Essentially, CMI takes the average line-up of about 18 funds, and replaces it with three, diversified professionally managed investment portfolios: stocks, bonds, and cash alternatives.
For participants who are actively selecting investment options, instead of selecting an allocation among the traditional plan lineup (with an average of 18 funds), participants will allocate among the three investment buckets. “Active” participants, who want to engage with the plan on a regular basis, make up about 1/3 of the participant population. 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, speaking at a media breakfast this morning. “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.
Similar to a custom target-date fund, CMI will be customizable at the plan sponsor level; the selection of which stocks, bonds, and cash alternatives to include in each portfolio will be decided upon for the plan. The 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.
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 Anne Lester, Portfolio Manager for JPMAM’s Global Multi-Asset Group.
“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.
Michael Falcon, head of Retirement for JPMAM explained that this new structure does not replace target-date funds, 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.
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.
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.
Mega-market plans are expected to be the first adopters, before smaller plans make the switch. But Falcon said this new way of thinking should be implemented in all market sizes – “We’re not just filling a need,” he said, “we think this is the right solution.”