Choosing between Defined Benefit Plans & Defined Contribution Plans
Evolution of defined contribution and the shift to a new ......Target date funds: Central to defined...
Transcript of Evolution of defined contribution and the shift to a new ......Target date funds: Central to defined...
Moderator:Chris Daley, Head of Institutional Defined Contribution Investment Solutions,
J.P. Morgan Asset Management
Speakers:Fredrik Axsater, Senior Managing Director and Global Head of Defined Contribution,
State Street Global AdvisorsToni Brown, Senior Vice President, Defined Contribution, Capital Group
John Croke, Target Retirement Funds Senior Product Manager, VanguardBarbara Kontje, Director, Retirement Americas & Smart Saving, American Express Company
Are your Target-Date Funds Suitable for your Plan?
Evolution of defined contribution and the shift to a new way of thinking
1 Cerulli, McKinsey, Brightwork Partners, Callan Associates, Sway Research, combined with J.P. Morgan analysis. “Private DC” includes 401(k) plans, money purchase plans, profit-sharing plans, Keoghs, and Taft-Hartley DC Plans, as defined by Cerulli.401(k) target date allocation applied to broader set of private DC assets. Projections from Cerulli.
Target date funds: Central to defined contribution investing
1The Callan DC Index™ is an equally weighted index tracking the cash flows and performance of nearly 80 plans, representing greater than 800,000 DC participants and over $100 billion in assets. The Index is updated quarterly and reflects 401(k) plans as well as other types of DC plans.
Flows as a % of Net Flows (CY 2014)DC Market1 as of Dec 31, 2014
U.S. Large Cap 26%
Target Date Funds25%
U.S. Small/Mid
Cap12%
Stable Value10%
U.S. Global/Balanced
7%
U.S. Fixed 7%
International Equity
6%
Company Stock5%
Money Market
2%82%
4% 2% 0%
(2)% (12)% (19)% (20)% (28)%
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The number of target date fund families is growingNumber of TDF families with MF AUM >$100MM
1 *Active funds have more than 75% active management ; Blend funds have 5-75% active management; Index funds have less than 5% active management2 Source: Strategic insight, Morningstar Target Date Industry Survey 2013
2 39 13 15 20 23 25 25 25 26 27 28
2 33
4 45
59 10 10 11 11 11
2 33
3 33
34 4 5 5 5 5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Active Blend Index
Understanding target date fund selectionPlease rate the level of understanding of the methodology used to construct the target date funds in your defined contribution plan
Source: J.P. Morgan Plan Sponsor Research 2015.Total n=756, 250+ n=125
24%
23%
59%
52%
13%
20%
5%
4%
2015 >$250 million
2015 Total
Understand completely Understand reasonably well Somewhat understandUnderstand just a little Do not understand at all
% of Respondents
1%
25%
18%
Note: If have TDFs. 2015 Total n=432, >$250mn=87.Source: J.P. Morgan Plan Sponsor Research 2015.
Using appropriate criteria when selecting a target date fundHow important were each of the following criteria when selecting your target date funds? (% responding “very” or “extremely” important)
Meeting fiduciary obligations in selecting target date funds
A February 2013 bulletin from the Department of Labor (DOL) pointed out that fiduciaries should:
• Establish a process for comparing and selecting target date funds
• Establish a process for the periodic review of selected target date funds
• Understand the fund’s investments including allocation in different asset classes (stocks, bonds, cash), individual investments and how they change over time
• Understand the fund’s glide path• Take advantage of available sources of information
to evaluate target date funds
Resource:
Translating Department of Labor guidance into Action
When selecting a target date fund for your plan, what did you place the most emphasis on to ensure the fund aligned to your needs?
