Analysis of the J.P.

Morgan
Target Date Compass
SM
A WH I T E PA P E R B Y
Fred Reish & Bruce Ashton
Drinker Biddle & Reath LLP
1800 Century Park East, Suite 1400
Los Angeles, California 90067
(310) 203-4000
fred.reish@dbr.com / bruce.ashton@dbr.com
www.drinkerbiddle.com
The research contained in this white paper was compiled by Drinker Biddle & Reath LLP. The description of the Target Date Compass
SM
process set forth in this white
paper was based on information provided by J.P. Morgan Asset Management (“J.P. Morgan”). J.P. Morgan is a subsidiary of JPMorgan Chase & Co. and is not afliated
with Drinker Biddle & Reath LLP. Drinker Biddle & Reath LLP is solely responsible for the information and content of this white paper. J.P. Morgan is not responsible
for conclusions of law set forth in this white paper. The research referred to in this white paper is current as of February 1, 2014. The reader should independently
determine whether the research set forth in this white paper is current after that date.
I I ANALYSI S OF THE J. P. MORGAN TARGET DATE COMPASS
SM
Any and all information set forth herein and pertaining to the Target Date Compass
SM
and all
related technology, documentation and know-how (“information”) is proprietary to JPMorgan
Chase Bank, N.A. (“JPM”).
U.S. Patents No. 8,255,308; 8,386,361 and patent(s) pending.
Fred Reish and Bruce Ashton are Partners in the Employee Benefits & Executive Compensation
Practice Group of Drinker Biddle & Reath LLP. They have been compensated by J.P. Morgan Asset
Management to provide advice and to give an opinion regarding the Target Date Compass
SM
.
The law and Drinker Biddle’s analysis contained in this white paper are general in nature and
do not constitute a legal opinion or legal advice that may be relied on by third parties. Readers
should consult their own legal counsel for information on how these issues apply to their
individual circumstances. Further, the law and analysis in this white paper are current as of
February 2014. Changes may have occurred in the law since this paper was drafted. As a result,
readers may want to consult with their legal advisors to determine if there have been any
relevant developments since then.
Important Disclosure
The information within has been obtained from sources deemed to be reliable. The content
within the Target Date Compass is for informational purposes only and should not be construed
as investment advice.
The Target Date Compass is designed to provide a framework for identifying and evaluating
target date funds (TDF) that align most closely with a plan’s overall goals and its participants’
needs. The goal of the tool is to help plan sponsors assess their retirement plans’ desired
level of equity exposure for participants at the target date and asset class diversification—
two important characteristics of TDFs. The framework also encourages plan sponsors to
understand, and consider, the characteristics and behaviors of their workforce as part of the
target date selection process—factors that the Department of Labor (DOL) has also stated
fiduciaries should take into account when assessing the selection of a TDF and in designing
the investment menu for a defined contribution plan. The Target Date Compass is meant to
help in the due diligence process when evaluating TDFs for a plan. The Target Date Compass is
not meant to replace the fiduciary responsibilities that are inherent with all plan sponsors. If
the Target Date Compass is used, it should be used as part of a comprehensive due diligence
process. Exclusive reliance on the Target Date Compass to make investment decisions is not
recommended. The ultimate responsibility for choosing an investment option is that of the plan
sponsor. J.P. Morgan takes no responsibility for the final investment decision. It is important to
note: The intention of the tool is to help highlight the diferences between target date funds in
order to make informed comparisons.
BY FRED REI SH & BRUCE ASHTON I I I
T A B L E O F C O N T E N T S
2
Introduction
3
Summary
6
Description of the Target Date Compass
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10
Analysis and discussion
17
Conclusion
18
About the authors
20
Endnotes
I V ANALYSI S OF THE J. P. MORGAN TARGET DATE COMPASS
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I n t r o d u c t i o n
BY FRED REI SH & BRUCE ASHTON 2
I n r e c e nt ye ar s , t he pr eval e nc e of t ar g e t dat e f unds ( TDFs ) in 401(k) plans
has more than doubled. According to an Investment Company Institute report released in December 2013, 41% of
401(k) participants held TDFs at the end of 2012 versus 19% as recently as 2006.
1
This growth—as well as significant government scrutiny—has
changed the TDF landscape. It has heightened the need for
prudent decisions by plan sponsors in selecting TDFs and,
equally as important, in revisiting decisions they made only a
few years ago.
Recent regulatory scrutiny and guidance have largely been
helpful in clarifying issues that fiduciaries should consider.
They have included:
A joint Department of Labor (DOL)/Securities and Exchange
Commission (SEC) public hearing on TDFs in June 2009
A DOL/SEC investor bulletin in May 2010
2

Proposed amendments related to TDFs to the DOL
regulations on participant disclosures and qualified default
investment alternatives (QDIAs)
3

Proposed amendments to SEC rules on investment company
advertising related to TDFs
4

