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Retirement savings behavior has considerable variability

Feb 25, 2008

Effective Target Date Design Rests on True Diversification Into Extended and Alternative Assets

New York, February 25, 2008 - JPMorgan Asset Management (“JPMAM”) today announced the findings of its latest target date research in a white paper entitled “Sharpening Your Aim” - Selecting the Best Target Date Strategy for Your Participants.  Following a previous white paper titled “Ready! Fire! Aim?” (2007) which challenged antiquated industry assumptions about participant saving behavior, this paper addresses whether participants’ saving and investing behavior varies from industry to industry and whether variances should affect overall selection of target date strategies for industry plans.

JPMorgan analyzed data in 10 industries including: Consumer Durables; Consumer Services; Consumer Staples; Energy; Financial; Healthcare; Industrials; Information Technology; Materials and Utilities; seeking to understand relevant differences in participant savings behavior among these groups.

White Paper Findings:

• There is considerable variability in participant behavior across industries. However, unless a specific industry’s variability is very different from the average of all industries, it should not affect the plan sponsor’s selection of a target date strategy.
• Across industries, the most effective target date designs are those that include extended and alternative assets, and remain highly diversified for the entire investment horizon.
• Participant behavior impacts savings outcomes across industries, two remarkable industry examples show:
• Consumer Durables - plan participants demonstrate a combination of potentially detrimental savings behaviors. For example, pre-retirement withdrawals occur with above average frequency (23% of industry participants took withdrawals versus the JPMorgan All Industries average of 15%) and are slightly larger than average in size over time.  At the same time, the industry savings rate averages around 7.5%, slightly lower than average (8% ) and the frequency of participants stopping contributions is higher. In combination, these behaviors — above average withdrawals and a below average savings rate — can leave a less than adequate amount of savings available for retirement. 
• Information Technology - plan participants have an above average savings rate, but larger than average withdrawals which can still have a negative impact on retirement savings.  The savings rate averages around 9%, and the frequency of participants lowering or stopping contributions is below average. However, withdrawals, though slightly less frequent than within the total population, are larger than average in the information technology industry (10% of participants over the age of 59 ½ withdraw an average of 30% of plan balances versus 25% of balances for the All Industries average ).  Despite above average savings rates, larger than average withdrawals can decrease participant success rates and increase the need for downside protection.

Ultimately, JPMorgan found that target date strategies emphasizing diversification and downside protection were most likely to help the greatest number of participants reach their retirement funding goals, across all industries. The results were conclusive:

• Participants’ behavior, which is resistant to change, is still compromising the ability to save and invest, and consequently, diminishing their retirement income security.
• The objective to provide downside protection to participants is justified across all industries.
• The most effective target date design for addressing both of these issues is one that is highly diversified and allocates to extended and alternative assets throughout the investment horizon.

“The second study confirms our initial findings and goes a step further in identifying that participant behavior matters. And unfortunately we are seeing right now that the interaction of real life behavior with volatility in the markets can have very negative consequences for participants,” said Anne Lester, Senior Portfolio Manager, Global Multi-Asset Group, JPMorgan Asset Management.  “Not a lot of people are thinking about the impact of participant behavior on success rates, but they should.  It’s true that plan sponsors have a challenge when it comes to changing participant behavior in the short term, but there is something they can do today — they can choose a well-diversified target date strategy.  This not only will help them satisfy their fiduciary responsibilities, but it is one thing plan sponsors can do quickly that can begin to mitigate the impact of participant behavior. A well diversified target date portfolio, which achieves a better balance of risk and return, is more likely to get more participants to income replacement safely. Not all target date fund designs are created equal and this is something for plan sponsors to watch out for.” 

For a copy of the white paper please visit our website at jpmorgan.com/insight or email: jpmam.info@jpmorgan.com

Notes to Editors:
Methodology:  
In order to gain further insight into the impact of participant behavior, JPMorgan analyzed participant behavior in three critical areas:

• cash inflows (e.g., contribution rates, and the frequency of changes over time)
• outflows (e.g., loans and withdrawals prior to and after retirement)
• salary (e.g., overall levels and frequency of change)

In order to effectively answer the plan sponsors’ questions of whether participants’ saving and investing behavior varies from industry to industry, and whether industry variations might affect their selection of target date strategies for their specific plans, JPMorgan called on the real-world observations of more than 1.3 million 401(k) plan participants, at nearly 200 companies which are recordkeeping clients of JPMorgan Retirement Plan Services. 

JPMorgan broke out and analyzed data in 10 categories, as determined by the Global Industry Classification System’s industry and sector definitions — the study population was divided as indicated per industry sector noted above.  The analysis covers the period from 2003 to 2006.

The Global Multi-Asset Group:
The Global Multi-Asset Group has been managing multi-asset portfolios on behalf of institutional investors including defined contribution plans, defined benefit plans and endowments and foundations for over 25 years. The Group, which consists of more than 40 investment professionals with an average of 10 years industry experience, blends its capital markets, strategic and tactical asset allocation, portfolio construction and active risk budgeting capabilities with one of the broadest product offerings in the industry. JPMorgan’s variety of return sources extends across asset classes, geographies and proven investment methodologies. This global product palette provides GMAG’s experienced multi-asset class investment specialists with access to the ideal, low correlation building blocks necessary for structuring efficiently diversified portfolios.

SmartRetirement:
SmartRetirement, the Global Multi-Asset Group’s target date strategies, provide defined contribution plan sponsors and participants with institutional quality investment solutions.

The JPMorgan SmartRetirement plan design includes investment strategies based on a targeted retirement date. The strategies with the longest time horizons, constructed for those in the early stages of their careers, hold a larger allocation in risk assets, putting more emphasis on capital appreciation and growth. Investment strategies with shorter time horizons have a greater allocation to low volatility assets, but maintain modest exposure to extended equity markets. The JPMorgan SmartRetirement strategies are a simple, one-time investment decision that adapts to the changing needs of participants as they approach retirement. 

About JPMorgan Asset Management:
With $1.2 trillion as of December 31, 2007*, in global discretionary assets under management, JPMorgan Asset Management is one of the largest active asset managers in the world and one of the largest mutual fund companies in the United States, providing institutional, ultra high net worth and retail clients with outstanding investment products across all asset classes globally, including fixed income, equity, liquidity, real estate, private equity and hedge funds. 

*Based on AUM for the Asset Management (JPMAM, PB, PCS) division of JPMorgan Chase & Co. as of December 31, 2007.

Opinions, estimates, assumptions and simulations 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. References to specific securities, asset classes, and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.

These materials have been provided to you for information purposes only and may not be relied upon by you in evaluating the merits of investing in any securities referred to herein.

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. You should consult your tax or legal advisor regarding such matters.

JPMorgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. and its affiliates worldwide which includes but is not limited to J.P. Morgan Investment Management Inc., JPMorgan Investment Advisors, Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc.

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