1. Performance2. Fees3. Glide path structure4. Participant demographics5. Risk level at target retirement date
DisclosuresRISKS ASSOCIATED WITH INVESTING IN THE FUNDS. Certain underlying J.P. Morgan Funds may invest in foreign/emerging market securities, small capitalization securities and/or high yield fixed income instruments. There may be unique risks associated with investing in these types of securities. International investing involves increased risk and volatility due to possibilities of currency exchange rate volatility, political, social or economic instability, foreign taxation and differences inauditing and other financial standards. The Fund may invest a portion of its securities in small cap stocks. Small capitalization funds typically carry more risk than stock funds investing in well-established “blue-chip” companies since smaller companies generally have a higher risk of failure. Historically, smaller companies’ stock has experienced a greater degree of market volatility than the average stock. Securities rated below investment grade are called “high yield bonds,” “non-investment-grade bonds,” “below investment-grade bonds” or “junk bonds.” They generally are rated in the fifth or lower rating categories of Standard & Poor’s and Moody’s Investors Service. Although these securities tend to provide higher yields than higher rated securities, there is a greater risk that the Fund’s share price will decline. Real estate funds may be subject to a higher degree of market risk because of a concentration in a specific industry, sector or geographical sector. Real estatefunds may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by the borrower. The underlying funds may use derivatives, which are instruments that have a value based on another instrument, exchange rate or index. In addition, the Fund may invest directly in derivatives. Derivatives may be riskier than other types of investments because they may be more sensitive to changes in economic and market conditions than other types of investments and could result in losses that significantly exceed the Fund’s or the underlying funds’ original investments. Many derivatives will give rise to a form of leverage. As a result, the Fund or an underlying fund may be more volatile than if the Fund or the underlying fund had not been leveraged because the leverage tends to exaggerate the effect of any increase or decrease in the value of the Fund’s or the underlying funds’ portfolio securities. Derivatives are also subject to the risk that changes in the value of a derivative may not correlate perfectly with the underlying asset, rate or index. The use of derivatives for hedging or risk management purposes or to increase income or gain may not be successful, resulting in losses, and the cost of such strategies may reduce the Fund’s or the underlying funds’ returns. Derivatives also expose the Fund or the underlying funds to the credit risk of the derivative counterparty. There may be additional fees or expenses associated with investing in a Fund of Funds strategy.
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.
IMPORTANT DISCLOSURES FOR PERSONAL RATE OF RETURN METHODOLOGY. Rate of return is calculated for active participants by an investment strategy using the Modified Dietz method and is based upon volatility between the highest rate of return and the lowest rate of return associated with each investment strategy among such participants. Services associated with the identified investment strategies were available as of the last day of the measurement period, but may not have been available throughout the measurement period. Target date fund users are participants with at least 70% of their account balances invested in target date funds as of the first and last day of the measurement period. “Do-it-yourselfers” are participants with less than 70% of their account balance invested in target date funds as of the first and last day of the measurement period and also includes participants using online advice services, if applicable.
Contact JPMorgan Distribution Services at 1-800-338-4345 for a fund prospectus. You can also visit us at www.jpmorganfunds.com. Investors should carefully consider the investment objectives and risks as well as charges and expenses of the mutual fund before investing. The prospectus contains this and other information about the mutual fund. Read the prospectus carefully before investing.
Opinions and estimates offered 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 offer 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 beenprepared 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 Funds are distributed by JPMorgan Distribution Services, Inc. (JPMDS) and offered by J.P. Morgan Institutional Investments, Inc. (JPMII); both affiliates of JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees for providing various services to the funds. JPMDS and JPMII are both members of FINRA/SIPC.
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, JPMorgan Chase Bank N.A., J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc.
Copyright © 2015 JPMorgan Chase & Co. June 2015
American Express Retirement Savings Plan –Custom Target Date Retirement Funds
Launched in 2006• Retirement Funds represent ##% of Plan assets• Target income replacement: 30%• Glidepath “through” retirement
– maturity date 10 years• Most funds are in the top quartile over all time
periods• QDIA• Retirement Funds represent 29% of Plan assets
Allocation• Equity/Fixed Income:
– Initial allocation: 90% equity & 10% fixed income– At retirement date: 50% equity & 50% fixed income– At maturity date: 30% equity & 70% fixed income
• Built using custom core funds (fund of funds)• Rebalanced quarterly• Initially had liquidity component
American Express Retirement Savings Plan –Custom Target Date Retirement Funds
2015 Review• Assumptions for Custom Target Date Fund Modeling• Initial age of participation/entry in the program?• Initial salary (consistent with the above employee)?• Annual salary growth?• Deferral percentages • Match rates • Termination and Retirement• Payout years• Target income replacement • QDIA
Which one of the following best describes how your organization makes decisions about the design of its DC plan?
1. Meeting your participants’ needs2. The cost to the organization3. Getting the maximum number of participants to
an adequate income replacement in retirement4. The capabilities of your provider
Focus on What’s Most Important
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Investment Results(Earnings)
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. Securities offered through American Funds Distributors, Inc.
Data points and glide path are hypothetical and intended only for illustration.
