And how can we prove whether plan design selections will ultimately allow participants to retire with a greater degree of financial security? Especially since the market downturn in 2008, many spon-sors have been grappling with how to design retirement plans that will have the most impact on participation and deferral rates and prepare employees to retire when and how they want. Sponsors with retirement plans administered by J.P. Morgan have adopted a variety of solutions to address these issues in the workplace.

To analyze the results of some of these decisions, J.P. Morgan Asset Management recently conducted a joint study with LionShare Marketing. The study, which analyzed changes to income replacement over time for more than 400,000 par-ticipants from 147 different retirement plans, identified plan design features and communication programs that could be statistically correlated to positive changes in income replace-ment projections. The study’s findings may prove to be useful for plan spon-sors when evaluating their retirement plan design and how

JOURNEY Fall 2011

Mapping participants to target date funds can improve asset allocation In addition to increasing participa-tion and deferral rates, the sponsor also wanted to improve the plan’s overall as-set allocation. At the time, around 20% of the retirement plan’s assets were held in its stable value option, most of it from younger employees who could have been in equity or more aggressive options that may have been more ap-propriate given the time period remain-ing before retirement.

To address asset al-location, the employer mapped participants in stable value funds to age-appropriate tar-get date funds when automatic enrollment and automatic increase

were implemented. The same participants were

then enrolled into an auto-matic increase program, in which their deferral is set to increase 1% annually. Based on J.P. Morgan’s study with LionShare, the client made another key decision by mapping participants into target date funds. The study showed that participants invested in an age-appropriate target date fund had 3% higher average income replacement rates than their colleagues who had not invested in target date funds. That difference may be small in terms of percentage, but for the aver-age American household, it can equate to tens of thousands of extra dollars in retirement.

Plan design features can significantly impact income replacement projections Thanks to the design features, the plan has experienced a signifi-cant increase in plan participation. For example, the decision to add re-enrollment has resulted in a

all participants, the average income replacement ratio was only 32%.

Re-enrollment can boost participation rates To increase participation, the spon-sor conducted a re-enrollment. In the campaign, eligible non-participating employees were automatically enrolled with a 3% deferral rate rather than at the 1% rate of the previous campaign. Additionally, the sponsor concluded that too few participants were plan-

ning to change their elections from the original default. Concerned that the 1% deferral rate was not going to enable par-ticipants to retire successfully, the spon-sor increased the initial default deferral from 1% to 3%, and added an annual automatic increase program of 1%. Based on J.P. Morgan’s study with LionShare, the client made two key choices with regard to the new plan design. First, they conducted the re-enrollment, which quickly moved eli-gible non-participating employees into the plan—people who may not have otherwise taken the steps needed to begin saving for retirement for some time. According to the J.P. Morgan and LionShare study, participants who start early have a 10% higher income replacement average than their coun-terparts who wait to begin saving for retirement. Second, increasing the ini-tial default deferral from 1% to 3% was also smart—the study showed higher deferral rates could lift income replace-ment by as much as 8% over time.

it can be optimized to help employees retire with financial security. To high-light the findings, the case study below describes one employer’s plan design decisions and how those decisions are expected to impact their employees’ retirement readiness, as measured by projected income replacement ratios. Participation in this sponsor’s plan in 2008 was higher than the national average—in the upper 70s—but be-low executive expectations. Many participants entered the plan through automatic enrollment, but failed to change their previ-ous election of 1% default deferral rate

and stable value default alloca-tion. Over time, the small percentage of deferrals resulted in a disproportionate percentage of the plan’s total assets in the stable value op-tion. As measured by income replace-ment, the retirement plan was falling short; only 2% of the employee popula-tion eligible to participate in the plan was on track to replace at least 70% of his or her income at retirement. Across

CLIENT

Fortune 500 company

5,200 employees with more than $600 million in plan assets

Increase participation and deferral rates while improving asset allocation

PLAN SIZE

CHALLENGE

96% participation rate—a 20% in-crease from 2008. Additionally, the decision to map participants into target date funds has resulted in a more appropriate distribution among the target date funds, equities and the less aggressive options available in the plan. In fact, across younger age groups, the average allocation to stable value is now below 10%—-half of what it was in 2008.

Even more encouraging, however, is the anticipated impact of these design changes on participants’ level of retirement readiness. Not only have income replacement levels increased from 32% to 74%, but also half of all participants are now on track to achieve greater fi-nancial security by receiving at least 70% of their current income replace-ment in retirement.

Publications referenced in this material are presented for general educational purposes only. JPMorgan and its affiliates did not receive any compensation or consideration for refer-encing these titles. The opinions and information presented in these titles do not necessarily reflect the opinions of JPMorgan Chase & Co. and its affiliates.

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 illustra-tive purposes only and are not intended to be, and should not be interpreted as, recommendations. Indices 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 situation or that of any entity that you represent or advise. Past performance is no guarantee of future results.

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