Analysis of the J.P. Morgan Target Date Compass SM A WHITE PAPER BY Fred Reish & Bruce Ashton Drinker Biddle & Reath LLP 1800 Century Park East, Suite 1400 Los Angeles, California 90067 (310) 203-4000 [email protected] / [email protected]www.drinkerbiddle.com The research contained in this white paper was compiled by Drinker Biddle & Reath LLP. The description of the Target Date Compass SM process set forth in this white paper was based on information provided by J.P. Morgan Asset Management (“J.P. Morgan”). J.P. Morgan is a subsidiary of JPMorgan Chase & Co. and is not affiliated with Drinker Biddle & Reath LLP. Drinker Biddle & Reath LLP is solely responsible for the information and content of this white paper. J.P. Morgan is not responsible for conclusions of law set forth in this white paper. The research referred to in this white paper is current as of February 1, 2014. The reader should independently determine whether the research set forth in this white paper is current after that date.
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The research contained in this white paper was compiled by Drinker Biddle & Reath LLP. The description of the Target Date CompassSM process set forth in this white
paper was based on information provided by J.P. Morgan Asset Management (“J.P. Morgan”). J.P. Morgan is a subsidiary of JPMorgan Chase & Co. and is not aWliated
with Drinker Biddle & Reath LLP. Drinker Biddle & Reath LLP is solely responsible for the information and content of this white paper. J.P. Morgan is not responsible
for conclusions of law set forth in this white paper. The research referred to in this white paper is current as of February 1, 2014. The reader should independently
determine whether the research set forth in this white paper is current after that date.
I I ANALYSIS OF THE J.P. MORGAN TARGET DATE COMPASS SM
Any and all information set forth herein and pertaining to the Target Date CompassSM and all
related technology, documentation and know-how (“information”) is proprietary to JPMorgan
Chase Bank, N.A. (“JPM”).
U.S. Patents No. 8,255,308; 8,386,361 and patent(s) pending.
Fred Reish and Bruce Ashton are Partners in the Employee Benefits & Executive Compensation
Practice Group of Drinker Biddle & Reath LLP. They have been compensated by J.P. Morgan Asset
Management to provide advice and to give an opinion regarding the Target Date CompassSM.
The law and Drinker Biddle’s analysis contained in this white paper are general in nature and
do not constitute a legal opinion or legal advice that may be relied on by third parties. Readers
should consult their own legal counsel for information on how these issues apply to their
individual circumstances. Further, the law and analysis in this white paper are current as of
February 2014. Changes may have occurred in the law since this paper was drafted. As a result,
readers may want to consult with their legal advisors to determine if there have been any
relevant developments since then.
Important Disclosure
The information within has been obtained from sources deemed to be reliable. The content
within the Target Date Compass is for informational purposes only and should not be construed
as investment advice.
The Target Date Compass is designed to provide a framework for identifying and evaluating
target date funds (TDF) that align most closely with a plan’s overall goals and its participants’
needs. The goal of the tool is to help plan sponsors assess their retirement plans’ desired
level of equity exposure for participants at the target date and asset class diversification—
two important characteristics of TDFs. The framework also encourages plan sponsors to
understand, and consider, the characteristics and behaviors of their workforce as part of the
target date selection process—factors that the Department of Labor (DOL) has also stated
fiduciaries should take into account when assessing the selection of a TDF and in designing
the investment menu for a defined contribution plan. The Target Date Compass is meant to
help in the due diligence process when evaluating TDFs for a plan. The Target Date Compass is
not meant to replace the fiduciary responsibilities that are inherent with all plan sponsors. If
the Target Date Compass is used, it should be used as part of a comprehensive due diligence
process. Exclusive reliance on the Target Date Compass to make investment decisions is not
recommended. The ultimate responsibility for choosing an investment option is that of the plan
sponsor. J.P. Morgan takes no responsibility for the final investment decision. It is important to
note: The intention of the tool is to help highlight the diferences between target date funds in
order to make informed comparisons.
BY FRED REISH & BRUCE ASHTON I I I
T A B L E O F C O N T E N T S
2Introduction
3 Summary
6 Description of the Target Date CompassSM
10Analysis and discussion
17 Conclusion
18 About the authors
20 Endnotes
IV ANALYSIS OF THE J.P. MORGAN TARGET DATE COMPASS SM
I n t r o d u c t i o n
BY FRED REISH & BRUCE ASHTON 2
I n r e c e n t y e a r s , t h e p r e v a l e n c e o f t a r g e t d a t e f u n d s ( T D F s ) in 401(k) plans
has more than doubled. According to an Investment Company Institute report released in December 2013, 41% of
401(k) participants held TDFs at the end of 2012 versus 19% as recently as 2006.1
This growth—as well as significant government scrutiny—has
changed the TDF landscape. It has heightened the need for
prudent decisions by plan sponsors in selecting TDFs and,
equally as important, in revisiting decisions they made only a
few years ago.