The DOL’s February 2013 bulletin, “Tips for ERISA Plan
Fiduciaries”
5
The DOL’s announced intention to finalize its 2010 proposals
on TDF disclosure
6
Fiduciaries have more guidance on what information to review in
selecting TDFs, but this greater clarity has brought with it a need
to review earlier decisions. Half a dozen years ago, fiduciaries
might have felt comfortable choosing a TDF family ofered by a
reputable provider. This is no longer the case.
To assist plan sponsors with the task of selecting (or replacing)
TDFs, this white paper evaluates the J.P. Morgan Target Date
Compass
SM
(“Target Date Compass”), a program designed to
help 401(k) fiduciaries satisfy their duties under the Employee
Retirement Income Security Act of 1974 (“ERISA”) for the selection
of TDFs. Our conclusion is that the Target Date Compass:
Provides a valuable—and unique—aid for assessing TDFs
available in the marketplace
Ofers material assistance to fiduciaries in fulfilling their
legal responsibilities under ERISA for the selection and
monitoring of TDFs
As context for our evaluation, we discuss the responsibilities
of fiduciaries (such as plan committee members and company
ofcers with discretion over plan investments) in managing
plan assets. Our focus is on the ERISA duties to:
Act for the exclusive purpose of providing benefits to
participants and beneficiaries
Engage in a prudent process to fulfill their duties, including the
obligation to evaluate the needs of the plan and its participants
This white paper analyzes these responsibilities for
participant-directed 401(k) plans and explains how the Target
Date Compass helps fiduciaries meet or exceed their legal
obligations by giving them a mechanism to: (1) prudently
evaluate the suitability of the TDF families available in the
marketplace, both as potential QDIAs and as investments to
be afrmatively selected by participants; and (2) assist the
fiduciaries in prudently selecting a particular TDF family that
meets the needs of the plan and its participants.
3 ANALYSI S OF THE J. P. MORGAN TARGET DATE COMPASS
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Summary
One solution is target date funds (TDFs). TDFs ofer what
might be referred to as the “snapshot and moving picture”
approach to investing. TDFs are typically “funds of funds”
(with the underlying funds representing distinct asset classes
and investment styles, collectively called “asset classes”
in this paper) that gradually adjust their asset allocations
along a “glide path.” That is, with the passage of time, TDFs
become more conservative (i.e., hold fewer investments in
equities). The snapshot is the asset allocation at a given point
in time; the moving picture is the changing asset allocation as
participants age. In this sense, TDFs address both aspects of
the diversification conundrum.
This creates a challenge for plan sponsors, because not all
TDFs are alike, and plan sponsors have a responsibility under
ERISA to select TDFs that are prudent for their plan. The
snapshot that is clear for one plan may be out of focus for
another; the moving picture may run too long or too short for
a specific group of participants.
ERI SA c ont e mpl at e s t hat par t i c i pant s will invest in a well-diversified way.
7
Unfortunately,
many participants lack the skill, time or inclination to create appropriate portfolios for long-term investing
and to periodically adjust those portfolios to fit changing circumstances. This fact might be referred to as the
“diversification conundrum” because it creates risk for plan sponsors and fiduciaries. As a result, plan sponsors
and the retirement industry have developed solutions to achieve better outcomes for employees and to reduce the
risks faced by fiduciaries.
The Target Date Compass
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is designed to help plan sponsors
understand the snapshot and the moving picture in order to
narrow the large number of TDF families to a group that fits
the needs of the plan and its participants. Target Date Compass
looks at the number of asset classes available in a TDF and
the equity exposure at retirement. We describe this in more
detail later, but the point here is that, by giving plan sponsors
a sophisticated view of the TDF’s investment structure, the
Target Date Compass facilitates and documents the plan
sponsors’ decision about which TDF family to select.
The Pension Protection Act of 2006 (“PPA”) helped spur
the search for diversification solutions. The PPA provided
an incentive to 401(k) plan sponsors to automatically enroll
employees by limiting the liability of fiduciaries for investing
automatically enrolled participant accounts. Specifically,
fiduciaries are relieved of liability for the investment of the
accounts of defaulting participants so long as the accounts
are invested in Qualified Default Investment Alternatives
BY FRED REI SH & BRUCE ASHTON 4
(QDIAs). In its QDIA regulation, the DOL lists TDFs as one form
of investment that may be used as a QDIA. Even though the
fiduciaries are relieved of responsibility for putting a defaulting
participant in a TDF, they still have the responsibility for
prudently selecting and monitoring the TDF.
Since passage of the PPA, the number of TDF families has
grown dramatically. The 401(k) dollars invested in TDFs have
grown almost eight-fold in roughly eight years. According to
an Investment Company Institute study, plan assets invested
in TDFs grew from about $51 billion in 2005 to slightly less
than $400 billion at the end of the third quarter of 2013.
8
The
increase in the number of TDFs, the significant variation in
their approaches, the explosive growth in investment in them
and changes in the regulatory environment are all factors that
have increased the difculty and importance of the fiduciary’s
job in selecting a suite of TDFs for use as a QDIA, as well as for
participants who afrmatively decide to invest in those vehicles.
From a legal perspective, fiduciaries are charged with carrying
out their duties as would a person “familiar with such matters”
(i.e., familiar with the universe of TDFs and their diferences)
and familiar with then-prevailing circumstances.
9
Therefore,
the manner in which fiduciaries go about their job is not
merely academic; while fiduciaries are not liable in connection
with the investment of a defaulted participant’s account in
a QDIA, they remain responsible—and therefore potentially
liable—for the proper selection and monitoring of the TDF
family that is used as the QDIA (as well as for participants
who direct their investments into the TDFs). A TDF family
that may be appropriate for one plan’s participants may be
inappropriate for the participants of another plan. In selecting
a TDF suite, fiduciaries must consider the needs of their
participants and select a TDF family that is appropriate for
those needs.
Given the variation among TDFs and the importance of the
selection, there have been a number of eforts to clarify the
information that fiduciaries should consider in selecting a
TDF family. These culminated in a piece issued by the DOL in
February 2013, called “Target Date Funds – Tips for ERISA Plan
Fiduciaries.”
10
As the DOL pointed out:
“ [the] considerable diferences among TDFs ofered by
diferent providers, even among TDFs with the same
target date. For example TDFs may have diferent
S U M M A R Y
investment strategies, glide paths, and investment-
related fees. Because these diferences can significantly
afect the way a TDF performs, it is important that
fiduciaries understand these diferences when selecting a
TDF as an investment option for their plan.”
In the proposed amendments to the participant disclosure
regulation and the QDIA regulation, the DOL used almost
identical wording to describe the information that fiduciaries
need to provide to participants:
“ An explanation of the alternative’s asset allocation,
how the asset allocation will change over time, and the
point in time when the alternative will reach its most
conservative asset allocation….”
* * * *
“ If the alternative is named, or otherwise described, with
reference to a particular date (e.g., a target date), an
explanation of the age group for whom the alternative is
designed, the relevance of the date, and any assumptions
about a participant’s or beneficiary’s contribution and
withdrawal intentions on or after such date….”
The “tips” ofered by the DOL are intended to help fiduciaries
make a prudent selection; and, while directed at participant
disclosures, the proposed regulations suggest areas that
fiduciaries should consider. These are all helpful, but they do
nothing to simplify the job of assessing TDF variables. The Target
Date Compass is intended to do just that.
In the February 2013 bulletin, the DOL pointed out that
fiduciaries need to take various steps, including the following:
Establish a process for comparing and selecting TDFs. The
DOL indicates that fiduciaries must engage in an objective
process to obtain information needed to evaluate the
prudence of their decision
Establish a process for the periodic review of selected TDFs.
The DOL points out that, at a minimum, the review process
should include an examination of whether there have been
changes in the information reviewed at the time of selection
Understand the fund’s investments including the allocation
in diferent asset classes (stocks, bonds, cash), individual
investments and how they change over time. Among other
things, the DOL says fiduciaries must make sure they
understand the fund’s glide path
5 ANALYSI S OF THE J. P. MORGAN TARGET DATE COMPASS
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Take advantage of available sources of information to
evaluate the TDF and recommendations they received
regarding the TDF selection
To assist plan fiduciaries in satisfying their obligations
to prudently select and monitor TDFs, J.P. Morgan Asset
Management (“J.P. Morgan”) has developed the Target Date
Compass. By using this tool, fiduciaries are following the
tips outlined in the DOL Bulletin: establishing a comparison
process, understanding the allocation in diferent asset classes
and how they change over time, and taking advantage of an
available source of information. The Target Date Compass is
more than just an information source, however, in that it is a
process that can be used by fiduciaries and their advisors in:
Clarifying plan goals and identifying the behaviors and
needs of their participants
Relating these needs and goals to a particular type of target
date fund philosophy
Assessing and comparing the diferences among the wide
range of TDF families available in the market
Narrowing the number of TDFs to a smaller list that is more
closely aligned with the particular needs and goals of the
plan and its participants
Documenting the process they used in their analysis
Using the Target Date Compass, fiduciaries, along with their
advisors, are able to follow the steps outlined by the DOL and
are able to select a particular suite of TDFs that is appropriate
for the needs of the plan and its participants.
The Target Date Compass
SM
involves four steps:
Step One
Focuses the fiduciaries on the plan’s optimal level of exposure
to equity investments as of the targeted retirement date. To
accomplish that, the Target Date Compass materials pose a
series of questions to fiduciaries that are designed to elicit
their beliefs and philosophies regarding the needs of their
plan; the behavior of participants relative to savings, deferrals,
loans and distributions; and their perceived risk tolerance.
Step Two
Involves a process whereby the fiduciaries and their advisors
assess the plan’s optimal level of asset diversification. This is
accomplished through questions relating to the fiduciaries’
beliefs about: (1) the extent to which heightened diversification
increases risk adjusted returns; and (2) the appropriateness of
including investments in asset classes that are not otherwise
included in their plan.
Step Three
Involves determining the plan’s “Target Date Type
SM
” by
compiling the answers to the questions and plotting the plan
on the Target Date Compass’ four-quadrant grid.
Step Four
Involves the fiduciaries and their advisors analyzing and
comparing the specific families of TDFs in the quadrant on the
Target Date Compass in which the plan is placed, based on
the plan goals as identified by the fiduciaries. The fiduciaries
and advisors can then determine which TDF families are most
appropriate to meet the needs of the plan and its participants.
Once those four steps are completed, the fiduciaries may
engage, along with their advisors, in a quantitative and
qualitative analysis of the TDFs within the applicable quadrant
of the Target Date Compass to select an appropriate TDF family
for the plan.
Our conclusion is that the Target Date Compass program
provides material assistance to plan fiduciaries in fulfilling
their legal responsibilities and providing a way for them to
engage in a procedurally and substantively prudent process
in connection with their selection of the QDIA for their plan. It
also satisfies ERISA’s requirement to document the selection
and monitoring process.
11
As a result, the Target Date Compass
increases the likelihood that plan fiduciaries will meet or
exceed their obligations under ERISA.
S U M M A R Y
BY FRED REI SH & BRUCE ASHTON 6
The Target Date Compass is a program developed by J.P. Morgan
that is designed to assist 401(k) fiduciaries in analyzing the
needs of their plans and participants and providing a process
for those fiduciaries to comply with ERISA’s legal requirements
in the selection of TDFs for participant-directed plans, such as
401(k) plans. This issue is particularly important because of the
obligation of fiduciaries to engage in a prudent process when
selecting and monitoring the investment(s) to be ofered under
the plan or used as the plan’s QDIA under the DOL’s fiduciary
safe harbor regulation.
12
It is important as well because of the
rapid growth in the popularity of TDFs,
13
and the relatively
recent release of guidance by the DOL on steps fiduciaries can
take for the prudent selection and monitoring of TDFs.
14

