Plan Design Guide A new framework to help benchmark and enhance defined contribution plan effectiveness
What is your plan s profile? Based on an extensive research study on how plan sponsors make plan design decisions, four types of plan sponsor profiles emerged. Each profile has distinct characteristics based on its approach to plan design. Below is a short description of each profile along with the typical plan features associated with it: INNOVATION INVESTMENT Northwest Quadrant Generally focused on proactively placing participants on a strong savings and investing path. Tend to offer an expanded range of time-tested plan features when improvements in projected income replacement rates justify additional cost. TYPICAL PLAN FEATURES Immediate eligibility for contributions and match Match offered, applied each pay period Early (one-or three-year cliff) vesting schedule Target date funds Managed solution as qualified default investment alternative (QDIA) Southwest Quadrant Generally focused on running an efficient plan, often in a high-turnover industry. Tend to offer more basic, timetested features, sometimes adopting new services when they lead to better projected income replacement rates at little to no additional cost to the firm. TYPICAL PLAN FEATURES Deferred eligibility to contribute (90 days to one year) Catch-up contributions Target date funds Managed solution as qualified default investment alternative (QDIA) Northeast Quadrant Generally focused on retaining talent in a highly competitive industry. Tend to adopt new features when improvements in projected income replacement rates justify additional cost. TYPICAL PLAN FEATURES Immediate eligibility and vesting Match offered, applied each pay period Full suite of automatic features (opt out) In-plan Roth 401(k) conversion Target date funds Managed solution as qualified default investment alternative (QDIA) Southeast Quadrant Generally focused on maintaining employee satisfaction in an established talent market. Tend to adopt new features when they lead to better projected income replacement rates at little to no additional cost to the firm. TYPICAL PLAN FEATURES Immediate eligibility for contributions Annual discretionary match Stretched eligibility for match (one/+ years of service) Stretched vesting schedule (three-or six-year graded) Automatic contribution escalation and rebalance (opt in) Target date funds Managed solution as qualified default investment alternative (QDIA)
Dissecting the components of plan success Traditional benchmarking of defined contribution plans can sometimes fall short. Companies may share size, industry or geography but pursue radically different retirement plan strategies that make direct comparisons challenging. The Plan Design Guide offers an objective way to evaluate plan effectiveness relative to companies with similar retirement benefit structures and goals. This classification is based on plan design, one of the most critical determinants in helping participants secure successful retirement funding levels. There are two primary influences on plan design: 1 2 How quickly the plan sponsor adopts new design features and services How much money the plan sponsor and participants invest in the plan The combination of these two factors innovation and investment determines a plan sponsor s profile and offers insight into how its design compares to a more precise group of peers with similar retirement plan preferences and characteristics. It also helps identify realistic, actionable opportunities to improve projected participant outcomes by evaluating the most effective features and services in each category.