Recent regulatory scrutiny and guidance have largely been
helpful in clarifying issues that fiduciaries should consider.
They have included:
A joint Department of Labor (DOL)/Securities and Exchange
Commission (SEC) public hearing on TDFs in June 2009
A DOL/SEC investor bulletin in May 20102
Proposed amendments related to TDFs to the DOL
regulations on participant disclosures and qualified default
investment alternatives (QDIAs)3
Proposed amendments to SEC rules on investment company
advertising related to TDFs4
The DOL’s February 2013 bulletin, “Tips for ERISA Plan
Fiduciaries”5
The DOL’s announced intention to finalize its 2010 proposals
on TDF disclosure6
Fiduciaries have more guidance on what information to review in
selecting TDFs, but this greater clarity has brought with it a need
to review earlier decisions. Half a dozen years ago, fiduciaries
might have felt comfortable choosing a TDF family ofered by a
reputable provider. This is no longer the case.
To assist plan sponsors with the task of selecting (or replacing)
TDFs, this white paper evaluates the J.P. Morgan Target Date
CompassSM (“Target Date Compass”), a program designed to
help 401(k) fiduciaries satisfy their duties under the Employee
Retirement Income Security Act of 1974 (“ERISA”) for the selection
of TDFs. Our conclusion is that the Target Date Compass:
Provides a valuable—and unique—aid for assessing TDFs
available in the marketplace
Ofers material assistance to fiduciaries in fulfilling their
legal responsibilities under ERISA for the selection and
monitoring of TDFs
As context for our evaluation, we discuss the responsibilities
of fiduciaries (such as plan committee members and company
oWcers with discretion over plan investments) in managing
plan assets. Our focus is on the ERISA duties to:
Act for the exclusive purpose of providing benefits to
participants and beneficiaries
Engage in a prudent process to fulfill their duties, including the
obligation to evaluate the needs of the plan and its participants
This white paper analyzes these responsibilities for
participant-directed 401(k) plans and explains how the Target
Date Compass helps fiduciaries meet or exceed their legal
obligations by giving them a mechanism to: (1) prudently
evaluate the suitability of the TDF families available in the
marketplace, both as potential QDIAs and as investments to
be aWrmatively selected by participants; and (2) assist the
fiduciaries in prudently selecting a particular TDF family that
meets the needs of the plan and its participants.
3 ANALYSIS OF THE J.P. MORGAN TARGET DATE COMPASS SM
Summary
One solution is target date funds (TDFs). TDFs ofer what
might be referred to as the “snapshot and moving picture”
approach to investing. TDFs are typically “funds of funds”
(with the underlying funds representing distinct asset classes
and investment styles, collectively called “asset classes”
in this paper) that gradually adjust their asset allocations
along a “glide path.” That is, with the passage of time, TDFs
become more conservative (i.e., hold fewer investments in
equities). The snapshot is the asset allocation at a given point
in time; the moving picture is the changing asset allocation as
participants age. In this sense, TDFs address both aspects of
the diversification conundrum.
This creates a challenge for plan sponsors, because not all
TDFs are alike, and plan sponsors have a responsibility under
ERISA to select TDFs that are prudent for their plan. The
snapshot that is clear for one plan may be out of focus for
another; the moving picture may run too long or too short for
a specific group of participants.
E R I S A c o n t e m p l a t e s t h a t p a r t i c i p a n t s will invest in a well-diversified way.7 Unfortunately,
many participants lack the skill, time or inclination to create appropriate portfolios for long-term investing
and to periodically adjust those portfolios to fit changing circumstances. This fact might be referred to as the
“diversification conundrum” because it creates risk for plan sponsors and fiduciaries. As a result, plan sponsors
and the retirement industry have developed solutions to achieve better outcomes for employees and to reduce the
risks faced by fiduciaries.
The Target Date CompassSM is designed to help plan sponsors
understand the snapshot and the moving picture in order to
narrow the large number of TDF families to a group that fits
the needs of the plan and its participants. Target Date Compass
looks at the number of asset classes available in a TDF and
the equity exposure at retirement. We describe this in more
detail later, but the point here is that, by giving plan sponsors
a sophisticated view of the TDF’s investment structure, the
Target Date Compass facilitates and documents the plan
sponsors’ decision about which TDF family to select.
The Pension Protection Act of 2006 (“PPA”) helped spur
the search for diversification solutions. The PPA provided
an incentive to 401(k) plan sponsors to automatically enroll
employees by limiting the liability of fiduciaries for investing
Bruce Ashton is a partner in the Drinker Biddle & Reath
Employee Benefits & Executive Compensation Practice Group.
