JPMAM Asks Plan Sponsors to Rethink Investment Menus

November 9, 2011 ( - J.P. Morgan Asset Management wants defined contribution plan sponsors to rethink their plan investment  menus, introducing a strategy it calls Core Menu Innovation (CMI). 

In short, CMI takes the average defined contribution plan line-up of about 18 funds, and puts them inside of three, diversified professionally managed investment portfolios: stocks, bonds, and cash alternatives.

Each of the three portfolios contains multiple asset classes. The structure allows plan sponsors to include investment asset classes in the portfolio, such as commodities, REITs, or emerging markets that they might not have been comfortable including in a DC plan lineup because of concerns about employees chasing returns or putting all their eggs in one basket, said Anne Lester, Portfolio Manager for JPMAM’s Global Multi-Asset Group, speaking at a press breakfast today.

For plan sponsors that already have a money-market or stable value fund, those can be kept or used in place of the diversified cash alternatives portfolio, according to the JPMAM presentation.

Similar to a custom target-date fund, each CMI option is customizable at the plan sponsor level (at particular plan sizes); the selection of which stocks, bonds, and cash alternatives to include in each portfolio can be made by a plan’s investment committee. Within each bucket could be six or seven funds, or 20 or 30 funds, Lester commented; it all depends on how much diversity the plan sponsor or investment committee wants to include. This provides not only fund diversification for participants but manager diversification as well, she noted.

A participant will then be able to decide how much of each building block he wants to include in his portfolio – 60% in stock, 30% in bonds, and 10% in cash alternatives, for example. The movement away from a long list of fund options to a choice between three investment “buckets” allows participants to think about risk allocations, Lester said.

The fee structure is also similar to custom target-date funds, presenters said, in that there is flexibility in how a plan sponsor decides to implement this and how to structure the broader fund options.


However, there is no customization of the funds available at a participant level, like a target-date fund.  If the plan sponsor decided to include U.S. High Yield bond option in the diversified bond portfolio, a participant would not be able to remove it, for example. It is a balancing act between simplification that will lead to improved outcomes, and offering an array of investments that some participants will want, even though they may not use them in the most efficient way, explained Lester.

“The idea is to free up the focus of plan sponsors. They’re too focused on the specifics of individual funds, and while those specifics are important, the energy should be at the design level to generate better outcomes,” Lester said. Plan sponsors can instead focus on plan design initiatives, she said.

For the "Active" Participant 

For participants who are actively selecting investment options, instead of selecting an allocation among the traditional plan lineup, participants will allocate among the three investment options. “Active” participants, which want to engage with the plan on a regular basis, make up about 1/3 of the participant population, according to J.P. Morgan research.

JPMAM believes that this segment has been underserved; whereas participants that are categorized as “interactive” have found online tools and professional advice to be helpful, and the largest segment, the “passive” participants, have benefited from automatic enrollment into TDFs.   

 “Active participants want freedom, but the 16-18 funds were too much for them to handle,” noted Donn Hess, head of product strategy for J.P. Morgan Retirement Plan Services. “They were reverting to potentially naïve and simple options, perhaps sticking to 2-4 funds and never rebalancing.” J.P. Morgan’s research shows that the average participant invests in 3.6 funds, despite the line-up size (and 42% of participants invest in only two investment options), and only 7% rebalance their portfolios.

Participants selected to invest in the CMI options, instead of a target-date fund or managed account options, will still need to rebalance their allocation between the stock, bond, and cash options, but the investment buckets themselves will be rebalanced and allocated without participant involvement.

Michael Falcon, head of Retirement for JPMAM explained that this investment structure does not replace target-date funds (TDFs), in fact, the company still sees that as the best investment option for participants. An ideal plan lineup using the CMI strategy would include a target-date fund suite or managed account product, the three baskets of CMI investment strategies, and perhaps a brokerage window, if the plan sponsor wants to include that as an option to provide investment diversity to participants.

In fact, the best way to implement such a solution would be as part of a plan re-enrollment into target-date funds, the panelists said. So all participants are defaulted into an appropriate target-date fund and those who opt out would select their allocation among the three investment solutions.

Mega Market Up First

JPMAM has presented CMI to about a dozen mega-market plan sponsors, noted John Galateria, head of Defined Contribution Investment Solutions; the sponsors are at different phases of considering adopting the model, some more seriously than others, according to the company.

Although the company has not had any plans adopt this strategy, plan sponsors are genuinely interested, Galateria said. As for participants, the key to not getting participant pushback is getting the communication and messaging right, the presenters said. In focus groups conducted by JPMAM across the country, once CMI was explained to participants, it was unanimously understood and embraced. Of course there is always expected to be the vocal few, Falcon noted, but the company is

Mega-market plans are expected to be the first adopters, before smaller plans make the switch.  There will likely be multiple iterations of this idea at various plan sizes, Falcon noted. For smaller plans, that might not qualify for the large custom options, Falcon said he can see the time there are branded diversified stock, bond, and cash alternative buckets available from J.P. Morgan, though that "productization" is down the road.

Falcon said this new way of thinking should be implemented in all market sizes and he sees a role for plan sponsors, consultants, and advisers across all plan sizes. “We’re not just filling a need,” he said, “we think this is the right solution.”