J.P. Morgan JOURNEY · Ed Gleason, Retirement Strategy Senior Specialist, American Airlines Melissa Conger, Corporate Compensation & Benefits Manager, Huhtamaki, Inc. Kate Stewart,

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ASpart of our ongoing series of plan sponsor roundtables, on April 20 Journey hosted a panel at J.P. Morgan’s Retirement Plan

Services headquarters in Kansas City, MO. Hosted by RPS marketing chief Kirk Isenhour, the round-table featured three plan sponsor representatives: Ed Gleason, Retirement Strategy Senior Specialist at American Airlines; Kate Stewart, Vice President at commercial printer Henry Wurst Inc.; and Melissa Conger, Corporate Compensation & Benefits Manag-er at specialty packaging producer Huhtamaki, Inc. In the hour-long discussion, the three panelists dis-cussed a number of issues centering on fund line-ups, including the optimal number of funds, monitoring processes, employee input and QDIAs. What follows are excerpts from our conversation...

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ISENHOUR: With everything going on in the industry and on Capitol Hill, what’s been your latest action on investments? CONGER: At Huhtamaki, we added a TIPS fund on the advice of our consultant. It was a pretty seamless process from start to finish and we’ve seen several hundred thousand dollars flow in already. GLEASON: How many funds does your company’s DC plan have? CONGER: We have 16 in total.

ISENHOUR: How involved was the outside consultant in your decision process to add the TIPS fund? CONGER: We’ve already had a relationship with this con-sultant for about four years. So it only took six months from beginning to end—from review through implementation. That was much faster than in the past, when nine or even 12 months was typical. Part of the reason it has taken so long previously is that our investment committee only meets four times a year and we split our time between DC and DB plans. We still do that, but the consultant helped pave the way to our decision.

ISENHOUR: What’s new with Henry Wurst’s plan, Kate? STEWART: We have about a dozen funds in our plan’s

line-up, plus TDFs. Right now, we’re looking at the possi-bility of adding managed accounts. We’re constantly asking ourselves: ‘Do we have the right number of funds?’ We’re satisfied with each specific fund, but we’re not so sure about the total number in the line-up. The pendulum swings back and forth on the optimal line-up. We used to think: ‘Are there segments of the market we’re missing?’ Now, we think it’s time to sit down and ask: ‘Do we belong in all of these funds?’ It comes down to properly connecting with our employees about their objectives.

ISENHOUR: What has been driving that process of rethink-ing the line-up?

STEWART: We have some new blood replacing some mem-bers of our investment committee, so we’re in the process of educating them about our plan’s offerings. We ask ourselves: ‘Is a dozen a good number?’ We deliberately choose the line-up, but is it more than the participants can absorb? I’m not sure, but we need to have that conversation. GLEASON: We have about 30 funds—two of them are frozen from accepting new investments, one of which is the company stock. Our main consideration is the diversity of our work force. Some of our participants are more experi-enced investors than others, they know the markets well and are eager for a brokerage window. These participants are the ones who typically ask when the plan is going to offer a gold fund! So by the end of the year, we should be putting in some type of brokerage window, understanding that maybe only 1-3% of our total number of participants will actually use it. Once that’s in place, we may look at reducing our core fund line-up down to a much more manageable number. STEWART: Does Huhtamaki have a brokerage window? CONGER: No, we don’t. STEWART: Actually, we find that our brokerage window helps mollify the ‘vocal’ participant. Some of our people used to say: ‘Gee, if I only had a brokerage window, then I’d be happy.’ Yet we’ve found that most don’t take advantage of the option now that we have it.