He has specialized in employee benefits law since 1986 and
works with private and public sector plans; advises and
represents plans, employers and fiduciaries before the IRS and
DOL; consults with financial institutions, including banks, trust
companies and insurance companies on 401(k) compliance
issue; and represents registered investment advisers on
issues related to fiduciary status and compliance, prohibited
transactions and internal procedures. Prior to focusing
on employee benefits, Bruce practiced as a corporate and
securities lawyer.
Bruce received a J.D. from the Southern Methodist University
School of Law, where he was selected to the Order of the Coif,
and his B.A. from Rice University.
Professional recognition and awards
Bruce has received a number of awards for his contributions to
the employee benefits community, including:
The 2011 Eidson Founder’s Award from ASPPA for his
significant contributions to that organization and to the
benefits community
Recognition by 401kWire as one of the 401(k) Industry’s Most
Influential People
Recognition as an outstanding lawyer in The Best Lawyers
in America®
Publications
Bruce has co-authored four books (with Fred Reish) and more
than 150 articles on employee benefits issues, including
fiduciary issues, prohibited transactions, IRS and DOL
correction programs, audits and investigations and plan
design. He has also been widely quoted in various benefits
publications.
Speaking engagements
Bruce is a frequent speaker on various employee benefits
issues and has spoken at the annual conferences of the
American Society of Pension Professionals and Actuaries,
the Western Pension and Benefits Conference, the Enrolled
Actuaries Conference, the International Foundation of
Employee Benefit Plans and the National Institute of Pension
Administrators.
BY FRED REISH & BRUCE ASHTON 20
Endnotes1 See, e.g., Holden, Sarah, Jack VanDerhei, Luis Alonso and Steven Bass, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2012,” ICI Research
Perspective 19, no. 12 (December 2013), available at www.ici.org/pdf/per19-12.pdf. (Referred to as the “ICI Study”).
2 U.S. Department of Labor and Securities and Exchange Commission, “Investor Bulletin: Target Date Retirement Funds,” May 2010, available at http://www.dol.gov/ebsa/pdf/TDFInvestorBulletin.pdf.
3 Release on Target Date Disclosure, 75 Fed. Reg. 229 (November 30, 2010), 73987-73995 (referred to as the “Proposed TDF Regulations”).
4 Securities Act Release No. 9126 (June 16, 2010) [75 FR 35920 (June 23, 2010)], comment period re-opened April 2012.
5 U.S. Department of Labor, Employee Benefits Security Administration, “Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries,” February 2013, available at http://www.dol.gov/ebsa/newsroom/fsTDF.html (referred to as the “DOL TDF Tips”).
6 See DOL regulatory agenda for Fall 2013, available at http://resources.regulations.gov/public/custom/jsp/navigation/main.jsp.
7 See, e.g., ERISA Regulation Sections 2550.404c-1(b)(3)(i)(B) and 2550.404c-5(d)(4).
8 See the ICI Study referred to in footnote 1.
9 ERISA Section 404(a)(1)(B).
10 See DOL TDF Tips referred to in footnote 5.
11 See, e.g., 29 C.F.R. §2509.08-2, in which the DOL states: “It is the view of the Department that compliance with the duty to monitor necessitates proper documentation of the activities that are subject to monitoring.”
12 29 C.F.R. §2550.404c-5(e)(4)(i). Note that, in order for fiduciaries to obtain the protections provided by the QDIA rule, the requirements and conditions of the regulation must be satisfied, including certain notice and information requirements. See 29 C.F.R. §2550.404c-5(c)(1)-(6).
13 Id.
14 See the DOL TDF Tips referred to in footnote 3.
15 LaRue v. DeWolQ, Boberg & Associates, 522 U.S. 248, 255, 128 S.Ct. 1020, 1025, 169 L.Ed.2d 847 (2008).
16 See JP Morgan Asset Management, “Retirement Insights: Ready! Fire! Aim? 2012,” August 2013; see also Samuel Estreicher & Laurence Gold, The Shift From Defined Benefit Plans to Defined Contribution Plans, 11 Lewis & Clark L. Rev. 331, 333 (2007), available at http://law.lclark.edu/org/lclr.
17 See, http://www.dol.gov/ebsa/newsroom/ fsdefaultoptionproposalrevision.html.
18 Id.
19 29 C.F.R. §2550.404c-5(b)(1).
20 72 F.R. 60452.
21 72 F.R. 60452, 60463.
22 29 C.F.R. §2550.404c-5(e)(4)(i).
23 29 C.F.R. §2550.404c-5(b)(2).
24 72 F.R. 60452, 60453.
