retire when they’re 65. If you reach 65, you have 20 more years of life expectancy. It’s an odd notion that people work extremely hard for 40 years to spend 20 years not working at all. J: What’s a more accurate picture of retirement today? Dr. Levitt: People are actively involved in second and third careers; they can still add value after ‘retirement.’ It’s what economists call ‘human capital.’ They still have the interest and capacity to contribute; they just aren’t interested in con-tinuing a 50- or 60-hour-a-week pace. There’s real opportunity to provide linkages to charities that need expertise. People can create new hopes and dreams. It’s not just money in the bank; there’s a cross-over. It’s about lifestyle. Money supports the lifestyle. Retirement is a choice. It’s a decision to stop working as opposed to an inability to do something. The best examples are professional athletes; they reach a level or age when they can no longer perform. Retirement is a luxury in some sense that is not a necessity; they do it because they can. Many people often find that leisure isn’t that rewarding in large quantities. Retirement can be more valuable with charitable work or a second career. J: How would you address the issue of retirement planning overall? Dr. Levitt: It’s really a hard question for people who are largely financially illiterate–how much to save, how to allo-cate savings. Inevitably, there’s very little that prepares them to make good decisions. I’d start in a different place, junior high school or high school. Of course, this won’t benefit the current generation. I think it’s inevitably going to be a problem. We have to start

educating earlier and then use experts as well. It’s like your own health. We teach healthy habits, but we have experts (doctors) who know better in diagnosing and treating. People respond to things that are pressing. Retirement is not pressing to a 30-, 40- or even 50-year-old. How you engage a 30-year-old is a difficult thing to do. All the effort that’s been put into the subject hasn’t been very successful. You have to start earlier and put some element of fun into it. J: Automatic programs continue to grow in popularity. If you could drive plan sponsor decisions, what would an em-ployer retirement program look like? Dr. Levitt: Many economists have moved in a different di-rection to ‘nudge’ people. We apply the experts’ knowledge and make it easier through defaults to help put individuals on the right track. The single most important thing would be the defaults. If a sponsor is worried about inadequate sav-ings, he or she should set defaults high which is the single most powerful weapon in ensuring their employees save a lot of money. Second is diversification. Employees should be set up to make good choices so we force people to ‘opt out’ of the tract the expert feels is the right one. There’s a lot of responsibility on the shoulders of plan sponsors; the deci-sions that are made will have effects. They’re really deciding their employees’ retirement planning. It’s a big burden, but if the employee isn’t willing to carry the burden, it needs to be put it in the hands of the person who’s thought about it. Ultimately, if your goal is to ensure your workers have successful retirement, it’s sensible to want to be involved or interested in their overall level of assets. There’s no fidu-ciary duty beyond that, of course, but it would seem that it is sensible and pragmatic that a plan sponsor would be able to provide information or help with other forms of financial management such as housing, savings, credit card debt, in-surance and the like. Sponsors might want to try to be more holistic in that regard.


q: What can I do about increasing participation? Overall, our numbers haven’t changed despite various approaches to employee communication. Participation is relatively flat and savings rates are too! —FLAT IN FARGO

Dear Flat: You’re not alone. As you can read in the roundtable discussion in this issue of Journey, approaches to the challenge of employee participation and communications remain front and center. Apathy, indifference and inertia are all factors. Depending on the size of your firm, the nature of the plan and the choices offered, there is really a wide range of approaches available to you. A few ideas that have come across our desk at Journey: 1) Divide by age cohort and conquer— develop programs that are more age specific than monolithic. 2) Message management. Each employee is going to respond to a slightly different variant of the basic themes of long-term saving, tax-deferred investing, diversification, etc. Manage your messages month-by-month, communication by communication . . . and see where you get the best uptake. 3) Don’t forget about working with key influencers. Typically in a workforce, there is a small cadre of leaders who by dint of their interest in the investments or the plan or just general leadership, can exert positive behavioral influence over others. Ask some of these natural