ISENHOUR: How willing are participants to get help? GLEASON: At American, we do a lot of retirement educa-tion for active employees—either through general financial advice or managed accounts. There are those who don’t know how to plan financially for the future at age 25 or 45. What makes us think they know what to do at 65 when their access to resources isn’t quite as robust? I’m always amazed when I see a participant equally invested in all 30 of our funds, three of which are risk-based. They just checked off every box! We may need to carry the education process and messages through even after retirement. CONGER: I think there may be a shift underway. While there are some people who can’t grasp the core concepts, there are plenty of others who do—but just don’t have the time to spend on mastering it. STEWART: I think the industry is moving that way be-cause of a lot more concern about volatility due to the finan-cial market’s gyrations over the past couple of years. I agree with Melissa that it’s not so much that people aren’t smart

Ed Gleason, Retirement Strategy Senior Specialist, American Airlines

Melissa Conger, Corporate Compensation & Benefits Manager, Huhtamaki, Inc.

Kate Stewart, Vice President, Henry Wurst, Inc.

I’M ALWAYS AMAzED WHEN I SEE A PARTICIPANT EQUALLY INVESTED IN ALL 30 OF OUR FUNDS, THREE OF WHICH ARE RISK-BASED.—GLEASON

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enough or don’t have the interest in their own retirement savings. It’s more about not having enough hours in the day and a high enough comfort level to make big decisions that could affect the future of their entire family. You see the relief on their faces when these people hear about TDFs. ISENHOUR: Are you offering TDFs at American Airlines? GLEASON: We looked at TDFs, but because 75% of our DC participants are in a DB fund, it changes the landscape. Our DB plan is essentially like a TDF, so we’re sticking with a selection of risk-based pre-mixed portfolios instead of TDFs. Of course, that may change as our demographics change.

ISENHOUR: So, with older employees comes the topic of annuitization and after-retirement income. What are you thinking in terms of that topic? GLEASON: One idea would be a guaranteed income product for retirement. We’re waiting for the marketplace to develop those products. Right now, a lot of the options like annuities are too expensive. There’s some talk of federal legislation to help shape that development. But what a DB plan gives you is an annuity. A DC plan puts all the risk on the employee. As we get older—and people are living longer—the concern is that ten years into retire-ment the money runs out. It’s even a big concern for people who have invested wisely and saved a lot. So you’ll see more annuities to serve that need, but there has to be better regula-tion of the market. STEWART: We don’t have a DB plan. We want to counsel our people, but we’re not their investment advisors. We have employees leaving after 30 years with a sizeable nest egg and we can only hope that they’ll make wise choices from here on out. After all, they gave their all to the company during their working years. As they walk out the door, we’d like to be able to say: ‘Here are some options to consider.’ But in the post-AIG world you have to be concerned about annuities. And anytime you suggest something in a corpo-rate capacity, it becomes a tacit endorsement. So I’m very reluctant to go down that path. We won’t feel comfortable recommending annuities until the cost structures change and we see what regulatory changes are coming. CONGER: We have chosen not to pursue annuitization strategies right now because we already have too many other

things on our plate. Also, we have a DB plan that addresses that issue for most of our employees. And like Ed says, we are waiting for more legislative guidance to see how things develop along those lines.

ISENHOUR: Back to fund line-ups. What are your preferred ways to monitor and evaluate specific funds? STEWART: Our investment committee meets on a quar-terly basis. We also solicit feedback from our diverse group of employees. Sometimes our savviest investors can be found where some might least expect it: shop floor guys that in-vest as a hobby. And some of our highest paid employees are the least savvy when it comes to their own investments.

In the past, we’d had employees come to us and say: ‘Hey, you’re really missing the boat on real estate. We need a dedi-cated fund.’ Maybe we’ve heard that a bit less in the past two years, but our employees do pay a lot of attention to their accounts online.

ISENHOUR: How does Wurst seek employee input? STEWART: Our employee population is used to speaking up. They’re pretty engaged in the whole benefits picture in general. CONGER: It used to come in automatically, mostly by ‘drive-by’ venting at HR. [laughs] But in the past two years, I’d say things have been pretty quiet on that front. So we’re working with J.P. Morgan to send out a survey to our employ-ees to better understand their thinking. GLEASON: We don’t have to actively seek out employee feedback since our employees are very vocal. Our pension asset administration committee meets on a quarterly basis. The advisor to our committee on all of our plans—DB and DC—is American Beacon Advisors, Inc., which was spun-out of corporate treasury department in the late 1980s.They actually manage the DB investments and help us review our 401(k) line-up. Our committee is pretty well educated on the markets, but we do rely heavily on this ‘in-house consultant’ for advice. CONGER: We also rely on our consultants. They make it easy for us to spot issues. But we also work very closely with J.P. Morgan in that regard. STEWART: We don’t use a consultant. We work with J.P. Morgan in our quarterly reviews.