While the process for the prudent selection of TDFs is similar
in some ways to the process generally used for mutual funds,
there are also material diferences. For example, while
ordinary mutual funds maintain their investment strategy/
Thi s de s c r i pt i on of t he Tar g e t Dat e Compas s
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is based on our review of the materials
provided to us by J.P. Morgan.
asset allocations over time, a TDF gradually adjusts its asset
allocation along a “glide path,” such that the TDF holds a lower
percentage of relatively volatile equity investments as time
passes. Generally speaking, as a TDF approaches its “target
date” (that is, the participants’ anticipated retirement date),
its focus shifts away from a growth strategy toward a more
stable, less volatile strategy, and the TDF reduces its exposure
to equity investments. There are currently many line-ups
(sometimes called “suites” or “families”) of TDFs available to
the market. The glide paths and asset allocation strategies
of those families of TDFs vary widely. Consequently, selection
of an appropriate suite of TDFs for use as a plan’s QDIA or
as a participant-directed investment presents a significant
challenge to fiduciaries.
The Target Date Compass is designed to provide a process
to be engaged in by plan fiduciaries (and the advisors with
whom they consult) to help them: (1) clarify plan goals and
Description of the Target
Date Compass
SM
7 ANALYSI S OF THE J. P. MORGAN TARGET DATE COMPASS
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identify the behaviors and needs of their participants; (2)
relate these needs and goals to a particular type of target
date fund philosophy; (3) assess and compare the diferences
among the wide range of TDF families available in the market;
and (4) narrow the number of TDFs to a smaller list that is
more closely aligned with the particular needs and goals of
the plan and its participants. Then, having used the Target
Date Compass, the fiduciaries and their advisors, engaging in
traditional quantitative and qualitative investment analysis
of those TDFs whose approaches most closely align with
the fiduciaries’ preferences, are better prepared to select a
particular suite of TDFs.
The Target Date Compass was created based on the premise
that the manner in which a TDF is designed, and the
implementation of that design, can significantly impact the
TDF’s level of risk and return and the degree of its volatility.
Consequently, the Target Date Compass questionnaire focuses
on assisting fiduciaries and their advisors in assessing the level
of volatility that is most appropriate for the plan.
According to J.P. Morgan’s research, two factors have a
significant impact on the extent of a TDF’s potential volatility
and its relative ability to produce investment returns
over time: (1) the fund’s exposure to equity investments
at the participants’ retirement dates; and (2) the level of
diversification of the fund’s assets. Considered together, these
two factors reflect the trade-of between the long-term growth
of participant account balances and the relative volatility of
those participant balances, particularly within 5–10 years
before or immediately after the retirement date.
The Target Date Compass consists of
four steps:
Step One includes a series of questions (to be answered by
the plan fiduciaries) designed to ascertain a plan’s preferred
level of exposure to equity investments at the participants’
retirement date
Step Two includes a series of questions designed to ascertain
the fiduciaries’ philosophy regarding asset class diversification
Step Three involves analyzing the answers to the questions
raised in Steps One and Two in order to place the plan on
a grid consisting of four quadrants, each of which reflects
a distinct philosophy regarding TDF investing. The plan is
placed in a specific quadrant corresponding to the plan’s
TDF philosophy
Step Four involves the fiduciaries and their advisors
analyzing and comparing the specific suites of TDFs in the
quadrant in which the plan is placed, based on the plan
goals as identified by the fiduciaries
The Target Date Compass is a two-dimensional grid with
four quadrants. Each quadrant of the Target Date Compass
corresponds to a particular Target Date Type
SM
. Plans plotted
within any one quadrant have similar goals and expressed
preferences with respect to levels of equity as of the
retirement date and extent of asset class diversification. For
instance, relative to the plans plotted in other quadrants of
the Target Date Compass, the TDF families in the “northwest”
(or upper left) quadrant seek a lower level of equity as of the
target retirement date, but a higher number of asset classes.
Conversely, plans plotted in the “southeast” (or lower right)
quadrant are characterized by a preference for relatively
higher levels of equity at retirement, but relatively fewer asset
classes.
STEP ONE:
Determine the plan’s desired level of
equity exposure at retirement
The first step is for the fiduciaries, working with their advisors,
to assess the plan’s desired level of equity exposure at the
retirement date. In this regard, the Target Date Compass
questionnaire sets forth issues to be considered by fiduciaries
in analyzing the plan’s optimal exposure to equity investments
and poses questions designed to elicit the fiduciaries’ opinions
relative to those considerations. The answers to those
questions are assigned numerical scores.
Equity exposure factor one: Define the plan’s goal
The Target Date Compass questionnaire first asks whether
the plan’s goal should be to help meet participants’ income
replacement goals as of their retirement dates or, alternatively,
D E S C R I P T I O N O F T H E T A R G E T D A T E C O M P A S S
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BY FRED REI SH & BRUCE ASHTON 8
to maximize participants’ savings throughout their lifetimes.
Those fiduciaries who believe their focus should be on helping
meet income replacement goals at retirement date would
favor funds that manage the impact of volatility in the years
leading up to retirement. For those focused on maximizing
account balances throughout their participants’ lifetimes, the
level of volatility in the years leading up to the retirement
date will not be as significant a consideration. The fiduciaries
are asked to answer a question, using a scoring system from
one to five, eliciting the fiduciaries’ preferences between
increasing the likelihood that participants achieve their
income replacement goals at retirement versus increasing
the likelihood that participants maximize total capital
appreciation over their lifetimes.
Equity exposure factor two: Assess participant
behavior
Participants’ saving and investment behavior—including the
frequency with which they take loans, the amount of their
contributions and the levels of their distributions—can also
impact the volatility their investments experience. Fiduciaries
should take these issues into account, since a plan may
experience a higher level of less desirable outcomes if a TDF’s
assumptions are not in line with actual participant behavior.
The Target Date Compass questionnaire asks fiduciaries to
consider the plan’s participant behavior, based on information
from the plan recordkeeper.
Equity exposure factor three: Define risk tolerance
There are two ends of the spectrum relative to a plan’s
approach to risk management: maximizing upside return
potential and minimizing downside risk. With respect to
each phase of the participants’ work lives, the plan sponsor
needs to consider the trade-of between seeking upside
growth potential and minimizing downside risk, taking into
account their employees’ ages, investment experience and
sophistication, all of which bear on participants’ abilities to
tolerate risk. The fiduciaries then score their preferences
for providing downside risk protection versus achieving high
levels of participant returns.
STEP TWO:
Determine the plan’s perspective on
the role of diversification
Step Two of the Target Date Compass program calls for
fiduciaries to assess their philosophy regarding asset
diversification.
To assist fiduciaries in making this assessment, the Target
Date Compass questionnaire poses two questions designed to
help fiduciaries determine their preferences regarding equity
exposure and diversification.
Diversification factor one: Assessing how
diversification affects returns
Some asset managers believe that risk-adjusted return
potential increases as the asset classes making up a portfolio
are more broadly diversified. Others suggest that while
broader diversification may mitigate risk and manage volatility,
it does not necessarily enhance risk-adjusted returns. The
Target Date Compass questionnaire asks fiduciaries to state
their beliefs regarding the extent to which broad diversification
improves a portfolio’s outcome. Plan sponsors may rank
their views on whether they agree or disagree that broad
diversification may improve portfolio outcomes.
Diversification factor two: Determining the
fiduciaries’ preferences regarding the scope of asset
classes in the target date fund
This question assesses the fiduciaries’ level of comfort with
various underlying asset classes contained in TDFs. It illustrates
the notion that diferent investment managers use diferent
types of asset classes in order to satisfy DOL regulations that
QDIAs be adequately diversified in order to minimize the risk
of large losses. Some managers rely only on “traditional” asset
classes (such as stocks, bonds and cash), while others include
extended asset classes in their funds (such as real estate, high-
yield income funds, commodities and emerging market debt
funds). The fiduciaries score their relative preference for using
traditional asset classes versus including extended asset classes.
D E S C R I P T I O N O F T H E T A R G E T D A T E C O M P A S S
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9 ANALYSI S OF THE J. P. MORGAN TARGET DATE COMPASS
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STEP THREE:
Identify the Target Date Type
SM
After the fiduciaries answer the questions posed in the Target
Date Compass questionnaire, the cumulative scores of those
answers are compiled. The answers to the first three questions
yield an “equity exposure score” that determines where the
plan is plotted on the “east-west” (or “x”) axis on the Target
Date Compass. The answers to the fourth and fifth questions
yield a “diversification score” and determine where the plan
is plotted on the “north-south” (or “y”) axis. The greater the
equity exposure score, the further to the right on the grid
the plan will be placed; the greater the diversification score,
the further “north” the plan will be plotted. Using the equity
exposure score and the diversification score, the plan is placed
in the appropriate quadrant on the Target Date Compass
Quadrant Map.
STEP FOUR:
Compare and select the most
appropriate target date funds
Once the plan has been plotted onto a particular quadrant
of the Target Date Compass, the fiduciaries, working with
their advisors, are in a position to compare TDF families that
correspond to the plan’s Target Date Type and to select the TDF
family that they believe to be most suited to accomplishing the
fiduciaries’ goals and to meeting the needs of the participants.
In this regard, advisors will have available to them a version of
the Target Date Compass on which J.P. Morgan has plotted the
various TDF strategies, using publicly available and third-party
sourced information from Morningstar.
Once the plan is plotted on the Target Date Compass, and the
fiduciaries and their advisors have identified a range of TDF
strategies (in the particular quadrant) that is more suitable to
the specified needs and goals of the plan and its participants,
the advisors and fiduciaries may engage in a process of
selecting an appropriate TDF from that quadrant for use as the
plan’s QDIA.
D E S C R I P T I O N O F T H E T A R G E T D A T E C O M P A S S
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BY FRED REI SH & BRUCE ASHTON 10
We begin with a discussion of the ways in which the law has
changed to encourage the inclusion of TDFs in plans, while
reducing the fiduciary’s potential liability exposure. Then,
we explain the legal obligations imposed on plan fiduciaries
in connection with the selection and monitoring of TDFs and
describe how the Target Date Compass
SM
assists fiduciaries in
meeting those obligations.
The importance of 401(k) plans in
meeting the needs of workers
As the U.S. Supreme Court has noted, “[d]efined contribution
plans dominate the retirement plan scene today.”
15