Step 1: Determine plan profile For each question, please select a number between 1 and 5 that best reflects the appropriate plan preferences or characteristics between the two options provided. 1. What is your philosophy on driving participant decisions? We focus on participants making their own choices. 1 2 3 4 5 We proactively place participants on a strong savings and investing path. 2. How quickly does your plan adopt new plan design or service features? We prefer the most common, 1 2 3 4 5 We are usually early adopters who implement the newest plan design time-tested features and services. features and services available. 3. Do you value offering a wide range of services in your retirement program? Simplicity is best. 1 2 3 4 5 We offer additional features/services and plans when we think they help generate desired outcomes. 4. How are plan fees, such as recordkeeping, advisor and audit fees, allocated? Participants pay all fees. 1 2 3 4 5 Employer pays all fees. 5. What level of employer contributions are provided? We provide no employer contributions. 1 2 3 4 5 We offer a highly competitive match and/ or profit-sharing contribution. 6. How much do plan participants save? Participant deferral rates are below average. 1 2 3 4 5 Participant deferral rates are above average. Add your combined scores from questions 1, 2 and 3 to determine your Innovation score: LOW INNOVATION YOUR SCORE HIGH INNOVATION 0-8 points 9-15 points Add your combined scores from questions 4, 5 and 6 to determine your Investment score: LOW INVESTMENT YOUR SCORE HIGH INVESTMENT 0-8 points 9-15 points
Step 2: Benchmark plan effectiveness The analysis has shown that all four plan profiles can help participants achieve retirement success, as measured by the percentage of participants who are on track to achieve adequate levels of retirement replacement income. Earlier adoption of plan design features and services within each quadrant frequently has had greater impact on improving participant outcome potential than increased company monetary investment. YOUR INNOVATION SCORE 0-8 9-15 Northwest Quadrant PROJECTED INCOME REPLACEMENT RATES Northeast Quadrant PROJECTED INCOME REPLACEMENT RATES YOUR INVESTMENT SCORE 0-8 9-15 46% 65% 83% LOWEST AVERAGE HIGHEST Southwest Quadrant PROJECTED INCOME REPLACEMENT RATES 38% 63% 80% LOWEST AVERAGE HIGHEST 44% 68% 91% LOWEST AVERAGE HIGHEST Southeast Quadrant PROJECTED INCOME REPLACEMENT RATES 40% 66% 85% LOWEST AVERAGE HIGHEST Source: J.P. Morgan Retirement Plans Services proprietary data aggregating retirement plans maintained by Retirement Plan Services as of December 31, 2010. Next step: Find your Plan Design Action Plan in the pocket to help determine the best possible opportunities for improving the outcome potential of your plan.
For more information about the Plan Design Guide or other retirement insights, please contact your retirement plan advisor or J.P. Morgan representative. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates 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 unaffiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties. Source: J.P. Morgan Retirement Plan Services 2010 Proprietary Research 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 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 Plan Design Guide, Patent pending DC-MKT-56881 1205
Northwest Quadrant Plan Design Action Plan Plan Profile Plan sponsors in the NW quadrant are generally focused on proactively placing participants on a strong saving and investing path. Plan sponsors typically: Continuously evaluate plan features and services to determine which may have positive impact on plan Utilize only time-tested plan features and are typically not early adopters Implement select features when potential impact is demonstrated and justifies the cost Potential Plan Design Opportunities Evaluate and consider the following plan design features and services: DESIGN CONSIDERATIONS Automatic enrollment Immediate eligibility to contribute Offer match, apply each pay period Immediate match eligibility Early (one-or three-year cliff) vesting schedule Standing, annual profit sharing Support a deferred compensation nonqualified plan, backed by a Rabbi trust ADMINISTRATION CONSIDERATIONS Purchase lost participant and data cleansing services Conduct interim testing Add a match true-up capability COMMUNICATION CONSIDERATIONS Roll-in campaigns to consolidate previous retirement accounts Total rewards statement experience Quick deferral increase Personalized, custom saving and investing education Face-to-face education seminars Tie participation and deferral campaigns to pay increase cycles. Avoid fourth quarter discretionary communications. INVESTMENT CONSIDER NW SW 3 INNOVATION NE SE 6 12 Plan design features and services continued on next page