WHEN WE STARTED HAVING EMPLOYEE MEETINGS, WE MADE SURE TO PUT A QUICK ENROLL FORM AND A PEN ON EVERY CHAIR—STEWART

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ISENHOUR: Are there issues where the administrative and investment halves of your plans butt heads? GLEASON: We have three committees. A Pension Asset Committee, a Pension Benefit Committee and a Pension Strategy Committee which oversees the other two. But all of our members serve on both the asset and strategy com-mittees—with exception of one member. So we don’t fight among ourselves! CONGER: We have only one committee. STEWART: That’s never been an issue for us. Our main challenge is communicating plan changes. We address that at the investment committee level and then go to HR to discuss communication. GLEASON: We just mapped. Communication is the key. STEWART: Yes, particularly when mapping.

ISENHOUR: Where do your plans stand when it comes to global, international or emerging market funds? GLEASON: We have an emerging markets fund. It’s very popular, not surprisingly if you look at performance. We consider it a high risk strategy so that’s why we capped it at 10% years ago. But times have changed. We still have a fiduciary responsibility, but loosening the cap to 15% was the right decision. We have two international funds, too, which aren’t capped. CONGER: We have an international fund. But our concern was more with having too much concentration in our stable value funds. We haven’t seen over-investing in international. STEWART: We also have some global/emerging market exposure. We don’t have a cap—that’s an interesting idea.

We may have one or two participants that may be “over invested” in these funds, but we assume that’s their choice.

ISENHOUR: What about stable value funds? CONGER: For us, trying to get participants to diversify out of stable value has been difficult. Actually, overexposure

I THINK THERE MAY BE A SHIFT UNDERWAY. WHILE THERE ARE SOME PEOPLE WHO CAN’T GRASP THE CORE CONCEPTS, THERE ARE PLENTY OF OTHERS WHO DO—BUT JUST DON’T HAVE THE TIME TO SPEND ON MASTERING IT.—CONGER

COMPANY PROFILESAmerican AirlinesThe world’s second largest airline in passenger miles transported, passenger fleet size, and in operating revenues; third largest, in aircraft operated. A subsidiary of the AMR Corporation, the airline is headquartered in Fort Worth, Texas, adjacent to the Dallas/Fort Worth International Airport.

Henry WurstFounded in 1937, Kansas City based Henry Wurst, Inc. provides targeted, integrated solutions managed by an experienced team that delivers from concept to print with complete production management capabilities.

HuhtamakiHuhtamaki is one of the world’s largest packaging companies with solutions such as smooth and rough molded fiber products, release films, flexible packaging, foodservice paper cups and other products based on paper forming technology.

in stable value may not have been a bad thing over the past two years, but it’s not a long-term strategy to grow retirement savings. One legacy plan we had mandated a 100% allocation in stable value for five years until the money vested, but we removed that in 2002. We have been educating our partici-pants about this, but we find that one-on-ones work best. Of course, not every employee wants to spend their own time sitting down with us.

ISENHOUR: Is active vs. passive an issue for your plans?ALL: No.