Consequently, the retirement security of American workers is
largely dependent on those defined contribution plans—most
Thi s s e c t i on di s c us s e s t he l aw as it applies to the selection and monitoring of TDF families.
ERISA requires fiduciaries to act prudently in selecting all investments ofered by a plan. This requirement applies
as well to a plan’s TDF suite, whether it is presented as an investment ofered to participants or as the plan’s QDIA.
However, fiduciaries now need to enhance their scrutiny of TDFs because of the increase in automatic enrollment
and the use of TDFs as the plans’ QDIA, the expansion of the use of TDFs by participants in their accounts and
heightened regulatory focus on TDFs.
often 401(k) plans. Though plan sponsors may provide some
funding for 401(k) plans in the form of matching and profit
sharing contributions, participants bear most of the cost of
funding 401(k) plans. Moreover, in the context of participant-
directed 401(k) plans, participants are primarily responsible
for investing the assets in their plan accounts.
Unfortunately, this responsibility poses a challenge to many
participants, because of lack of knowledge or experience, a
perceived lack of time or a failure to understand the importance
of the decisions they need to make. And these challenges may
lead to inadequate retirement income caused by a failure to
participate in their plan, failure to contribute at a significant
enough level or an inadequate job of investing their 401(k)
plan assets.
16
Fortunately, legal developments and marketplace
trends may help address these deficiencies. These include:
Analysis and discussion
11 ANALYSI S OF THE J. P. MORGAN TARGET DATE COMPASS
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A N A L Y S I S A N D D I S C U S S I O N
The increased use of automatic enrollment. While the
Employee Benefit Security Administration of the DOL
concluded that approximately one-third of eligible workers
do not participate in their employers’ plans,
17
studies
suggest that most workers who are automatically enrolled
chose to remain participants
18

The adoption of the QDIA safe harbor. We discuss this in
more detail later, but the safe harbor has given comfort
to fiduciaries who may have been reluctant to make the
“default investment” decision for automatically enrolled
participants rooted in fear of the potential liability that
might result. The safe harbor has also provided an implicit
endorsement of TDFs
Release of regulatory guidance on the selection and
monitoring of TDFs. This guidance, also discussed later in
this section, provides helpful tips to fiduciaries on the steps
they can take to make the selection
How QDIAs enable plan sponsors to
increase plan participation without
taking on greater liability
The Pension Protection Act of 2006 (PPA) made it easier for
plan sponsors to increase participation in their plans without
exposing themselves to commensurately greater liability
associated with making default investments. It did so by adding
to ERISA a new fiduciary protection for default investments.
Specifically, the PPA added ERISA §404(c)(5) (the “QDIA rule”).
The QDIA rule provides that, for default investments made in
accordance with regulations issued by the DOL, the fiduciaries
are entitled to a statutory defense (sometimes called a fiduciary
“safe harbor”) against any claims by participants that they were
improperly invested.
19
A fiduciary of a plan that complies with
this final regulation will not be liable for any loss, or by reason of
any breach, that occurs as a result of such investments.
20
The DOL regulation describes the types of investments that
may constitute a QDIA. The preamble to the regulation explains
the DOL’s reasoning and its conclusion that TDFs qualify for the
safe harbor protection:
“ It is the view of the Department that investments made
on behalf of default participants ought to and often
will be long-term investments and that investment of
defaulted participants’ contributions and earnings in
money market and stable value funds will not over the
long term produce rates of return as favorable as those
generated by products, portfolios, and services included
as qualified default investment alternatives; thereby
decreasing the likelihood that participants invested
in capital preservation products will have adequate
retirement savings.”
21
TDFs are one type of investment product specifically identified
by the DOL as a type of product that may be used as a QDIA:
“ [A]n investment fund product or model portfolio that
applies generally accepted investment theories, is
diversified so as to minimize the risk of large losses, and
that is designed to provide varying degrees of long-
term appreciation and capital preservation through a
mix of equity and fixed income exposures based on that
participant’s age, target retirement date (such as normal
retirement age under the plan) or life expectancy. Such
products and portfolios change their asset allocations
and associated risk levels over time with the objective
of becoming more conservative (i.e., decreasing risk of
losses) with increasing age.”
22
While fiduciaries are protected from liability in connection with
their participants’ investment in a QDIA, the fiduciaries remain
subject to ERISA’s requirements for selecting and subsequently
monitoring the investments (for our purposes, a suite of TDFs)
to be used as a QDIA.
23
As the DOL stated in the preamble to its
QDIA regulation:
“ [n]othing in [the regulation] shall relieve a fiduciary from his
or her duties under … ERISA to prudently select and monitor
any qualified default investment alternative under the plan
or from any liability that results from a failure to satisfy
these duties, including liability for any resulting losses.”
24