Target Date Funds Are CriticalAppropriate Investment Can Drive Participant Success
25 30 35 40 45 50 55 60 65 70 75Age of participant
Young participants withvery low equity allocations
High equity allocationnearing retirement
Hypotheticaltarget dateglide path
Individualparticipant
0
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Data points and glide path are hypothetical and intended only for illustration.
Target Date Funds Are CriticalConduct Investment Re-enrollment
25 30 35 40 45 50 55 60 65 70 75Age of participant
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Majority of participantson QDIA glide path
Some participants havereconfirmed their choices
After Investment Re-Enrollment
Hypotheticaltarget dateglide path
Individualparticipant
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45 40 35 30 25 20 15 10 5 Retire 5 10 15 20 25 30
Equity % of portfolio
AFTD
BlackRock
Fidelity Freedom
JPMorgan
T. Rowe
Vanguard
Wells Fargo
ABCDEFG
Target Date Fund EvaluationFocus on Critical Periods of Time
Accumulation
Distribution
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Wells Fargo
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Target Date Fund EvaluationFocus on Critical Periods of Time
Distribution
Accumulation
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Vanguard
Wells Fargo
Distribution
Target Date Fund EvaluationFocus on Critical Periods of Time
ABCDEFG
Accumulation
Important Information
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing.
These statements represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.
Important Information
Allocation percentages and the underlying American Funds of the target date funds are subject to the Portfolio Oversight Committee’s discretion and will evolve over time. Underlying funds may be added or removed during the year. For quarterly updates of the underlying fund allocations, visit americanfundsretirement.com. Investment professionals continue to manage each fund for 30 years after it reaches its target date. Although the target datefunds continue to be managed for investors on a projected retirement date time frame, the funds’ allocation strategy does notguarantee that investors’ retirement goals will be met. Investing outside the United States involves risks such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries. Small-company stocks entail additional risks, and they can fluctuate in price more than larger company stocks. Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds. The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with underlying bond holdings. While not directly correlated tochanges in interest rates, the values of inflation-linked bonds generally fluctuate in response to changes in real interest rates and may experience greater losses than other debt securities with similar durations. Investments in mortgage-related securities involve additional risks, such as prepayment risk, as more fully described in the prospectus. Bond prices and a bond fund’s share price will generally move in the opposite direction of interest rates. Shares ofU.S. Government Securities Fund are not guaranteed by the U.S. government.
Assessing TDF suitability . . . So many tough decisions• “To” or “through”• Active or passive• Off-the-shelf or custom• Wealth accumulation or retirement income • Traditional investments or alternative asset classes• Re-enrollment or re-education• Chocolate or vanilla
A brief history of the target-date industry . . .Annual target-date assets under management
Sources: Vanguard, Morningstar, company public filings, as of June 30, 2015.Investments in target-date funds are subject to the risks of their underlying funds.
The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from
more aggressive investments to more conservative ones based on its target date. An investment in target-date funds is not guaranteed at any time, including on or after the target date.
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$0$200$400$600$800
$1,000$1,200$1,400
1994 1997 2000 2003 2006 2009 2012 2Q2015
Plan sponsors are challenged to . . .
Defend the TDF decision amid
growing scrutiny
Find an enduring
investment solution
Help plan participants reach
goals through a holisticapproach
Self-assessment: Looking inward, planning outward• Your plan’s role? • Your plan’s mission and goals? • Your plan’s utilization? • Your plan’s governance?• What will your plan look like in 10, 15, or 20+ years?
Target-date fund suitability:From self-assessment to product-assessment
Enduring investment solution
Holistic approachto reaching goals
Defendable decisionamid growing scrutiny
TDFselection
InvestmentbeliefsGovernance
Planobjective
All investing is subject to risk, including the possible loss of money you invest.
Important Information
Investments in Vanguard Target Retirement TM Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date.
Past performance is no guarantee of future results.
All investing is subject to risk, including the possible loss of the money you invest.
© 2015 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.
Moderator:Chris Daley, Head of Institutional Defined Contribution Investment Solutions,
J.P. Morgan Asset Management
Speakers:Fredrik Axsater, Senior Managing Director and Global Head of Defined Contribution,
State Street Global AdvisorsToni Brown, Senior Vice President, Defined Contribution, Capital Group
John Croke, Target Retirement Funds Senior Product Manager, VanguardBarbara Kontje, Director, Retirement Americas & Smart Saving, American Express Company
Are your Target-Date Funds Suitable for your Plan?