Northwest Quadrant?Not sure how plan design changes will affect participant outcomes? Contact your retirement plan advisor or J.P. Morgan representative for additional resources. INVESTMENT CONSIDERATIONS Advisory services suite with online advice Add diversified, income-oriented options to the line-up Fiduciary Considerations CONSIDER 3 6 12 Automatic enrollment Plans adopting an automatic enrollment program continue to rise. This feature has proven to have a dramatic impact on plan participation rates with opt-out rates of typically less than 10% and on average increase a plan s income replacement ratio by 2%. Employer contributions Offering an employer match or profit-sharing contributions is perhaps the most direct way to contribute to your employees retirement. Research shows that offering a match can translate to an 8% average income replacement rate increase, and profit sharing contributes a 4% lift in income replacement. One hypothesis for the difference is that the match requires engagement from employees and generates a tailwind of good behavior. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates 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 unaffiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties. Source: J.P. Morgan Retirement Plan Services 2010 Proprietary Research 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 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 Plan Design Guide, Patent pending DC-MKT-56885 1205
Northeast Quadrant Plan Design Action Plan Plan Profile Plan sponsors in the NE quadrant are generally focused on retaining talent in a highly competitive industry. Plan sponsors typically: Evaluate new features and services as soon as they are available many times offering to pilot new programs to evaluate success Want their participants to know they aspire to bring them the latest solutions Adopt new, relevant features early rather than waiting for broad adoption Modify their plans proactively and encourage participants to evaluate their decisions on an ongoing basis Potential Plan Design Opportunities Evaluate and consider the following plan design features and services: DESIGN CONSIDERATIONS Immediate eligibility to contribute Offer match, apply each pay period Immediate match eligibility Immediate vesting schedule In-plan Roth 401(k) conversion Annual automatic enrollment (non-participating employees) Automatic deferral increase (participant opt out) Annual investment re-enrollment (participant opt out) Annual, discretionary profit sharing Support an account-based deferred compensation non-qualified plan, backed by a Rabbi trust ADMINISTRATION CONSIDERATIONS Manage an ERISA spending account to pay basic plan fees and allocate appropriate remainder back to participants COMMUNICATION CONSIDERATIONS Broad financial planning services Total rewards interactive, transactional experience INVESTMENT CONSIDER NW SW 3 INNOVATION NE SE 6 12 Plan design features and benefits continued on next page
Northeast Quadrant?Not sure how plan design changes will affect participant outcomes? INVESTMENT CONSIDERATIONS CONSIDER 3 6 12 Contact your retirement plan advisor or J.P. Morgan representative for additional resources. Implement a streamlined core investment menu Self-directed brokerage with full spectrum of investment choices; limit the dollars that can flow into the brokerage account Fiduciary Considerations The automatic suite - Offering the powerful package of automatic enrollment, automatic contribution escalation and automatic rebalance can have the most dramatic impact on income replacement ratios for participants. Plans that offer automatic enrollment typically see a 2% lift in average income replacement rates, and the addition of automatic escalation and rebalance bring a 5% lift in average income replacement rates. Also, consider a default contribution rate of 6% and increase it 2% each year to get to a double-digit contribution rate as soon as possible. Re-enrollment - Engaging in a plan re-enrollment can offer significant benefits to plan sponsors and their participants. Give participants the opportunity to make a new investment election during a certain window or default into the plan s QDIA. Participants and plan sponsors may enjoy a 7% average income replacement increase. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates 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 unaffiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties. Source: J.P. Morgan Retirement Plan Services 2010 Proprietary Research 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 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 Plan Design Guide, Patent pending DC-MKT-56883 1205
Southwest Quadrant Plan Design Action Plan Plan Profile Plan sponsors in the SW quadrant are generally focused on running an efficient plan, often in a high-turnover industry. Plan sponsors typically: Evaluate time-tested features that have been proven successful and are broadly adopted by other plan sponsors Implement new features and services on a very limited basis, which likely have little or no cost to the firm Continuously seek strategies to reduce costs for the plan sponsor Potential Plan Design Opportunities Evaluate and consider the following plan design features and services: DESIGN CONSIDERATIONS Make an annual, discretionary match with a 12/31 requirement Stretched (one year of service) eligibility for the match Stretched (six-year graded) vesting schedule Forgo safe harbor designation and instead support an excess deferral non-qualified plan Deferred eligibility to contribute based on service Catch-up contributions ADMINISTRATION CONSIDERATIONS Limit in-service distributions to a single loan and hardships Prototype plan document Small balance force-out provision Accept rollovers in from a broad source of account types (401(k)s, 457, defined benefit and other qualified accounts) COMMUNICATION CONSIDERATIONS Quick enroll program Budgeting and debt planning services for participants Create a train the trainer in-house advocate program Provide on-the-clock paid attendance webinars Standard saving and investing education INVESTMENT INNOVATION NW NE SW SE CONSIDER 3 6 12 Plan design features and services continued on next page