ISENHOUR: What is your QDIA? GLEASON: We use a moderate pre-mix portfolio of risk-based options. Based on our demographics, we felt that was most appropriate. Our prior default option was the company credit union money market plan and that didn’t qualify un-der the terms of a QDIA. When a person signs up for our DC plan, we require them to select an investment. We very rarely default someone into it. But it’s there if we were to do so in the future. For example, we’re getting ready to do a quick enroll that would put new participants into that fund. Our participation rate is in the 60% range. We attribute that to our DB plan. CONGER: We use managed accounts. A balanced fund had been our default. But we put participants in managed accounts and sent them a survey to ask them about their preferred investment style. STEWART: We use TDFs for our QDIA. continued on p. 30

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or bonds for a given investment strat-egy no matter where the companies are listed. Interestingly, institutional investors have invested more of their money with global funds than emerg-ing market or other regional-based strategies (excluding pure U.S. or tra-ditional multi-regional International) over the past two years, says J.P. Mor-gan’s Emmett. He adds: “If it makes sense for DB plans, why shouldn’t DC participants have access to the same opportunity?” So going global may involve a strategic rethinking of the fund line-up in more plans.

What are the big trends affecting mu-tual funds?

What is the latest pattern you are seeing in DC plan fund line-ups?

What are the key legislative initiatives you are keeping an eye on?

What is some of the newest think-ing in terms of

fund strategies?

Isn’t the TDF structure one way to ac-cess these extension strategies?

Curious, though, as much of the re-search seems to indicate that investors in DC plans spend hardly any time on their investments...

Is there a difference in the DC/DCIO approach to fund selection?

Executive Perspective continued from p. 8

Speaking Investments contined from p.7 Plan Sponsor Roundtable continued from p. 14

In your view, what makes for a success-ful fund complex? While there are a lot of components, strong risk-adjusted returns are the most critical factor. But you also need a strong investment man-agement culture and a sense of conti-nuity among the team of investment professionals and their managers.

There is a lot of discussion about the relative virtues of commingled funds, SMAs and mutual funds. What is your view? Commingled funds and separately managed accounts (SMAs) provide increased flexibility for the plan sponsor, including the ability to negoti-

ate fees. On the other hand, mutual funds provide services that most commingled funds and SMAs don’t—such as a detailed prospectus, the oversight of an independent board and greater trans-parency, including daily valuations. And mutual funds have the added benefit of portability, the ability of the participant to take the assets with them if they leave or retire.

How has the mutual fund industry fared in the wake of the credit cri-sis? It’s pretty clear that the image of mutual funds has actually improved a great deal compared to other investment vehicles and, at the end of the day, the mutual fund industry’s outlook is very strong. Share-holder and investor protection have proven to be very resilient and mutual funds continue to be the dominant investment vehicle of choice by indi-vidual investors. Think about it—more

than 80 million U.S. households invest in mutual funds.

What drew you to mutual funds in a bank as diverse as J.P. Morgan? I’ve been involved with mutual funds at J.P. Morgan since 1990. Twenty years ago, J.P. Morgan had seven mutual funds and $4 billion in assets under management (AUM). Today, we have over 100 funds and over $400 billion in AUM. In the early 1990s, it was hard to get fund managers interested in man-aging a mutual fund because there was more visibility running SMAs for pen-sion funds. Now, every fund manager we have wants to manage a mutual fund!

We moved from lifestyle funds a few years ago. Originally, our default option was a money market fund, and that was scary because we saw employees who retired with 100% of their retirement savings in money market funds. When we rolled out lifestyle funds, it had a positive reception. But there was still a lot of confusion. Some people put one-third of their money in the aggressive bucket, another third in moderate and the remaining third in conservative.

When TDFs came along, we found that suited a lot of our employees. They are the solution to the age-old question: ‘What do I do with my money?’ It’s been two years now. When we started

having employee meetings, we made sure to put a quick enroll form and a pen on every chair. As a result, we got a very good response. Ask them to go home and do it on their PC? Forget about it!

ISENHOUR: Do your plans see their ob-jective as getting participants to retire-ment or through retirement?

GLEASON: We’re through. I think that’s mostly because we have DB plans which take them through retirement and we want our 401(k) plan to offer the same thing to all participants.

STEWART: We’re focused on to. Ide-ally, we’d like to provide the tools for post-career retirement, but our focus is just trying to maximize where they are when they get to retirement age.

