Penny wise, pound foolish

Transcription

1 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION RETIREMENT INSIGHTS Penny wise, pound foolish Do passively managed target date strategies serve participants best interests?

2

3 Overview Fee pressure in the defined contribution (DC) industry has driven many plan sponsors to focus on so-called passively managed target date strategies. These portfolios use passively managed underlying investments to implement their asset allocation strategies, capturing cost synergies that typically result in lower overall fees and expenses. All things being equal, lower fees should translate into higher returns, and it may seem that cost savings offered by passively managed target date strategies might help participants accumulate greater amounts of retirement assets. All things, however, are not equal when comparing target date portfolios. These strategies can vary widely in terms of asset allocation, glide path and portfolio implementation, all of which have substantial impact on overall portfolio outcomes. Given this context, viewing fees in isolation can be problematic. Target date strategy cost is an important fiduciary concern, but evaluating different managers purely on a fee basis neglects the nuances of how various aspects of portfolio design shape risk/ reward expectations and associated long-term performance. In this paper, we examine these dynamics by assessing: What passively managed actually means in the target date strategy space The risk/reward trade-offs of passive management portfolio construction How these trade-offs translate into real-world participant outcomes Potential solutions to capturing passive management cost efficiencies with minimal outcome limitations Effective target date strategy evaluation must carefully weigh these considerations as DC plans continue to seek prudent strategies that help maximize the expected number of participants able to achieve retirement security. Table of contents 2 The great myth of passively managed target date strategies 3 Evaluating risk/reward trade-offs 6 Applying passive management trade-offs to real-world outcomes 7 Combining passive management cost efficiency with greater portfolio efficiency 10 Conclusion 11 Appendix 1

4 THE GREAT MYTH OF PASSIVELY MANAGED TARGET DATE STRATEGIES While the concept of a passively managed target date strategy is emotionally appealing, the term is a misnomer. Passive management implies that an investment s performance is designed to closely replicate returns of a designated benchmark, typically an index. There is no industry-standard glide path benchmark to manage against, and each target date portfolio must develop its own asset allocation and glide path strategy to follow. Consequently, specific target date managers may utilize only passively managed underlying investments in portfolio construction, but all target date strategies are actively managed when it comes to glide path development. Focusing solely on whether a target date portfolio executes its asset allocation strategy with passively or actively managed investments overlooks a much more critical factor: How effective is the asset allocation strategy to begin with? The case for passive management portfolio construction usually centers on fees and underlying manager performance risk. These factors, however, are not the primary drivers of multi-asset class portfolio outcomes. Target date strategy performance is much more contingent on the accumulation of asset allocation decisions over the life of a strategy series. What asset classes are included? How do these interact to shape portfolio return and volatility expectations? How does the glide path transition to a more conservative allocation? What is the resulting risk exposure, especially in the years leading up to retirement? Is this overall approach appropriate for the plan s specific goals and participant needs? These are the important initial questions when assessing different target date strategy solutions. Limiting a glide path to passively managed underlying investments forces several strategic decisions about asset allocation that may be cheaper and less prone to underlying manager underperformance, but certainly not more attractive from an expected overall portfolio risk/reward perspective. In fact, the restrictions placed on a passive-only approach to portfolio construction may actually decrease anticipated participant outcomes. In order to maintain fee advantages, the glide paths for passively managed target date strategies generally only consist of asset classes that are cost efficient to index, which may limit their ability to compete on a risk-adjusted return basis with more effective asset allocation strategies. For example, the compounding benefits of 15 basis points in cost savings (the average fee spread between actively and passively managed target date strategies) can be sizable when comparing portfolios with similar performance. But compounding an additional 50 basis points in annual returns through a stronger allocation strategy easily outpaces these cost-saving gains, even if overall expenses for this more effective allocation are slightly higher (see Exhibit 1). Exhibit 1: Even modest higher returns may outpace lower-cost, lower-performing options $300 $250 $200 $150 7% return 7% return net of 15bps 7.5% return 7.5% return net of 30bps $ This chart is for illustrative purposes only and does not represent the performance of any investment or group of investments. 2