However, the preamble to the QDIA regulation goes on to
point out that, among other things, fiduciaries must consider
competing TDF families before making a selection:
“ The selection of a particular qualified default investment
alternative (i.e., a specific product, portfolio or service) is
a fiduciary act and, therefore, ERISA obligates fiduciaries
to act prudently and solely in the interest of the plan’s
participants and beneficiaries. A fiduciary must engage
BY FRED REI SH & BRUCE ASHTON 12
A N A L Y S I S A N D D I S C U S S I O N
in an objective, thorough, and analytical process that
involves consideration of the quality of competing
providers and investment products, as appropriate.”
25

(emphasis added)
As a result, it is clear that:
The QDIA protection can be lost if the investments are not
prudently selected and monitored
A prudent process requires the comparison of competing
investments, for example, competing families of TDFs
Plan sponsors and participants have responded favorably to
the safe harbor status conferred upon TDFs in connection
with the DOL’s QDIA regulation. A recent study shows that
43% of plans now ofer automatic enrollment; the inclusion
of this feature in larger plans (over $250 million) exceeds
60%.
26
Also, the number of TDFs available in the marketplace
has expanded dramatically, from 19 in 2005 to 37 in 2014.
27

However, the fiduciary job of selecting TDFs has become more
difcult because the diferences among the growing number
of TDFs are significant. Among other diferences, TDFs can
be structured to be invested aggressively, moderately or
conservatively, based on their asset allocation percentages,
glide paths and “landing points” (i.e., the date at which the
asset allocation becomes static), the composition of their
underlying investments and active or passive management.
28

As a result, it is apparent even to the mainstream financial
press that “… finding the appropriate family of TDFs can be
incredibly complicated for plan sponsors.”
29

Thus, fiduciaries must familiarize themselves with:
The unique standards that relate to selection of TDFs
as QDIAs
The traditional rules generally applicable to the selection
of plan investments
And conduct themselves according to these rules.
Recent guidance on selecting TDFs
Three elements, consideration of the asset allocation, glide
path and needs of participants, have been identified as key to
the TDF selection process, most recently in the DOL’s February
2013 bulletin. The bulletin provides “tips” for fiduciaries for
the prudent selection and monitoring of TDFs,
30
including
the following:
1. Establish a process for comparing and selecting TDFs.
This tip contains a number of important elements:
It reflects the DOL’s emphasis on considering competing
providers and investment products, discussed in the
preamble to the QDIA regulation mentioned earlier
It reminds fiduciaries that they should consider, among other
factors, performance (investment returns) and investment
fees and expenses
It also tells fiduciaries that they should consider the needs
of their participants. In this context, the DOL says fiduciaries
should consider how well the TDF’s characteristics align
with eligible employees’ ages and likely retirement dates, as
well as other characteristics of the participant population,
such as participation in a traditional defined benefit pension
plan ofered by the employer, salary levels, turnover rates,
contribution rates and withdrawal patterns
2. Establish a process for the periodic review of selected
TDFs. First, the DOL reminds fiduciaries that they are
required to periodically review the plan’s investment options
to ensure that they should continue to be ofered. This is
especially important in the context of TDFs, given the growth
in the number of funds, their popularity as an investment
alternative and the expansion of regulatory scrutiny and
guidance. What may have been appropriate several years
ago may no longer be suitable for a plan’s demographics.
Specifically, the DOL says that fiduciaries should consider
replacing the TDFs if the investment strategy or
management team changes significantly, if the fund’s
manager is not efectively carrying out the fund’s stated
investment strategy or if the plan’s objectives in ofering a
TDF change.
3. Understand the TDFs’ investments including the
allocation in diferent asset classes (stocks, bonds, cash),
individual investments and how these will change over
time. The DOL recommends reviewing the fund’s prospectus
or ofering materials in order to understand the principal
strategies and risks of the fund, or of any underlying asset
allocation, and whether the glide path will become most
conservative at or after the target date. It points out that
when a TDF keeps a sizable investment in equities past the
“target” retirement date, participant retirement savings may
13 ANALYSI S OF THE J. P. MORGAN TARGET DATE COMPASS
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A N A L Y S I S A N D D I S C U S S I O N
continue to have some investment risk after they retire. The
DOL suggests that:
“ These funds are generally for employees who
don’t expect to withdraw all of their 401(k) account
savings immediately upon retirement, but would
rather make periodic withdrawals over the span of
their retirement years. Other TDFs are concentrated
in more conservative and less volatile investments at
the target date, assuming that employees will want
to cash out of the plan on the day they retire.”
And, again, the DOL stresses the importance of
considering the needs of the participants. It states:
“ If the employees don’t understand the fund’s glide
path assumptions when they invest, they may be
surprised later if it turns out not to be a good fit for
them.”
4. Take advantage of available sources of information to
evaluate the TDF and recommendations you received
regarding the TDF selection. The DOL notes that there are
an increasing number of commercially available sources
for information and services to assist fiduciaries in their
decision-making and review process.
5. Document the process. Finally, the DOL observes that, as
with any decision, fiduciaries should document the selection
and review process, including how they reached decisions
about individual investment options.
These “tips” are the most definitive guidance from the DOL
on selecting TDFs. As a result, they are helpful in reminding
plan sponsors of the steps they should be taking in selecting
and monitoring TDFs for their plans. That said, they provide
an outline that must be filled in, as the DOL notes, by
“commercially available sources for information and
services to assist plan fiduciaries in their decision-making
and review process.” (emphasis added)
Specific analysis of the needs of the
plan and its participants
The demographics, educational background, experience and
sophistication—particularly about finance and investments—of
participants vary widely. To meet ERISA’s general obligation to
engage in a procedurally and substantively prudent process,
when selecting a TDF family fiduciaries must analyze the needs
and goals of the plan and its participants and evaluate the
appropriateness of a particular TDF family in light of those
particular needs and goals.
The focus on the purposes of the plan—the provision of retirement
income—is an indispensable element of the fiduciary’s analysis:
“ In other words, in deciding whether and to what extent to
invest in a particular investment, or to make a particular
fund available as a designated investment alternative, a
fiduciary must ordinarily consider only factors related to
the interests of participants in their retirement income.
31

The courts have embraced the need for fiduciaries to assess the
needs of a plan in making decisions regarding plan investments:
“ Failure to investigate the needs of a plan or to ascertain
the particular requirements or restrictions of a plan,
and failure to invest in accordance with the best interest
of plan participants … constitutes a breach of fiduciary
duties imposed by ERISA.”
32
(Emphasis added.)
The participants’ needs must also be considered:
“ At the very least, [fiduciaries] have an obligation to (i)
determine the needs of a fund’s participants, (ii) review
the services provided and fees charged by a number of
diferent providers, and (iii) select the provider whose
service level, quality and fees best matches the fund’s
needs and financial situation.”
33

As one court has noted:
“ Indeed, it has been held that [a fiduciary] has a duty
to inquire of the particular needs of the plan vis-à-vis
its participants.”
34