‘shopfloor’ leaders to share ideas with you. Create a forum where you can bounce ideas off others, and gain from their contributions to your program too.

q: Our firm is considering a Target Date Fund investment option. Some members of management see it as a replacement for a balanced option. Is that a fair characterization? —BALANCED IN BOISE

Dear Balanced: While balanced strategies and Target Date Fund strategies share some characteristics, their differences are striking. The two product types part ways when it comes to the degree of diversification. A traditional balanced investment allocates between stocks and bonds, a Target Date Fund typically contains more than those two asset classes and offers a ‘glidepath’ that modulates the allocation between the asset classes as

the fund reaches its target date. In a volatile market such as we’ve just experienced, underlying equity and fixed income values were tossed asunder as performance correlations headed toward 1.00, erasing the value of two asset classes that were thought to be complementary—the raison d’être of balanced strategies in the past. Target Date Funds are typically designed to include more diversified, non-correlated asset classes than a traditional balanced fund. So, yes, a Target Date Fund may replace a balanced fund but it may offer more diversification, less correlation of performance and thus provide a stronger, long-term risk correlation of performance.

Each issue, we answer questions we receive from readers. Please send your questions to: [email protected]

Q:I hear a lot about extended asset classes being offered in 401(k) plans.

Real estate is one example, but there are also niche investments in fixed income and equities that are discussed. Can you comment on trends or opportunities to expand the fund line-up in this respect? —ExTENDED IN THE EVERGLADES

Dear Extended: Over the last decade, there has been more acceptance of non-traditional investments in DC fund line-ups, often through commingled fund vehicles, but there are limitations. Some of the more exotic strategies are not allowed, e.g., Private Placements and Section 3(c)(7) hedge funds are off the table, open only to qualified investors. Still, the industry has been able to include non-correlated strategies inside the Target Date Fund structure wherein the allocation among various investment types is managed through a dynamic glidepath. Some Target Date Funds include real estate and infrastructure, as an example. The management of risk and return, over time, in this way can be an advantage for the participant, particularly the hands-off participant.

Everything you want to know about retirement (but were afraid to ask)


What a difference a year can make. Across most asset classes, valuations rebounded strongly in 2009 from the depths of their decline. But investing for retirement means keeping an eye on a more distant horizon.To help investors stay focused on the future, J.P. Morgan Asset Manage-ment releases annually its much-anticipated long-term capital market assumptions—a forward-looking set of returns, volatilities and correla-tions across key asset classes.

An extensive network of institutional investors, including pension plans, insurance companies, endowments and foundations, use these long-term (10- to 15-year) assumptions in the development and stress-testing of their strategic allocation strategies and expected portfolio risks and returns. Our rigorous process, which relies on the expertise of a multi-asset class team of senior investors from across the firm, was undertaken with greater scrutiny than ever this year, given the dramatic recovery in asset prices over the past months.

Long-term Capital Market ReturnsThe next Decade

FIxED INCOME

3.50 CashPolicy rates to rise from today’s extraordinarily low levels, but Federal Reserve likely to err on the side of raising rates too late rather than too early.

4.00 Long TreasuriesYields to rise towards a higher equilibrium nominal rate as federal debt levels and inflation risks increase.

5.00 TIPSTIPS to outperform nominal Treasuries as expected inflation rises from current levels.

4.50 AggregateFurther spread narrowing expected, but total returns to be constrained as overall yields rise with risk-free rates.

7.50 High Yield Spreads currently close to equilibrium, but total returns compromised as overall yields rise with risk-free rates.

3.75 Non-U.S. World Government BondBond yields to rise globally from current levels leading to capital losses as rates converge to equilibrium.

7.50 Emerging Market DebtSpreads currently close to equilibrium, but total returns compromised as overall yields rise with risk–free rates.