Southwest Quadrant?Not sure how plan design changes will affect participant outcomes? Contact your retirement plan advisor or J.P. Morgan representative for additional resources. INVESTMENT CONSIDERATIONS Review use of company stock Target date funds Managed solution (target date fund or managed account) as QDIA Establish an Investment Policy Statement CONSIDER 3 6 12 Fiduciary Considerations QDIA - Offering a professionally managed solution, like a target date fund, as the plan s qualified default investment alternative (QDIA) is an important consideration for plan sponsors. This type of solution helps place defaulted participants in an appropriate asset allocation. Plans that use a series of target date funds as the QDIA may see an increase of 12% in average income replacement rates. Quick enroll program - Offering a quick enroll program makes it easier for less engaged participants to start saving. On average, plans that offer quick enroll see an increase in participation, contribution levels and adoption of target date funds. That typically translates to a 5% lift in average income replacement rates. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates 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 unaffiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties. Source: J.P. Morgan Retirement Plan Services 2010 Proprietary Research 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 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 Plan Design Guide, Patent pending DC-MKT-56889 1205
Southeast Quadrant Plan Design Action Plan Plan Profile Plan sponsors in the SE quadrant are generally focused on maintaining employee satisfaction in an established talent market. Plan sponsors typically: Evaluate new features and services as soon as available Adopt new, relevant features early rather than waiting for broad adoption Implement new features and services that have little or no cost to the firm Continuously seek strategies to reduce costs for the plan sponsor Potential Plan Design Opportunities Evaluate and consider the following plan design features and services: DESIGN CONSIDERATIONS Immediate eligibility to contribute Annual, discretionary match Stretched (one/+ years of service) eligibility for the match Stretched (three-or six-year graded) vesting schedule Automatic rebalance option (participant opt in) Automatic deferral increase (participant opt in) Roth 401(k) provision Increase the upper limit (20%) of the automatic deferral increase program Support a deferred compensation nonqualified plan backed by a Rabbi trust ADMINISTRATION CONSIDERATIONS Pass transaction fees (loans, hardships, QDROs, etc.) to participants Manage an ERISA spending account to pay for a wide range of plan-related fees Use plan forfeitures to pay plan expenses COMMUNICATION CONSIDERATIONS Income replacement forecast and modeling Maximize webinar and electronic communications INVESTMENT NW SW INNOVATION NE SE CONSIDER 3 6 12 Plan design features and services continued on next page
Southeast Quadrant?Not sure how plan design changes will affect participant outcomes? Contact your retirement plan advisor or J.P. Morgan representative for additional resources. INVESTMENT CONSIDERATIONS Model portfolios Advisory services suite with managed accounts Self-directed brokerage with access to limited range of mutual funds If offering company stock, do so only through the self-directed brokerage Installment and partial distributions in support of a professionally managed drawdown solution CONSIDER 3 6 12 Fiduciary Considerations Income replacement forecasting Research has shown that participants consistently exposed to their retirement income replacement projection, on the web, in print or via the phone service center, generally enjoy a 13% average income replacement rate increase. Stretched eligibility and vesting Stretching out the eligibility and vesting for employer contributions does not negatively impact participation rates and contribution levels. The mere existence of a company match is most impactful, translating to a potential 4% increase in average income replacement rates. Roth 401(k) provision Offering an after-tax or Roth source allows participants to save money either from pre-tax or after-tax earnings. It s a way to offer additional choices to participants at no additional cost to the plan sponsor. Plans with an after-tax or Roth source may see a 3% lift in average income replacement rate outcomes. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates 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 unaffiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties. Source: J.P. Morgan Retirement Plan Services 2010 Proprietary Research 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 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 Plan Design Guide, Patent pending DC-MKT-56887 1205