CONGER: We’re also more to, even though we have a DB plan as well. We might get back to through at some point in the future. Several years ago we al-lowed employees to take a lump

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DC: The Next Chapter contined from p.24

sum from their DB plan. At first, it was all lump sums. But in recent years, we’ve seen a good mix of those that roll over into an annuity and those that take a lump sum payment. We’re start-ing to do more retirement education—the full picture, not just retirement fi-nances, but wills and other things they need to take into consideration. That’s been eye-opening for the 40 or so em-ployees that have gone through it.

GLEASON: We have an older work-force so our retirement readiness effort has been well received. The feedback on it is tremendous. It’s not financial planning advice, but rather education to get them thinking about all the reali-ties of retirement.

STEWART: The majority of employ-ees today don’t have a DB plan. At our size, a DB plan is really cost prohibi-tive. So we’re very interested in coming legislation and regulation that is shift-ing us toward the idea that a significant percent of the employee population

may receive DB-like mandates. We’re cu-rious to see what that does to our overall structure and costs.

ISENHOUR: So what keeps you up at night?

STEWART: Our concern is the regula-tory environment going forward. How can a plan of our size comply with some of the regulatory challenges proposed? From my perspective, I don’t disagree with the objectives of reforms. But it’s more along the lines of: ‘How do we get from here to there in a cost effective way?’ Some of the ideas might pose a big burden for the employer. So how would we adapt to and meet those new regula-tory requirements?

CONGER: The biggest burden may fall on J.P. Morgan and other plan ad-ministrators when it comes to fee dis-closure. But certainly there may be a greater burden borne by plan sponsors as well. How do we communicate that? And how much of it will participants

really even understand?GLEASON: The regulatory burden

and what we as plan sponsors will be required to do differently is our lead-ing concern. What will be the finan-cial impact on the employer from new mandates? Mandatory auto-enrollment would definitely have an impact. If you’re eligible for a company match and some participants aren’t even contributing, then the employer may become responsible for meeting those match commitments. That’s potentially a huge increase in the financial burden on companies.

STEWART: Another thing is: What does a mandate do for pricing of plan services if you suddenly have a lot more small dollar accounts to administer? Your average plan balance could come down significantly and negatively im-pact plan pricing economics.

ISENHOUR: Thank you all for your three very unique perspectives.

Can more fund options result in bet-ter diversification and outcomes? It depends. Core menu discussions previ-ously focused on the number of available investment options with the assumption that participants were best served by an expansive selection. We saw the aver-age plan’s investment options increased from 10 in 1998 to around 19 today.Yet research shows that adding options for the sake of increasing investment choice may actually decrease participation rates due to participant indecision. And, more choices don’t necessarily lead to better diversification for participants or higher risk-adjusted returns. Correlations across

asset classes and results must be carefully considered when evaluating the appro-priateness of any new menu option.

When should plan sponsors consider adding new funds? In most cases, ei-ther to replace an under-performing fund or to fill a void that helps address specific risks. In the past, plan sponsors often limited their investment menus to traditional asset classes. Today we’re seeing the addition of inflation hedges, such as TIPS, commodities, and real es-tate, as well as non-correlated extended asset classes to help manage volatility–sometimes as single strategies and of-ten as packaged offerings.

Is annuitization an appropriate retire-ment income solution? There is clearly a place for these products to address the longevity risks faced by participants. Consider that the defined benefit plan naturally led participants to think in

terms of regular monthly income rela-tive to their household expenses and other financial needs. While the defined contribution plan may bring more flex-ibility for some in the manner in which their accumulated balance is accessed over time, it has also resulted in less focus by participants on the needs and choices faced in the decumulation phase of retirement.

Are there viable retirement income products that cater to the masses?There’s no silver bullet, but intense in-novation is underway. What the market has told us is that portability, flexibility, cost effectiveness and credit worthiness are important criteria in the develop-ment of these products. The industry continues to grapple with the right combination of features that address the differences in levels of participant demographics and psychographics.