Emerging guidance from the DOL and the SEC also point out
the need for fiduciaries to consider TDF asset allocation. In
May 2010, the DOL and SEC jointly issued a document directed
to individual investors (which, in the case of 401(k) plans,
would be the participants) titled “Investor Bulletin: Target Date
Retirement Funds.” In this document, the agencies advised
individual investors that in evaluating TDFs, they should “…
consider the fund’s asset allocation over the whole life of the
BY FRED REI SH & BRUCE ASHTON 14
A N A L Y S I S A N D D I S C U S S I O N
fund and at its most conservative investment mix, as well as
the fund’s risk level, performance and fees.”
35
As noted earlier,
this point is reiterated in the February 2013 “Tips” bulletin.
The DOL and SEC have issued proposed guidance that
emphasizes the issues that fiduciaries should consider, asset
allocation and glide path – the same elements analyzed in
the Target Date Compass.
36
Since the SEC and the DOL both
recommend that prospective TDF investors (including retirement
plan participants) focus on asset allocation in deciding whether
to invest in TDFs (and, if so, which TDF to invest in), fiduciaries
should similarly focus attention on that information in deciding
among TDFs as a QDIA and as an investment option for non-
defaulting participants.
Common sense, moreover, suggests that in selecting a suite
of TDFs, fiduciaries should consider (among other things)
the age of their workforce, the relative sophistication of the
workforce relative to investing and retirement planning and
the participants’ access to retirement assets outside the 401(k)
plan (such as other plans sponsored by the employer; e.g., a
defined benefit plan or an employer stock ownership plan and
Social Security). A TDF that falls into the “conservative” end of
the spectrum, while arguably appropriate for a workforce that
would be significantly harmed by losses near retirement, may
be less well-suited to a younger, more afuent workforce of
largely “white collar” investment professionals. However, the
approach is not formulaic; it is the fiduciaries’ job to evaluate
the covered workforce and its needs.
The rules generally applicable to
ERISA fiduciaries
ERISA imposes high standards on fiduciaries responsible for
investing plan assets—the courts refer to those duties as “the
highest known to law.”
37
The fundamental obligations of ERISA
fiduciaries are set forth in ERISA §404 (29 U.S.C. §1104). The
first of these is the so-called “exclusive purpose rule” of ERISA
§404(a)(1)(A).
The Exclusive Purpose Rule
“ [A] fiduciary shall discharge his duties with respect
to a plan solely in the interest of the participants and
beneficiaries and—
(A) for the exclusive purpose of:
(i) providing benefits to participants and their
beneficiaries; and
(ii) defraying reasonable expenses of administering
the plan …”
Thus, the exclusive purpose of any decision by a plan fiduciary—
including decisions about which investment products to include,
retain or remove as investment options for participants—must
be to provide retirement benefits to participants.
The Prudent Person Rule
ERISA also requires plan fiduciaries to act prudently and in a
manner consistent with the standard applicable to persons
knowledgeable about the functions they are performing:
“ [A] fiduciary shall discharge his duties … with the
care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man
acting in a like capacity and familiar with such
matters would use in the context of an enterprise of
a like character and with like aims ...”
38

This is not a “prudent layperson” standard. Rather, it is an
objective standard that efectively requires that the conduct of
plan fiduciaries “… be measured against the standards in the
investment industry.”
39
Stated another way, a fiduciary’s “lack
of familiarity with investments is no excuse …”
40

The focus of the analysis is on the fiduciary’s conduct.
Specifically, a fiduciary is obligated to undertake an
independent investigation of the merits of a particular
investment and to use appropriate, prudent methods
in conducting the investigation.
41
Moreover, in those
circumstances where fiduciaries “…lack the requisite
knowledge, experience and expertise to make the necessary
decisions with respect to investments, their fiduciary obligations
require them to hire independent professional advisors.”
42

Substantive and Procedural Prudence
The DOL and the federal courts agree that prudent fiduciary
conduct requires that the fiduciary engage in a prudent
process. A prudent process, in turn, requires both that the
fiduciary engage in procedural prudence (i.e., act prudently in
15 ANALYSI S OF THE J. P. MORGAN TARGET DATE COMPASS
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A N A L Y S I S A N D D I S C U S S I O N
obtaining and reviewing the information necessary to make an
investment decision) and substantive prudence. Substantive
prudence requires fiduciaries to use the information obtained
during their investigation to make a reasoned investment
decision. As one court explained:
“ Courts have articulated two ways in which to measure
a fiduciary’s use of prudence in carrying out their
duties. The first is whether the fiduciary employed
the appropriate methods to diligently investigate the
transaction and the second is whether the decision
ultimately made was reasonable based on the
information resulting from the investigation.”
43

The part of the prudence requirement that looks at the process
used by the fiduciaries is referred to as procedural prudence.
In order for a fiduciary to engage in a prudent process, the
fiduciary must perform an independent investigation of
the merits of an investment.
44
This requires that fiduciaries
understand and apply generally accepted investment theories
and evaluate the investments using prevailing practices in the
investment industry.
45

Substantive prudence requires fiduciaries to give appropriate
consideration to the factors outlined in the DOL regulation
relative to ERISA §404(a). According to the DOL, the fiduciary
satisfies his obligation:
“ if the fiduciary (A) has given appropriate consideration to
those facts and circumstances that … the fiduciary knows
or should know are relevant to the particular investment
or investment course of action involved, including the
role the investment or investment course of action plays
in that portion of the plan’s investment portfolio with
respect to which the fiduciary has investment duties; and
(B) has acted accordingly.”
46

This regulation contains a number of important elements:
The fiduciary must know what information is relevant to the
decision; i.e., the information that needs to be evaluated to
make a prudent and informed decision
The fiduciary must accumulate the information relevant to
making the specific decision
The fiduciary must evaluate and make appropriate judgments
about the relevant information. That is, having accumulated
the information, fiduciaries must decide how to act upon it.
“ Under ERISA, a fiduciary’s failure to exercise his or her
discretion - i.e., to balance the relevant factors and
make a reasoned decision as to the preferred course of
action - under circumstances in which a prudent fiduciary
would have done so, is a breach of the prudent man
standard of care”
47

From a risk-management standpoint, however, engaging in a
prudent process and using the information obtained during that
process is not enough. Plan fiduciaries should also document the
process. This is because if the fiduciary’s conduct is ever questioned
or the subject of litigation, the issue of whether the fiduciary
engaged in a prudent process will be scrutinized based on the facts
that existed at the time the fiduciary made the investment decision.
As one court stated, determinations regarding the fiduciary’s
investment decision “require factual findings and are usually
made on the basis of expert testimony after trial.”
48
Moreover,
DOL regulations suggest that complying with a fiduciary’s duties
requires documenting the steps taken in the process of doing so:
“It is the view of the Department that compliance with the duty to
monitor necessitates proper documentation of the activities that
are subject to monitoring.”
49
The Target Date Compass provides
material assistance for the obligation.
Evaluation of the Target Date
Compass
SM
relative to the general
rules applicable to ERISA fiduciaries
The Target Date Compass
SM
helps plan fiduciaries meet their
obligations to engage in a procedurally and substantively prudent
process and to efectively document that process. It provides a
methodical framework for carrying out the fundamental duties
under the Exclusive Purpose Rule and the Prudent Person
Rule. As noted earlier, fiduciaries are obligated to consider
“the circumstances then prevailing” and act as would a person
“familiar with such matters” (in this case, familiar with TDFs)
in making their selection. In order to fulfill their obligation to
consider the “circumstances then prevailing,” fiduciaries must
periodically monitor the plan’s existing investments.
With respect to TDFs, the duty to monitor has become
particularly challenging given the significant increase in the
BY FRED REI SH & BRUCE ASHTON 16
A N A L Y S I S A N D D I S C U S S I O N
number of TDFs available in the marketplace and the changes
in regulatory guidance. For example, plans that selected a
TDF family in 2006 will find many new TDF options available
to them in 2014. Given the evolving needs of the plan and its
participants, fiduciaries may conclude that a suite of TDFs that
was not available at the time of that earlier selection is now a
more prudent investment alternative for their plan.
The Target Date Compass provides material assistance to
fiduciaries by:
Making available to fiduciaries an analysis of the TDFs that
reside in the same quadrant of the Target Date Compass as
the plan’s Target Date Type
Providing them with a framework to refine the list of TDFs
from the broader universe of those in the marketplace to a
more appropriate subset of TDFs
Identifying TDFS whose approach to equity exposure at
retirement and asset class diversification is more in line with
the needs of the plan and its participants
How the Target Date Compass
SM

