THE PENSION PROTECTION Act’s (PPA) new safe harbor provisions for auto enrollment into Qualified Default Investment Alternatives (QDIAs) present retirement advisors with a key opportunity: to go beyond merely presenting investment solutions to guiding QDIA implementation, thereby ensuring plan sponsors fully maximize the potential benefits of the safe harbor privileges. This can not only help advisors enhance their value as retirement specialists, but also allow them to differentiate themselves in the retirement marketplace.

Follow these steps to guide implementation and to help ensure plan sponsors adopt the optimal plan for participants:

1.       Choose a course of action with plan sponsor.  Select from among the following QDIA provisions:

• ADD a QDIA – No Auto Escalation/Auto Enrollment. With this arrangement, a QDIA can be added to a DC plan, yet, because it does not offer auto enrollment or escalation features, it may result in low plan impact.
• Eligible Automatic Contribution Arrangement (EACA).  New employees and existing employees who have not made affirmative elections are automatically enrolled and defaulted into a QDIA.  No matching contributions are required and the plan sponsor has up to six months after the plan year-end to process refunds from failed non-discrimination testing.  This option, however, does not result in better investment allocation for affirmatively-enrolled employees and is subject to stringent notice requirements.
• Qualified Automatic Contribution Arrangement (QACA).  Like an EACA, a QACA offers safe harbor relief for auto-enrollment of employees into a QDIA as outlined above. However, this option requires auto-enrolled participants be subject to minimum, matching and escalating contributions of 3% of compensation, with increases by one percentage point annually, up to 6% of compensation by the fourth year. (Contributions cannot exceed 10% of participants’ salaries.)  The plan sponsor benefits by being exempt from performing non-discrimination testing. Additionally, under proposed regulations, the automatic contributions would be required to be in place at the beginning of the plan year.
• Automatic Contribution Arrangement (ACA).  For plan sponsors that do not want to wait until the beginning of the plan year to implement automatic enrollment, this option automatically defaults new participants into a QDIA. This option does not, however, offer the 6-month ADP correction period to process non-discrimination testing refunds without penalty, as offered by EACA. 
• Re-enroll the Entire Plan.  None of the above options address “existing” participants in a DC plan.  Plan sponsors that want to “update” their plan for “all” participants may consider this option.  This could be considered an “aggressive” course of action, however, and the risks of implementation should be weighed with the plan sponsor. Additionally, this option could increase plan matching contributions and administrative expenses.

2. Evaluate investment options.  Target date funds are emerging as a popular type of QDIA. In recommending an appropriate QDIA solution, your goal is to define the optimal efficient frontier, or glide path, that helps participants achieve appropriate level of risk/return as they move closer to their retirement date.  Among your considerations:

·    Plan sponsor objectives.  Assess both time horizons and sponsors’ goals: Is it to maximize savings balances, or maximize the number of participants reaching minimum income replacement targets?

·    Participant savings behavior.  To improve potential outcomes, consider the impact of irrational behavior patterns—particularly during market fluctuations—by adopting strategies with broad diversification and enhanced downside protection against risk and volatility—particularly toward the end of the glide path. 

·    Target date style box. If a target date strategy is the most suitable option, determine the “style” of target date fund that best fits employee demographics by assessing asset class and diversification, percent of equity at retirement age, and average number of asset class investment styles covered through the glide path.   Then, select from universe of funds.  Sponsors should compare providers who “live” in the same part of the style box—not across the boxes. 

·    (Target date strategy) architecture options. Assess both strategic glide path issues such as equity allocation, risk levels, and beginning and end points, as well as well as manager execution issues, i.e., active or passive, proprietary or non-proprietary, fund or trust, and fee levels.    

JPMorgan Asset Management is pleased to provide advisors with additional insights and resources on evaluating target date strategy designs and QDIA implementation. For more information, please contact Glenn Dial at JPMorgan Asset Management at 1-877-JPM-IODC (1-877-576-4632) or glenn.a.dial@jpmorgan.com.

JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

JPMorgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co., and its affiliates worldwide.

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