5 EVALUATING RISK/REWARD TRADE-OFFS Target date strategies are complex portfolios that must manage a wide range of risks, some of which are addressed by passive management portfolio construction and some of which are not. Broadly speaking, there are three types of risks target date managers need to consider in their fundamental portfolio design. Shortfall risk: The risk of delivering inadequate returns that fail to help participants secure a safe level of retirement funding. Market risk: The risk of overexposing participants to negative market movements that detract from overall portfolio returns. Implementation risk: Risks such as underlying investment underperformance or ineffective glide path execution. Shortfall risk and market risk are primarily managed through asset allocation by determining which asset classes to include in a target date portfolio and appropriate exposure to each across the glide path. Implementation risk is where active/passive management decisions typically come into play through portfolio construction. The risk of focusing on the wrong risks Passively managed target date strategies may offer protection against underperformance within each asset class, but the common misperception that this effectively shields overall portfolio returns is misleading at best and, at worst, may lull plan fiduciaries into a false sense of security. The primary driver of target date strategy performance is asset allocation, and investors must buy managers actively managed glide path decisions, as well as the underlying strategies used to implement them. The reality is the wrong type of asset allocation strategy can greatly increase potential market risk and shortfall risk the far more serious threats to reaching safe levels of retirement replacement income. It is much easier to replace an underperforming underlying investment than to recalibrate a glide path that fails to deliver adequate riskadjusted returns, regardless of the types of underlying investments used in portfolio construction. Conventional wisdom holds that allocation decisions account for 80%-90% of overall investment returns, and within most glide path strategies, allocation differences largely revolve around how managers approach equity exposure. Stocks are critical for increasing the odds of overcoming shortfall risk; however, the financial crisis was a painful reminder that outsized equity allocations can overexpose participants to market risk. There are several ways to manage this, but each approach comes with trade-offs. The manager may decide that equity risk is simply too great for retirement savings and limit stock exposure accordingly, even if this curtails upside potential. This, of course, can drastically increase shortfall risk. Alternatively, the manager may view shortfall risk as a bigger threat to retirement security and utilize higher equity exposure in the hopes that long-term market averages prove to be true. This can fuel sizable returns during strong equity markets, but it may also prove devastating to participants unlucky enough to experience periods of extreme stock volatility, particularly in the crucial years before retirement. Another approach is to seek to mitigate equity volatility without substantially restricting expected return potential by including extended asset classes such as emerging market debt, real estate and high-yield fixed income. Each has proven to offer equity-like returns over distinct market cycles, often when stock markets are underperforming. While these asset classes can be volatile on their own, collectively their low correlations and higher risk/reward characteristics may help reduce both equity market risk and portfolio shortfall risk. 3

6 Portfolio construction solely reliant on passively managed strategies usually restricts asset class diversification since some asset classes are not accessible as passively managed investments or the available options are not cost efficient in terms of their potential additive benefits to an overall portfolio. This is often the case with extended asset classes a manager may use to help reduce expected portfolio volatility without sacrificing return potential (see Exhibit 2). Costs from a fiduciary perspective Target date strategy costs must be reasonable for the services delivered, but apples-to-apples fee comparisons can be challenging without conducting a portfolio risk/reward analysis based on the broad variances in fundamental portfolio design. There is a clear difference between price and value in investment management, and plan fiduciaries must carefully consider how fee decisions can help improve or hinder potential participant outcomes. Exhibit 2: Passive management may lose price advantages when applied to alternative asset classes, even when indexed Pure index access Replicable, with active-like fees Active access U.S. Large Cap U.S. Small Cap International Equity Emerging Markets Equity +42 bps Core Fixed Income High Yield +47 bps Emerging Markets Debt +55 bps T-Bills TIPS +20 bps REITS +32 bps Source: J.P. Morgan, Goldman Sachs. Added cost estimates based on average transaction costs on most liquid exchange-traded funds for represented asset classes. As a result, constraining asset class selection to purely cost-efficient, passively managed investments generally results in more limited diversification, less sophisticated portfolio efficiency and a higher dependency on equities which are relatively easy to index to drive long-term returns (see Exhibit 3). Exhibit 3: Typical strategic trade-offs for low-fee, passively managed target date strategies Lower fees generally translate into: Fewer asset classes Less sophisticated asset allocation Higher dependency on equity returns Potential costs: Decreased opportunity set Lower portfolio efficiency and less focus on risk-adjusted returns Increased volatility More exposure to downside risk 4