assists plan fiduciaries in satisfying
their obligations to assess the needs
of the plan and its participants
The Target Date Compass
SM
provides material assistance to
fiduciaries. It helps them fulfill their obligations to consider
the needs of the plan and its participants, to select a TDF
family that is consistent with those needs, and to document
their process. The Target Date Compass first helps fiduciaries
determine the Target Date Type best aligned with their plan’s
goals and participant needs. It then helps them evaluate the
strategies of the TDFs within that type in order to select the
TDF family most suitable for their plan.
A plan may have evolved over time by ofering additional
investment options. The demographics of the participants
continually evolve, as do their needs. Without a methodology
for assessing those needs and goals, it would be difcult for
the typical plan fiduciary to: (1) satisfy the obligations imposed
by ERISA for evaluating the needs of the participants and
the goals of the plan; and (2) identify a Target Date Type and
the TDF families that respond to those needs. To answer the
questions posed by the Target Date Compass questionnaire,
fiduciaries will consider the relative sophistication of their
workforce about the appropriate percentage of equity
investments at the participants’ retirement age and the
participants’ willingness to accept greater risk (i.e., volatility).
By engaging in the process presented by the Target Date
Compass, fiduciaries are more likely to satisfy the obligations
imposed on them by ERISA, the DOL and the courts, which
mandate consideration of the participants’ needs.
Where an employer also sponsors a defined benefit plan, the
fiduciaries most likely will consider the efect those additional
benefits have on the needs of the 401(k) participants in
answering the questions posed by the Target Date Compass
questionnaire. They may conclude that, in light of the
additional “cushion” provided by the defined benefit plan, the
participants are in a better position to weather greater risk
in the volatility of the TDFs. Conversely, the fiduciaries may
conclude that the enhanced retirement income provided by
the defined benefit plan makes it unnecessary and unwise to
accept more than minimal risk in the TDF. That decision is, at
its essence, the fiduciaries’ job. In either case, the Target Date
Compass provides material assistance to plan fiduciaries by
providing: (1) a framework for consideration of these issues; (2)
an opportunity to prudently select a TDF family that is aligned
with the goals and needs of the plan and its participants; and
(3) a mechanism that documents the process.
By answering the questions posed by the Target Date Compass
questionnaire (which requires an analysis of the goals of the
plan and the needs of its participants) and plotting the plan’s
location on the Target Date Compass, the fiduciaries engage
in a process that fulfills their fiduciary obligation to select an
asset allocation that is appropriate for their participants and
documents that step in the process.
17 ANALYSI S OF THE J. P. MORGAN TARGET DATE COMPASS
SM
Conclusion
Fiduciaries are responsible for making a prudent selection
and for monitoring the suite of TDFs to be used in the plan.
This process is complicated by the number of TDF families and
the diversity of their investment philosophies. The needs of
participants difer significantly from plan to plan. Fiduciaries
must take these factors into account and must continually
monitor the TDFs selected for their plan in order to fulfill their
ERISA duties.
ERISA’s legal requirements present a challenge to fiduciaries,
but the challenge is heightened in connection with the
selection and monitoring of TDFs because of the complexity of
those investments and the increasing government scrutiny.
The obl i gat i on i mpos e d on pl an s pons or s and f i duc i ar i e s to act prudently in
making a prudent TDF choice has become more important than ever. This is due to the growth in the number and
popularity of TDFs and the increased regulatory scrutiny surrounding the selection of TDFs for 401(k) plans.
The Target Date Compass
SM
provides fiduciaries material help
to meet or exceed those requirements. This is accomplished by
providing a framework for the analysis of the needs of a plan’s
participants, a mechanism by which to match those needs with
a prudently selected family of TDFs and a tool for documenting
their process.
BY FRED REI SH & BRUCE ASHTON 18
About the authors
Fred Reish
Fred.reish@dbr.com
Fred Reish is a partner in the Drinker Biddle & Reath Employee
Benefits & Executive Compensation Practice Group and Chair
of the Financial Services ERISA Team. He has specialized in
employee benefits law since 1973 and works with both private
and public sector plans and fiduciaries; represents plans,
employers and fiduciaries before the IRS and the DOL; consults
with banks, trust companies, insurance companies and mutual
fund management companies on 401(k) investment products
and issues related to plan investments; and represents broker-
dealers and registered investment advisers on compliance
issues. Fred serves as a consultant and expert witness for
ERISA litigation.
Fred received a J.D. from the University of Arizona James E.
Rogers College of Law and B.S. from Arizona State University.
Professional recognition and awards
Fred has received a number of awards for his contributions to
benefits education, communication and service, including:
In 2011, selection by PLANADVISER magazine as one of the
5 Legends of the retirement industry and with retirement
advisors
The 2009 American Society of Pension Professionals &
Actuaries (ASPPA)/Morningstar 401(k) Leadership Award for
directly and positively influencing the ability of Americans to
build successful retirements
Selection by PLANSPONSOR magazine as one of the 15
Legends in the development of retirement plans
Recognition by 401kWire as the 401(k) Industry’s Most
Influential Person for 2007 (and has, for every year of that
survey, been in the top 10)
The IRS Director’s Award and the IRS Commissioner’s Award
for his contributions to employee benefits education
The 2006 Lifetime Achievement Award from PLANSPONSOR
magazine
The 2006 Lifetime Achievement Award from Institutional
Investor for his contributions to the benefits community
The 2004 Eidson Founder’s Award from ASPPA for his
significant contributions to that organization and to the
benefits community
On behalf of ASPPA, he has co-authored amicus curiae briefs
with the Supreme Court of the United States in the case of
Patterson v. Shumate and with the Tax Court in the case of
Citrus Valley Estates v. Commissioner of Internal Revenue
Service.
Publications
Fred has written four books and more than 350 articles. He
authors a monthly column on 401(k) fiduciary responsibility for
PLANSPONSOR magazine.
As an experienced lawyer on benefits matters, Fred is
frequently quoted by both professional and public publications,
including The Wall Street Journal, Fortune, Forbes, Inc., CFO
Magazine, New York Times, Washington Post, Los Angeles Times,
USA Today, Institutional Investor, PLANSPONSOR and Pensions &
Investments.
Speaking engagements
Fred is a nationally known speaker on fiduciary responsibility.
He has spoken at the annual conferences of the American Bar
Association, the American Society of Pension Professionals
and Actuaries, the Western Pension and Benefits Conference,
the Enrolled Actuaries Conference and the International
Foundation of Employee Benefit Plans.
19 ANALYSI S OF THE J. P. MORGAN TARGET DATE COMPASS
SM
About the authors
Bruce Ashton
Bruce.ashton@dbr.com
Bruce Ashton is a partner in the Drinker Biddle & Reath