Expe

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d re

turn

s (%

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tion

ale

U.S. ECONOMIC INDICATORS

3.25 Inflation High unemployment and bank de-leveraging to keep inflation low in the near-term, but today’s aggressive policy stimulus may lead to higher inflation as economic conditions normalize.

2.75 Real GDP High unemploymemt and bank de-leveraging to keep inflation low in the near-term, but today’s aggressive policy stimulus may lead to higher inflation as economic conditions normalize.


Equities shown in total return terms. Government bonds based on Barclays 7-10yr Treasury index. Long government based on Barclays 20+yr Treasury index. Note: Private Equity is unlike other asset classes shown above in that there is no underlying investible index. The return estimates shown for these assets are our estimates of industry medians—the dispersion of returns among managers in these asset classes is typically far wider than in traditional assets. Given the complex risk-reward tradeoffs involved, we advise clients to rely on judge-ment rather than quantitative optimization approaches in setting strategic allocations to these asset classes. Please note that all information shown is based on qualitative analysis. Exclusive reli-ance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or as a promise of future performance. Note that these asset class assumptions are passive only—they do not consider the impact of active management. Return estimates are on a compound or internal rate of return (IRR) basis.

EqUITIES

7.50 U.S. Large CapSlightly lower total returns than in pre-crisis years reflects higher inflation and constraints on growth over the longer term.

7.25 U.S. Large Cap Growth Value to outperform growth over time, espe-cially given likelihood of increased investor demand for yield.

7.75 U.S. Large Cap Value Value to outperform growth over time, especially given likelihood of increased investor demand for yield.

7.75 U.S. Small Cap Moderate premium to large cap assumed for both (small and mid). Tighter credit availability and limited scope for valuation improvement to restrain return advantage.

7.75 MSCI EAFE Dollar depreciation against weighted average of EAFE currencies expected to boost returns to U.S. investors. EUROPE ex-UK: Earnings premi-um to nominal GDP given greater scope for cost-cutting and relatively large share of emerging market sourced revenues. JAPAN: Demographic challenges and ongoing battle with deflation to mean that Japan remains a global laggard.

9.50 Emerging Market Equity Relatively healthy emerging economy funda-mentals and high rates of productivity make for strong economic growth.

ALTERNATIVE ASSETS

8.50 U.S. Private EquityHigher cost of debt implies lower returns, but recent underperformance versus public markets serves as an offset.

8.00 U.S. Direct Real Estate (unlevered)Returns typically between stocks and bonds, but premium to equities reflects current under-valuation and reversion to fair pricing over the forecast period.

The Big PictureWhile we remain optimistic about near-term prospects for the economy and markets, we are considerably less sanguine about the longer-term. Relative to last year’s projections, we are lowering our long-term return assumptions across asset classes, with the exception of real estate. Here’s why:

Last year’s market rebound (again, with the exception of real estate) means we are starting from a higher base in projecting returns.

We see the long-term implications of these potential developments as higher inflation, higher interest rates, more normalized credit spreads and hence, lower expected returns for fixed income. A higher starting point for share prices and expected long-term constraints on corporate profit growth imply lower expectations for equity returns as well.

We expect further government stimulus on top of the massive doses already dispensed, additional Treasury debt issuance, more government involvement, a likely pro-labor policy shift, rising commodity prices given emerging market demand and a greater tolerance for inflation in the pursuit of economic growth.

With property prices already down more than 40%, we see real estate as underpriced, providing opportunity for an increase in long-term return expec-tations for this asset class.

ployer exercise? If the fine print is too fine, or the concept of risk too painful to parse, what value does ‘choice’ pro-vide the employee? If the new decade resembles the tail-end of the one just com-pleted, the self-direct-ed participant’s days are numbered. True, a minority will attend enrollment meetings, read the literature, actively police their

allocations and consider fees and style drift. Most don’t. What do we expect to see over the next several quarters? For starters, we believe the wake-up call is just starting. We’re now acknowledging what retire-ment isn’t going to be: the sunset walks along the beach, the golfing, the endless summer of visiting children, grandchil-dren, foreign countries. Saving money for the future rather than a prosaic view of retirement is the growing concern. Providers who recog-nize this shift are adjusting their com-munication and plan design, beginning to offer tools and advice platforms that integrate more variables—Social Secu-rity, savings, employer plans, life insur-ance, inheritance, property and so on.