7 Exhibit 4 illustrates this point by presenting the actual glide paths of two target date portfolios that utilize only passively managed investments in their allocation strategies compared to the more broadly diversified JPMorgan SmartRetirement Strategy. For this analysis, we employed the framework used by J.P. Morgan Asset Management s Target Date Compass SM, which maps target date strategies into one of four categories based on portfolio compositions of actual strategies in the marketplace: The Southeast (SE) quadrant consists of concentrated strategies with higher equity levels at retirement and a focus primarily on core asset classes. The Southwest (SW) quadrant captures conservative strategies with lower equity levels at retirement and a focus primarily on core asset classes. The Northwest (NW) quadrant includes strategies such as JPMorgan SmartRetirement Strategy with lower levels of equity exposure at retirement and a broader range of portfolio diversification, including a higher number of extended asset classes. The fourth category, the Northeast (NE) quadrant, represents aggressive strategies with higher equity levels at retirement and a broader range of portfolio diversification. This quadrant is not included in this analysis because these types of strategies typically include a higher number of extended asset classes in their glide paths, and there is no representative passively managed target date strategy in the group. Target date strategies and efficient returns Diversification and its role in increasing return efficiency (i.e., optimizing return potential in relation to appropriate risk exposure) is particularly important for target date strategies given their significance in the 401(k) market. At the heart of this discussion is the concept of portfolio efficiency, which measures a portfolio s expected returns compared to its expected risk level in different market scenarios. One of the first steps in maximizing return efficiency (i.e., providing the greatest expected return for a given level of risk) is deciding which asset classes to include in a portfolio based on a specific risk profile. Exhibit 4: Evaluating glide path differences SE: Concentrated passive only 100% 80% 60% 40% 20% 0% SW: Conservative passive only 100% 80% 60% 40% 20% 0% NW: SmartRetirement 100% 80% 60% 40% 20% 0% Sources: J.P. Morgan Asset Management and industry prospectuses. n U.S. Large Cap n U.S. Small Cap n EAFE n Emerging Markets Equity n REIT n Direct Real Estate n Commodities n Emerging Market Debt n High Yield n U.S. Fixed Income n International Fixed Income n TIPS n Cash equivalent 5

8 APPLYING PASSIVE MANAGEMENT TRADE-OFFS TO REAL-WORLD OUTCOMES The reduced portfolio efficiency characteristics of target date strategies restricted to passively managed underlying investments may have a considerable mitigating impact on potential participant outcomes. Exhibit 5 demonstrates how the expected risk/reward characteristics of the representative passively managed target date strategies might translate into real-world performance compared to the JPMorgan SmartRetirement Strategy. Using each strategy s glide path, we analyzed potential retirement outcomes in various market scenarios. Our analysis included a statistical simulation of 10,000 participants to project a range of expected retirement account balances at age 65 (for a more detailed description about the Monte Carlo analysis methodology used in this evaluation, please refer to the Appendix). Exhibit 5: Range of expected account balances at retirement (000)s $1,800 $1,600 $1,400 $1, Percentile 5% 25% 50% 75% 95% 1008 Each employee started with the same salary, but the potential outcome ranges were actually quite wide. This is because we included a broad range of possible market conditions in the simulations, from strong rallies to market crashes. We also included all types of participant saving patterns, from investors who contributed consistently and left accounts untouched, to those who saved more erratically, borrowed and/or made early withdrawals. Based on this research, the expected returns for the JPMorgan SmartRetirement Strategy glide path are substantially higher than the passive-only strategies. JPMorgan SmartRetirement Strategy outperforms at all percentile levels, and its broadly diversified approach, coupled with relatively rapid reduction in equity exposure in the years leading up to retirement, strengthens the probability that participants reach safe retirement funding levels. A GUIDE TO THE BOX-AND-WHISKER CHARTS The box marks the range of the 25th, 50th (median) and 75th percentile outcomes, from top (best) to bottom (worst). The whiskers reaching out from the top and bottom of the box show the range up to the 5th and down to the 95th percentiles of the distribution of outcomes. As the dispersion of returns increases, the box-and-whisker becomes more elongated. $1,000 $ $600 $400 $ NW: SmartRetirement all active SE: Concentrated passive only SW: Conservative passive only Results are based on analysis derived from J.P. Morgan Asset Management longterm capital market assumptions and strategic asset allocations as of 12/31/ Forward-looking analysis Our portfolio simulations used forward-looking capital market assumptions, rather than historical returns, based on J.P. Morgan Asset Management s long-term capital market outlooks. This asset class analysis is used by many institutional investors, including pension plans, who employ it to develop and support their anticipated return assumptions for financial reporting purposes. 6

