Simple is often the hardest thing to do, but simple can also be the most transformative. And simple is what George Gatch has his team at JPMorgan Asset Management [see profile] focused on. This morning the asset manager and recordkeeper took the wraps off a new effort that reimagines the core investments offered inside 401(k) plans.

Mike Falcon JPMorgan Asset Management Head of Retirement

The idea is to replace the core investment lineup with three diversified funds that each focus on an asset class. Participants choosing to create their own asset allocation would simply mix from a core equity fund, core fixed income fund and a cash fund. Target date funds would remain as the QDIA for the plan, explained Mike Falcon, who heads JPMorgan's retirement business.

"What we are advocating is replacing the core menu -- which often has eight or more funds -- with three portfolios," Falcon explained. "For the vast majority of participants we believe that target date remains the best option and that there is a role for managed accounts."

Anne Lester JPMorgan Asset Management Portfolio Manager

The benefit for the participants, in Falcon's view, is that it puts a wider range of assets into participants' hands.

For plan sponsors, this design promises to shift the focus from the micro level of watching individual funds to focusing on plan design.

"They can spend energy at the design level so the outcome is better," said Anne Lester, a portfolio manager in JPAM's global multi-asset group. She added that the simple core "frees up design energy for the plan sponsor."

Lester said that the three core funds would bring assets such as emerging markets equities, REITs and commodities into participants' accounts. Under current plan designs, those funds are not understood by participants and are typically lost to the asset mix as participants whittle their choices from a dozen or more to the two or three most used.

For JPMorgan, the new design offers another potential payoff. By "breaking the brand" of the core mutual fund firms and refocusing participants on higher level asset allocation decisions, JPMorgan and other providers offering this product would be able to recapture the lion's share of plan assets, including those that are not in the target date funds. The sole leakage from the provider's product would be any self-directed brokerage option.

The challenge JPMorgan faces is convincing plan sponsors to adopt such a radical rethinking of how plan investment menus are designed. John Galateria, who heads the DC investment sales for the group, acknowledged that the firm is still in the introduction stage with plans sponsors. He added that they are currently focusing on the largest plan sponsors and that a handful that are currently reconsidering their investment lineup are the furthest along in their review.

If sponsors accept the idea, this is a simple idea that could complicate the 401(k) market for everyone in it.

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Company Press Release

NEW YORK, Nov. 9, 2011 -- J.P. Morgan Asset Management (NYSE: JPM) is introducing a new approach to the traditional menu of investment choices offered by most U.S. defined contribution (DC) plans.

The approach, called Core Menu Innovation (CMI), replaces overly complex and redundant fund line-ups with a simplified menu of just three investment portfolios: one consisting of diversified stock strategies, one with diversified bond strategies and one with diversified cash alternatives.

"CMI represents our most advanced thinking on how to help Americans achieve a more financially sound retirement," said Michael Falcon, head of Retirement for J.P. Morgan Asset Management. "The 401(k) plan is the primary retirement savings vehicle for most Americans today, so it's critical that we help participants make better investment decisions. J.P. Morgan research shows that participants who choose to invest on their own rather than in some form of professionally managed solution are, on average, falling short of their retirement savings goals. We have to help them close that gap, and we believe CMI is one way to do so."

Plan sponsors are searching for ways to increase participant engagement and consolidate their investment line-ups. The CMI solution provides fewer, but more sophisticated, investment options and leverages the diversification benefits offered by target date funds and other professionally managed, asset-allocation solutions.

Improving Choice Architecture for Better Retirement Outcomes

Although target date funds have been widely adopted by plan sponsors, participation in them is lagging at the participant level: The majority (nearly 79%) of DC assets remain invested in the plan's core menu(1). Today, the average 401(k) plan's core investment line-up includes at least 18 different fund choices(2), and often many more. However, a growing body of research shows that when participants are presented with complex or too many choices, they are most likely to make no choice at all or an uneducated choice—either of which leaves them inadequately diversified and overexposed to individual investment strategies.

How CMI Fundamentally Rethinks Core DC Line-Up

CMI seeks to combine the diversification benefits of professionally managed asset allocation solutions with proven research into participant behavior and choice architecture. It involves consolidating and streamlining the 18+ mutual funds found in an average DC plan into three professionally managed stock, bond and cash alternative investment options designed by J.P. Morgan's Global Multi Asset Group, which is responsible for the firm's suite of SmartRetirement Target Date Fund solutions. Each of these consolidated core portfolios is built with sophisticated asset allocation incorporating diversification across traditional and extended asset classes.

"CMI draws upon the Global Multi-Asset Group's unified investment approach that influences the group's target date strategies, which seek to capture attractive returns with lower volatility, increasing the overall probability that participants reach their retirement-income goals," said Anne Lester, portfolio manager for the Global Multi-Asset Group at J.P. Morgan Asset Management. "We continue to believe that target date funds are a good solution for the vast majority of participants. However, for those participants who elect not to enter target date funds, we believe CMI provides a better framework than that of the traditional DC plan's core line-up. "

How CMI Impacts Plan Sponsors

By helping to limit the range of extreme investment outcomes, and thereby generating better investment results, CMI helps plan sponsors meet their fiduciary responsibilities, while also contributing to a plan's overall success in helping participants achieve better retirement outcomes.

"As the investment and regulatory landscape has become drastically more complex, plan sponsors are increasingly under scrutiny to ensure they fulfill their legal obligations and act with responsibility for the prudence and suitability of participant investment decisions," said John Galateria, head of Defined Contribution Investment Solutions at J.P. Morgan Asset Management. "The investment thinking and participant research driving CMI is aligned to support those fiduciary responsibilities."

CMI also enables plan sponsors to potentially reduce individual manager risk and decrease any brand bias at the participant level. The strategy aims to capture greater fee efficiency and transparency by unbundling record-keeping and investment management fees.

"CMI brings together advanced asset-allocation thinking and a deep understanding of participant behavior — a powerful combination that we believe can help improve the retirement-savings outcome for Americans invested in 401(k) plans," Mr. Falcon said.

About J.P. Morgan Asset Management

J.P. Morgan Asset Management, with assets under supervision of approximately $1.9 trillion and assets under management of $1.3 trillion (as of 9/30/2011), is a global leader in investment management. J.P. Morgan Asset Management's clients include institutions, retail investors and high-net worth individuals in every major market throughout the world. J.P. Morgan Asset Management offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity. JPMorgan Chase & Co. (NYSE: JPM), the parent company of J.P. Morgan Asset Management, is a leading global financial services firm with assets of $2.2 trillion and operations in more than 60 countries. Information about JPMorgan Chase & Co. is available at www.jpmorganchase.com.

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

Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The manager seeks to achieve the above referenced objectives. There is no guarantee that these objectives will be met.

The manager seeks to achieve the above referenced objectives. There is no guarantee that these objectives will be met.

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.

Diversification does not guarantee investment returns and does not eliminate the risk of loss,

Certain underlying Funds of the JPMorgan SmartRetirement strategy 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 differences. 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. A fund of funds is normally best suited for long-term investors.

(1) Source: McKinsey, "Winning in the Defined Contribution Market of 2015" – Asset Allocation Funds includes Target Date and Balanced/Target Risk

(2) Source: PSCA's 53rd Annual Survey of Profit Sharing and 401(k) Plans, 2010

SOURCE J.P. Morgan Asset Management


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