25 Id.
26 See J.P. Morgan 2013 Defined Contribution Plan Sponsor Survey.
27 Strategic Insight target date assets analysis, 2010 and 2013. See, also, Special Report: Retirement Benefits, Five Questions For Picking a Target Date Fund, by Mark Bruno, Financial Week, June 23, 2008, available at http://www.financialweek.com/apps/pbcs.dll/ article?AID=/20080623/REG/276976064.
28 Id.
29 Id.
30 See the DOL TDF Tips referred to in footnote 3.
31 DOL Advisory Opinion 98-04A (May 28, 1998).
32 GIW Industries, Inc. v. Trevor, Stewart, Burton & Jacobsen, Inc., 10 EBC 2290, 2301 (S.D.Ga 1989).
33 Liss v. Smith, 991 F.Supp. 278, 300 (S.D.N.Y. 1998); see also, Whitfield v.
Tomasso, 682 F.Supp.1287, 1304 (E.D.N.Y. 1988): “In providing ... benefits, in order to fulfill their fiduciary duties, the [fiduciaries] should have considered the needs of the ... participants and an appropriate level of benefits, and then should have solicited multiple proposals and completely evaluated the proposals before entering into an agreement.”
34 Lanka v. O’Higgins, 810 F.Supp. 379, 388 (N.D.N.Y. 1992).
35 DOL/SEC “Investor Bulletin: Target Date Retirement Funds,” issued May 6, 2010.
36 75 F.R. 73987, 73994. Proposed amendments to rule 482 under the Securities Act of 1933 and rule 34b-1 under the Investment Company Act of 1940, available at http://www.sec.gov/rules/proposed/2010/33-9126.pdf. See DOL regulatory agenda for Fall 2013, available at http://resources.regulations.gov/public/custom/jsp/navigation/main.jsp.
37 Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan, 793 F.2d 1456, 1468 (5th Cir. 1986); Donovan v. Bierwirth, 680 F.2d 263, 272 n. 8 (2d Cir.), cert. denied, 459 U.S. 1069, 103 S.Ct. 488, 34 L.Ed.2d 631 (1982).
38 ERISA Section 404(a)(1)(B).
39 Ulico Casualty Co. v. Clover Capital Management, Inc., 217 F.Supp.2d 311, 315-316 (N.D.NY 2002), citing Lanka v. O’Higgins, supra, 810 F.Supp. at 387.
41 Harley v. Minnesota Mining & Mfg. Co., 42 F.Supp.2d 898, 906 (D. Minn. 1999), citing In re Unisys Savings Plan Litigation, 74 F.3d 420, 435 (3rd Cir. 1996).
42 Liss v. Smith, supra, 991 F.Supp. at 297.
43 Riley v. Murdock, 890 F.Supp. 444, 458 (E.D.N.C. 1995).
44 In re Unisys Savings Plan Litig., 74 F.3d 420, 435 (3rd Cir. 1996).
45 Lanka v. O’Higgins, supra, 810 F.Supp. at 387.
46 29 C.F.R. §2550.404a-1.
47 George v. Kraft Foods Global, Inc., 641 F.3d 786, 796 (7th Cir. 2011).
48 Liss v. Smith, supra. 991 F.Supp. at 301.
49 29 C.F.R. §2509.02-2.
J . P. M O R G A N A S S E T M A N A G E M E N T
270 Park Avenue I New York, NY 10017
TARGET DATE FUNDS: Target date funds are funds with the target date being the approximate date when investors plan to start withdrawing their money. Generally, the asset allocation of each fund will change on an annual basis, with the asset allocation becoming more conservative as the fund nears the target retirement date. The principal value of the fund(s) is not guaranteed at any time, including at the target date.
Certain underlying funds of target date funds may have unique risks associated with investments in foreign/emerging market securities and/or fixed income instruments. International investing involves increased risk and volatility due to currency exchange rate changes, political, social or economic instability and accounting or other financial standards diferences. Fixed income securities generally decline in price when interest rates rise. Real estate funds may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector, including, but not limited to, declines in the value of real estate, risk related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by the borrower. The fund may invest in futures contracts and other derivatives. This may make the fund more volatile. The gross expense ratio of the fund includes the estimated fees and expenses of the underlying funds. There may be additional fees associated with investing in a Fund of Fund strategy.
Fred Reish and Bruce Ashton are partners in the Employee Benefits & Executive Compensation Practice Group of Drinker Biddle & Reath LLP. They have been compensated by J.P. Morgan Asset Management to provide advice and to give an opinion regarding the Target Date Compass.
IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its agliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unagliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
Opinions and estimates ofered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an ofer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc.
JPMorgan Distribution Services, Inc., member FINRA/SIPC