Longevity risk enters the vocabulary; we are going to be living longer work-ing longer, and generally spending more time on the shop floor, in the cubicle and the mobile office—and living to 95! As we move ahead into 2010, we ex-pect to witness a re-doubling of focus on these critical issues. Those retirement plan providers who embrace a progressive, dynamic approach should navigate through the prism of behavioral science to better help plan sponsors reach and educate their employees. Refining tools and de-ploying more muscular, practical pro-grams for enrollment and participation are vital. Only then can we break the mold of participant apathy and raise the bar on participant engagement.

THE PICTURE PAINTED IS PALE. IT’S Any MAn OR WOMAn

FOR THEMSELVES.

1,2 Anything but Certain, J.P. Morgan Retirement Plan Services, 2009


The End of InertiaHow dull is retirement investing, really?

reTiremenT resPOnsibiliTy masquer-ades as a hot potato passed between employer and employee these days. Having wrested choice of investments, open brokerage windows, extended as-set classes and a range of style-pure and niche strategies, the participant appears to have shrugged his or her shoulders and yawned. When the subprime mortgage mania unravelled, a decade’s worth of 401(k) gains tumbled, erasing the common investor’s self-regard as a savvy stock picker. But with these dramatic shifts in values, there has been little change in participants’ 401(k) allocations. Our research supports the notion that the workforce says responsibility lies with them alone,1 but the workforce affirms that it has little appetite to spend more than 10 minutes a year focused on their retirement choices and allocations. What is the cause of this participant inertia? Has the employer offered too much? Is retirement savings really a cause for ennui? As we reviewed the data,2 several themes thumped their tails. One, apa-thy. Two, self-reliance in the face of paternalistic advice and marketplace choice. Three, low correlation between the employer match and employee participation. Four, broad discount-ing of the employer and government responsibility. The picture painted is pale. It’s any man or woman for themselves. If the plan participant isn’t willing to read the fund material or turn the dial on their investment allocation, what level of responsibility should the corporate em-

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he study was conducted online by Harris Interactive among 1,077 respondents in the U.S. from April 24 to May 1, 2009. For a copy of the 36-page report based on the study results, or an executive

summary, please contact your J.P. Morgan relationship manager.


3 in 4 PEOPLE DID NOT MAKE ANY CHANGES

TO THE AMOUNT THEY ARE CONTRIBUTING, WHEN

ASKED ABOUT THE MOST RECENT CHANGE THEY

HAVE PERSONALLY MADE TO THEIR 401(K) DURING

THE PAST 12 MONTHS.

When identifying their top financial goals,

76% of individuals indicated saving for retirement was a priority, followed by paying bills and then paying off their mortgage.

of participants admit they don’t take the time to read all the investment information that is provided to them.

59% of participants are concerned or very

concerned that they may never be able to retire.

67% are concerned or very

concerned that they will have to work longer.

of individuals currently contributing to a 401(k) plan feel that they are

very/extremely confident that they will be able to reach their financial goals for retirement.

Americans strongly believe that it is their responsibility to make certain that

they have saved enough for retirement. 86% feel that they are either

solely or very responsible for making sure they have saved enough. Only

36% of people feel they are extremely/very confident in their ability to

manage their future. 6% stated they were extremely/very confident in

their employer and 3% were extremely/very confident in the government

managing their retirement future.

J.P. Morgan Retirement Plan Services LLC P.O. Box 219300 Kansas City, MO 64121—9300

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