Employee Benefits & Executive Compensation Practice Group.
He has specialized in employee benefits law since 1986 and
works with private and public sector plans; advises and
represents plans, employers and fiduciaries before the IRS and
DOL; consults with financial institutions, including banks, trust
companies and insurance companies on 401(k) compliance
issue; and represents registered investment advisers on
issues related to fiduciary status and compliance, prohibited
transactions and internal procedures. Prior to focusing
on employee benefits, Bruce practiced as a corporate and
securities lawyer.
Bruce received a J.D. from the Southern Methodist University
School of Law, where he was selected to the Order of the Coif,
and his B.A. from Rice University.
Professional recognition and awards
Bruce has received a number of awards for his contributions to
the employee benefits community, including:
The 2011 Eidson Founder’s Award from ASPPA for his
significant contributions to that organization and to the
benefits community
Recognition by 401kWire as one of the 401(k) Industry’s Most
Influential People
Recognition as an outstanding lawyer in The Best Lawyers
in America®
Publications
Bruce has co-authored four books (with Fred Reish) and more
than 150 articles on employee benefits issues, including
fiduciary issues, prohibited transactions, IRS and DOL
correction programs, audits and investigations and plan
design. He has also been widely quoted in various benefits
publications.
Speaking engagements
Bruce is a frequent speaker on various employee benefits
issues and has spoken at the annual conferences of the
American Society of Pension Professionals and Actuaries,
the Western Pension and Benefits Conference, the Enrolled
Actuaries Conference, the International Foundation of
Employee Benefit Plans and the National Institute of Pension
Administrators.
BY FRED REI SH & BRUCE ASHTON 20
Endnotes
1 See, e.g., Holden, Sarah, Jack VanDerhei, Luis Alonso and Steven Bass, “401(k)
Plan Asset Allocation, Account Balances, and Loan Activity in 2012,” ICI Research
Perspective 19, no. 12 (December 2013), available at www.ici.org/pdf/per19-12.pdf.
(Referred to as the “ICI Study”).
2 U.S. Department of Labor and Securities and Exchange Commission, “Investor
Bulletin: Target Date Retirement Funds,” May 2010, available at http://www.dol.
gov/ebsa/pdf/TDFInvestorBulletin.pdf.
3 Release on Target Date Disclosure, 75 Fed. Reg. 229 (November 30, 2010),
73987-73995 (referred to as the “Proposed TDF Regulations”).
4 Securities Act Release No. 9126 (June 16, 2010) [75 FR 35920 (June 23, 2010)],
comment period re-opened April 2012.
5 U.S. Department of Labor, Employee Benefits Security Administration,
“Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries,” February 2013,
available at http://www.dol.gov/ebsa/newsroom/fsTDF.html (referred to as the
“DOL TDF Tips”).
6 See DOL regulatory agenda for Fall 2013, available at http://resources.
regulations.gov/public/custom/jsp/navigation/main.jsp.
7 See, e.g., ERISA Regulation Sections 2550.404c-1(b)(3)(i)(B) and
2550.404c-5(d)(4).
8 See the ICI Study referred to in footnote 1.
9 ERISA Section 404(a)(1)(B).
10 See DOL TDF Tips referred to in footnote 5.
11 See, e.g., 29 C.F.R. §2509.08-2, in which the DOL states: “It is the view of
the Department that compliance with the duty to monitor necessitates proper
documentation of the activities that are subject to monitoring.”
12 29 C.F.R. §2550.404c-5(e)(4)(i). Note that, in order for fiduciaries to obtain
the protections provided by the QDIA rule, the requirements and conditions
of the regulation must be satisfied, including certain notice and information
requirements. See 29 C.F.R. §2550.404c-5(c)(1)-(6).
13 Id.
14 See the DOL TDF Tips referred to in footnote 3.
15 LaRue v. DeWolf, Boberg & Associates, 522 U.S. 248, 255, 128 S.Ct. 1020, 1025,
169 L.Ed.2d 847 (2008).
16 See JP Morgan Asset Management, “Retirement Insights: Ready! Fire! Aim?
2012,” August 2013; see also Samuel Estreicher & Laurence Gold, The Shift From
Defined Benefit Plans to Defined Contribution Plans, 11 Lewis & Clark L. Rev. 331,
333 (2007), available at http://law.lclark.edu/org/lclr.
17 See, http://www.dol.gov/ebsa/newsroom/ fsdefaultoptionproposalrevision.
html.
18 Id.
19 29 C.F.R. §2550.404c-5(b)(1).
20 72 F.R. 60452.
21 72 F.R. 60452, 60463.
22 29 C.F.R. §2550.404c-5(e)(4)(i).
23 29 C.F.R. §2550.404c-5(b)(2).
24 72 F.R. 60452, 60453.
25 Id.
26 See J.P. Morgan 2013 Defined Contribution Plan Sponsor Survey.
27 Strategic Insight target date assets analysis, 2010 and 2013. See, also, Special
Report: Retirement Benefits, Five Questions For Picking a Target Date Fund, by
Mark Bruno, Financial Week, June 23, 2008, available at http://www.financialweek.
com/apps/pbcs.dll/ article?AID=/20080623/REG/276976064.
28 Id.
29 Id.
30 See the DOL TDF Tips referred to in footnote 3.
31 DOL Advisory Opinion 98-04A (May 28, 1998).
32 GIW Industries, Inc. v. Trevor, Stewart, Burton & Jacobsen, Inc., 10 EBC 2290,
2301 (S.D.Ga 1989).
33 Liss v. Smith, 991 F.Supp. 278, 300 (S.D.N.Y. 1998); see also, Whitfield v.
Tomasso, 682 F.Supp.1287, 1304 (E.D.N.Y. 1988): “In providing ... benefits, in order
to fulfill their fiduciary duties, the [fiduciaries] should have considered the needs
of the ... participants and an appropriate level of benefits, and then should have
solicited multiple proposals and completely evaluated the proposals before
entering into an agreement.”
34 Lanka v. O’Higgins, 810 F.Supp. 379, 388 (N.D.N.Y. 1992).
35 DOL/SEC “Investor Bulletin: Target Date Retirement Funds,” issued May 6,
2010.
36 75 F.R. 73987, 73994. Proposed amendments to rule 482 under the Securities
Act of 1933 and rule 34b-1 under the Investment Company Act of 1940, available
at http://www.sec.gov/rules/proposed/2010/33-9126.pdf. See DOL regulatory
agenda for Fall 2013, available at http://resources.regulations.gov/public/custom/
jsp/navigation/main.jsp.
37 Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan, 793 F.2d
1456, 1468 (5th Cir. 1986); Donovan v. Bierwirth, 680 F.2d 263, 272 n. 8 (2d Cir.),
cert. denied, 459 U.S. 1069, 103 S.Ct. 488, 34 L.Ed.2d 631 (1982).
38 ERISA Section 404(a)(1)(B).
39 Ulico Casualty Co. v. Clover Capital Management, Inc., 217 F.Supp.2d 311, 315-
316 (N.D.NY 2002), citing Lanka v. O’Higgins, supra, 810 F.Supp. at 387.
40 Katsaros v. Cody, 744 F.2d 270, 279 (2nd Cir. 1984).
41 Harley v. Minnesota Mining & Mfg. Co., 42 F.Supp.2d 898, 906 (D. Minn. 1999),
citing In re Unisys Savings Plan Litigation, 74 F.3d 420, 435 (3rd Cir. 1996).
42 Liss v. Smith, supra, 991 F.Supp. at 297.
43 Riley v. Murdock, 890 F.Supp. 444, 458 (E.D.N.C. 1995).
44 In re Unisys Savings Plan Litig., 74 F.3d 420, 435 (3rd Cir. 1996).
45 Lanka v. O’Higgins, supra, 810 F.Supp. at 387.
46 29 C.F.R. §2550.404a-1.
47 George v. Kraft Foods Global, Inc., 641 F.3d 786, 796 (7th Cir. 2011).
48 Liss v. Smith, supra. 991 F.Supp. at 301.
49 29 C.F.R. §2509.02-2.
J . P. MORGAN ASSET MANAGEMENT
270 Park Avenue I New York, NY 10017
TARGET DATE FUNDS: 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.
Certain underlying funds of target date funds 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 diferences. 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. There may be additional fees associated with investing in a Fund of Fund strategy.
Fred Reish and Bruce Ashton are partners in the Employee Benefits & Executive Compensation Practice Group of Drinker Biddle & Reath LLP. They have been
compensated by J.P. Morgan Asset Management to provide advice and to give an opinion regarding the Target Date Compass.
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