9 Successfully navigating changing market scenarios Financial markets are unpredictable, and target date strategies must be designed to deliver competitive returns in both strong and difficult climates. Increasing portfolio efficiency through expanded asset class diversification may deliver more consistent performance across a broad range of market scenarios, offering potential long-term returns comparable to more equity-aggressive portfolios but with relatively less downside risk and lower volatility. COMBINING PASSIVE MANAGEMENT COST EFFICIENCY WITH GREATER PORTFOLIO EFFICIENCY This research reveals the potential drawbacks of a pure passive management approach to target date portfolio construction due to restrictions in asset class diversification. Nevertheless, there is a reasonable argument to be made that passive management may make sense for certain asset classes as long as the mandate does not significantly alter portfolio risk/reward potential. When we developed the JPMorgan SmartRetirement Strategies, our portfolio team made a conscious decision to implement the allocation strategy with actively managed underlying investments. The J.P. Morgan Asset Management platform offers access to a wide array of talented investment professionals covering a broad scope of asset classes, and we believe this opportunity to add alpha at the portfolio construction level may help further strengthen participants returns in a meaningful way. Conversely, we also recognize that some plans have practical reasons for preferring passive management investments, all things being equal from a potential outcome perspective. To help these clients capture the expected enhanced portfolio efficiency of a broader asset allocation strategy while still utilizing passive management when appropriate, we researched how passively managed investments might be introduced into a more sophisticated target strategy glide path without substantially detracting from the portfolio s overall risk/reward characteristics. We found that implementing the JPMorgan SmartRetirement allocation strategy with a mix of passively and actively managed underlying investments only slightly reduced expected overall risk-adjusted performance, offering a workable solution for these plans. This passive blend approach divides the asset classes used in the JPMorgan SmartRetirement glide path into three broad categories. Passive management opportunities: Strong candidates for passive management include U.S. large cap equities and EAFE stocks. There are many outstanding active managers in these two categories, but accessing these asset classes as passively managed strategies had the least impact on altering overall portfolio efficiency. Beneficial low tracking strategies: We found low tracking strategies (i.e., those that are expected to deviate only slightly from index performance) useful in the bond segment of the portfolio, covering core U.S. fixed income as well as Treasury Inflation-Protected Securities (TIPS). TIPS can be difficult to index due to market liquidity issues, and while core U.S. fixed income can be easily accessed as a passively managed option, we believe a strategy that skews to higher-quality securities is more additive on a risk-adjusted return basis compared to a purely passive approach. In the equity space, most of the correlation benefits of small cap stocks can be captured through a low tracking strategy, while also addressing any underlying strategy capacity concerns. Areas where active management remains the most viable option: High-yield fixed income, real estate and emerging market equity are all asset classes where actively managed strategies offer compelling alpha potential and/or correlation diversification not available in passively managed alternatives. Passively managed strategies in these market segments can be impractical because they may be either too expensive to replicate or available representative benchmarks can be inefficient in accurately capturing additive market characteristics. 7

10 Employing all three types of underlying investment approaches in the JPMorgan SmartRetirement Strategy glide path helps capture passive management cost efficiencies without major shifts in overall volatility and return characteristics. Exhibit 6 illustrates how this passive blend approach holds up to the rigors of our earlier portfolio simulation. In terms of projected performance, some upside was reduced compared to the all-active JPMorgan SmartRetirement Strategy series, but this passive blend strategy still outperformed the strictly passively managed target date strategies. The return differences may appear small, but they are not inconsequential at the participant level. In our projected outcomes: JPMorgan SmartRetirement passive blend strategy helped approximately 70% of participants enter retirement with at least minimum levels of income replacement necessary to maintain their standard of living, compared to 62% in the SE: Concentrated purely passive portfolio and 56% in the SW: Conservative purely passive portfolio. JPMorgan SmartRetirement passive blend strategy posted median, 75th and 100th percentile outcomes higher than both strictly passive portfolios. It also outperformed the strictly passive strategies when participants fell in the bottom quartile of returns, either as a result of difficult markets or poor investment behaviors. For a plan with 10,000 participants, these percentage differences translate to an expected 800 to 1,400 more individuals reaching their retirement goals under the JPMorgan SmartRetirement passive blend strategy (see Exhibit 7). Exhibit 6: Range of expected account balances at retirement, including SmartRetirement passive blend (000)s $1,800 $1,600 $1, Percentile 5% 25% 50% 75% 95% $1, $1,000 $800 $600 $ $ NW: SmartRetirement all active NW: SmartRetirement passive blend SE: Concentrated passive only SW: Conservative passive only Results are based on analysis derived from J.P. Morgan Asset Management long-term capital market assumptions and strategic asset allocations as of 12/31/10. 8

