J.P. Morgan Asset Management Rethinks DC Plans

‘It’s a radical change from the core menus available today,’ says retirement head Michael Falcon

In a foray into the retirement marketplace, J.P. Morgan Asset Management announced Wednesday that it has developed a way for defined-contribution plan participants to engage more actively with their plans while saving more by gaining exposure to sophisticated alternative investments.

Called Core Menu Innovation (CMI), the newly created J.P. Morgan approach replaces “overly complex and redundant fund line-ups” with a menu of just three investment portfolios, according to the company’s news release. One portfolio consists of diversified stock strategies, another one uses diversified bond strategies and a third one invests in diversified cash alternatives.

“We think it’s a significant change. We think it’s a radical change from the core menus available today,” said Michael Falcon, J.P. Morgan Asset Management’s head of retirement, at a media breakfast in New York.

The CMI developers expect the approach to start being implemented by defined-contribution plan sponsors in 2012. During the development stage, J.P. Morgan spoke with dozens of DC sponsors and interviewed plan participants to learn what they want in a retirement plan.

Mega-fund DC clients with plans of $500 million or greater liked the idea of reducing the number of investment plan options down to three, but CMI’s introduction has been slowed by clients’ questions about fiduciary responsibility, said John Galateria, head of Defined Contribution Investment Solutions.

“But they immediately get it,” Galateria added. “Investors are overwhelmed by too much choice.”

In a written statement addressing clients’ fiduciary concerns, Galateria said: “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. The investment thinking and participant research driving CMI is aligned to support those fiduciary responsibilities.”

In its research supporting the CMI, J.P. Morgan found that the average 401(k) plan’s core investment line-up includes at least 18 fund choices.

“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,” according to the news release.

Anne Lester, portfolio manager for J.P. Morgan Asset Management’s Global Multi-Asset Group, said at the breakfast that the CMI’s three core menus free up DC plan design to migrate from many retail-branded funds to fewer institutional products.

For example, the core menu that invests in a diversified stock portfolio would include large-cap, mid-cap and small-cap U.S. equities along with real estate investment trusts and international and emerging market equity.

Lester acknowledged that DC plan participants may not understand the risks that come from more sophisticated alternatives, but she said J.P. Morgan developed its core managed portfolios to achieve better risk-adjusted returns.

“If you oversimplify things, you’re actually making it harder to get there,” Lester said, adding that one plan participant in a focus group said she used an “eenie, meenie, miny, mo” approach to picking the funds in her DC retirement plan—a sure way to take on unintended risk.

Retirement income is not addressed in the CMI approach, at least not initially, Falcon said, noting that the three core menus focus on accumulation.

For more about retirement income, read The 2011 IA/Cerulli Retirement Income Study at AdvisorOne.com

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