11 Exhibit 7: Additional participants expected to cross the income replacement goal with the SmartRetirement design (plan with 10,000 lives; account balance goal of $400,000) Other target date designs JPMorgan SmartRetirement passive blend Strategy Expected success rate Expected success rate Expected participant impact SE: Concentrated 62% 70% 8% or 800 more successes passive only SE: Conservative 56% 70% 14% or 1,400 more successes passive only JPMorgan SmartRetirement 75% 70% -5% or 500 less successes all active Results are based on analysis derived from J.P. Morgan Asset Management long-term capital market assumptions and strategic asset allocations as of 12/31/10. Crossing the retirement finish line Exhibit 7 defines an account balance goal of $400,000. In our analysis, we assumed the population of retirees earned, on average, $65,000 (in current dollars). Conventional wisdom holds that people can maintain their working years lifestyle with around 80% of their working income. A more rigorous analysis arrives at a replacement rate of about 78% for working incomes of around $65,000, due to lower income tax rates in retirement and proportionally greater Social Security benefits. If Social Security provides approximately 44% of this replacement income, the remaining rate declines to about 34%. The $400,000 goal represents the asset threshold needed to purchase an annuity to replace 34% of a $65,000 working income in late This helps establish a baseline of measuring plan success for providing a minimum level of income replacement at retirement. 9

12 Conclusion Facing increased fee scrutiny, many DC plans have centered target date strategy evaluation around cost, focusing on pricing as the primary determinant in strategy selection. This, coupled with concerns about the steep declines in some target date strategies during the depths of the financial crisis, has led many plan sponsors to default to target date strategies that employ only passively managed underlying investments in portfolio construction. While this may intuitively seem logical, the markets over the last several years have showcased how critical effective volatility management and portfolio efficiency can be in shaping target date strategy returns. A glide path strategy that has been developed to accommodate strictly passively managed underlying investments places sizable restrictions on asset allocation that may hinder risk/reward characteristics compared to more broadly diversified target date portfolios. In fact, focusing too intently on the question about whether passive or active management is more appropriate for participants actually can be a distraction to the more vital debate of which type of glide path strategy is most likely to increase the odds participants can cross the retirement savings finish line as safely as possible. Fortunately, the decision about utilizing passive or active management investments in target date portfolio construction does not need to be an either/or proposition. Based on our research, a glide path that incorporates a more broadly diversified asset allocation model, working in conjunction with tight risk controls around equity exposure, increases the probability participants will be able to replace an adequate level of income as they enter retirement. Implementing this glide path design with a passive blend approach can help plan sponsors balance demands for passive management cost efficiencies while still helping to strengthen potential outcomes for their participants through increased portfolio efficiency. 10

13 Appendix: Monte Carlo simulations OVERVIEW Target date portfolios present special challenges in estimating expected returns: their asset allocations change over time, and the sequence of both cash flows and market returns can affect results. Historical results, therefore, often are not a good representation of future performance, as the order of returns or extreme market events are not likely to repeat exactly. A common approach to solving these problems is a series of Monte Carlo simulations. Named for the famous casino in Monaco, Monte Carlo simulations incorporate both randomness and repetitiveness to create large samples of observations and minimize the influence of outlier values in returns or the order of returns. By using a series of repeating computations, the simulations create a large number of outcomes for the portfolio, each with an independent path of returns, which combined have a specified average and volatility. In the simulations for this paper, we used changing, or stochastic, return patterns to generate 10,000 different possible portfolio outcomes. Although the most common application of Monte Carlo simulations in portfolio construction is to simulate various market return scenarios, assumptions on other variables can also be incorporated. Our Monte Carlo simulations encompass two different stochastic processes: the capital markets simulator and the participant behavior simulator. CAPITAL MARKETS SIMULATOR There are several ways to determine potential returns on a portfolio. The simplest is a static return model, where an expected average market return is applied for each period. A static analysis can approximate the level of long-term average returns, but it ignores the impact of volatility. A more useful approach generates a distribution of simulated returns with the desired long-term average and standard deviation, but it assumes that each year is independent of the next. This approach accounts for the importance of volatility, but it still ignores correlations among assets, as well as asset trends or mean reversions that can distort short-term movements and alter the volatility of the portfolio. A slightly more complex approach, stochastic return generation, incorporates all of the typical characteristics of asset returns (long-term average, volatility, correlation and autocorrelation), while introducing additional randomness into the returns to prevent exclusive reliance on historical or assumed patterns. In order to develop the most robust analysis of these portfolios, we applied simulated market returns using stochastic return generation to incorporate uncertainty in future market returns. Our approach combined four layers to simulate a fully robust market environment. Return generator: Asset returns were generated so that future values were dependent on previous returns and the long-term mean, volatility and autocorrelation levels of the assets remained near their desired levels. Market environment generator: We incorporated correlations among assets so that over time, asset returns maintained the desired relationships. For example, high U.S. equity returns were unlikely to correspond to low or negative international equity returns. Long-term trend generator: We also built in long-term return trends. Assets that typically show normally distributed historical returns have normally distributed simulations. Other assets with mean-reverting returns, such as interest rates, show simulated returns that tend toward an average over time. Randomness generator: Asset returns were influenced by a small amount of random noise to introduce realistic shorter-term movements. This multi-layered approach also gave us the ability to stress-test the portfolios by changing the underlying assumptions of average returns, volatility or correlations to simulate more extreme market environments. 11

14 PARTICIPANT BEHAVIOR SIMULATOR Understanding target date strategies also requires careful modeling of the behavior of participants. In order to best reflect the diversity of behavior in the simulations, we have not assumed average contributions or withdrawals, but instead created a distribution of participant behaviors that collectively has the same characteristics as our sample from the JPMorgan Retirement Plan Services participant database. To model a participant base that resembled the real world, we generated simulated values for several variables: Participant contribution rate Event of salary growth Event and size of loans Event and size of near-retirement withdrawals Event and size of post-retirement withdrawals For example, if 20% of 60 year olds in the JPMorgan Retirement Plan Services population took withdrawals each year, then about 2,000 of the 10,000 simulations will make withdrawals at age 60. The 10,000 simulations each incorporate the variability in participant cash flows and market returns to best account for all possible portfolio outcomes. Similar to the capital market simulator, this participant simulator allowed us the flexibility to test the portfolios sensitivity to changes in each variable. These robust processes for simulating both market returns and participant traits, as well as the number of simulations run, provide a comprehensive sample for comparing the characteristics of different target date designs and give us confidence in our results. 12

15

16 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Target date strategies are strategies with the target date being the approximate date when investors plan to start withdrawing their money. Generally, the asset allocation of each strategy will change on an annual basis with the asset allocation becoming more conservative as the strategy nears the target retirement date. The principal value of the strategy(s) is not guaranteed at any time, including at the target date. The projections in this commentary are based on J.P. Morgan Asset Management s (JPMAM) proprietary long-term capital markets assumptions (10-15 years) for risk, return and correlations between major asset classes. The resulting projections include only the benchmark return associated with the portfolio and does not include alpha from the underlying product strategies within each asset class. The assumptions are presented for illustrative purposes only. They must not be used, or relied upon, to make investment decisions. The assumptions are not meant to be a representation of, nor should they be interpreted as, JPMAM investment recommendations. Allocations, assumptions and expected returns are not meant to represent JPMAM performance. Please note all information shown is based on assumptions; therefore, exclusive reliance on these assumptions is incomplete and not advised. The individual asset class assumptions are not a promise of future performance. Note that these asset class assumptions are passive-only; they do not consider the impact of active management. Opinions and estimates 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. 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. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. Certain underlying funds of target date strategies 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 differences. 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 strategy may invest in futures contracts and other derivatives. This may make the strategy more volatile. The gross expense ratio of the strategy includes the estimated fees and expenses of the underlying funds. A strategy of funds is normally best suited for long-term investors. J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc. IRS Circular 230 Disclosure 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 Chase & Co., September 2011 WP-SR-PB