UMN System Switch from Vanguard Target Date to expensive JPMorgan SmartRetirement Funds, Fiduciary?

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William4u
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UMN System Switch from Vanguard Target Date to expensive JPMorgan SmartRetirement Funds, Fiduciary?

Post by William4u » Wed Oct 02, 2019 2:50 pm

The university system manages $50 billion in retirement assets. 76% of new employees use the default Target Date Funds for their retirement investments. Currently, those target date investments go into a Vanguard Target Date Institutional Fund with an ER of as little as 0.08%. A university system committee recently decided to switch all target date funds to the more expensive JPMorgan SmartRetirement Passive Blend Funds, which will be the new default retirement investment for university system employees.
https://conservancy.umn.edu/bitstream/h ... _02_04.pdf

The committee noted that this JPMorgan fund is more expensive, but seemed to suggest that this added expense is justifiable because it consists of actively managed funds. It is well known here that active funds lag behind index funds after fees. One Vanguard study found that 95% of active funds lag behind equivalent index funds (in the same asset class) after a couple of decades. Active funds that have higher returns than index funds tend to have survivorship bias and the like.

A number of boglehead threads have noted that the JPMorgan SmartRetirement fund is expensive and consists of an odd and large array of sub-funds.
viewtopic.php?t=149937
viewtopic.php?t=261184
viewtopic.php?t=232248
viewtopic.php?t=247943

The JPMorgan Smartfund holds 29 mutual funds within it (yes 29, that is not a typo). And it has 4 fund managers. Talk about unnecessary! No wonder it is more expensive than the Vanguard Target funds (which have 2 managers and 4 funds, and more assets under management). The Vanguard Target funds consist of total domestic and international stock index funds, and total domestic and international bond index funds. Here is the seemingly random, disorganized JPMorgan fund lineup.
https://am.jpmorgan.com/us/en/asset-man ... /portfolio

My understanding is that the university system retirement plan is supposed to function in a fiduciary manner for university system employees. Vanguard offered their target date funds (as did other companies) to the committee, but for no obviously apparent reason was rejected by the committee. There are many non-Vanguard target date funds that seem better than the JPMorgan ones as well.

If I were to go in front of the committee and argue against this change, what are the best evidence and arguments I can use? My own investments would be better, I believe, if this change were not made.

Thanks.

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JAZZISCOOL
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Re: UMN System Switch from Vanguard Target Date to expensive JPMorgan SmartRetirement Funds, Fiduciary?

Post by JAZZISCOOL » Wed Oct 02, 2019 3:32 pm

I'm not sure what options you have if the Committee has already made its decision to go with the JPM funds. I did see they do offer a brokerage window:

Will participants have the option to stay in the funds they are currently invested in, asked Mr.
Donahue? For participants who want to retain an investment that will no longer be offered going
2
forward, the only way they will be able to do that is through the open brokerage window (tier 3),
which could potentially increase the fees they pay.


Depending on who the broker is, you might be able to find a lower expense ratio passive option. For example, many employers offer a Schwab brokerage window. Schwab has many passive options.

I could not tell on the info sheet you included exactly what the new fees will be. IMO, all 401(k) and 403(b) providers should offer passive options on the core line-up but at least you can research the brokerage window.

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Re: UMN System Switch from Vanguard Target Date to expensive JPMorgan SmartRetirement Funds, Fiduciary?

Post by Broken Man 1999 » Wed Oct 02, 2019 3:41 pm

Wow! That is one ugly fund!

I can't imagine anyone selecting such a monstrosity. :annoyed

To get changes you are going to need others with you. Bad thing is so many of your peers probably have no clue how this change will affect their plan. So they might just be willing to rock along. Dang shame, for sure.

But, a single voice just won't do it, IMHO.

I hope you can find some allies.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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goingup
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Re: UMN System Switch from Vanguard Target Date to expensive JPMorgan SmartRetirement Funds, Fiduciary?

Post by goingup » Wed Oct 02, 2019 3:45 pm

You have to wonder how a committee could make such a poor decision. :oops: Why would they change from a low cost Target Fund provider (Vanguard) to one that offers funds that are 8X as expensive? I would think that's a real breach of their oversight responsibility.

Here's an article from Barrons in December 2018 detailing how various Target Funds performed in that difficult year.
https://www.barrons.com/articles/target ... 1544817528
From the article: "JPMorgan SmartRetirement 2040 (SMTAX), a fund with 31% in foreign stocks, has lost 6.5% for the year, trailing 98% of peers, according to Morningstar."

If you go before the committee you could call upon the vast body of Jack Bogle's work--costs matter! Also, if you use the current Target Funds and will be personally negatively impacted by the change, making that case could be very illuminating.

ofckrupke
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Re: UMN System Switch from Vanguard Target Date to expensive JPMorgan SmartRetirement Funds, Fiduciary?

Post by ofckrupke » Wed Oct 02, 2019 3:54 pm

Just as there are costly active Fidelity Freedom target date funds and cheap passive Fidelity Freedom Index target date funds, and similar at Schwab, it looks like JPMCB has at least two and maybe three strata of funds under their SmartRetirement service mark.
The fund/product line linked in the opening post appears to be the most active one, just "SmartRetirement (year)"
There's another fund line called SmartRetirement Blend.
Then I believe there's another line that based on a quick google search may exist only in "collective investment trust" (aka CIT) form so doesn't have convenient tickers, and the members of this line have "Passive Blend" in their names. Since that is what was shown in the minutes PDF from the retirement plan subcommittee meeting, this is what I think the UMN participants will probably be getting (here I follow your example in the OP of linking to the 2025 "fund"):

NetBenefits page for JPMCB SmartRetirement® Passive Blend 2025 Fund CF

Its er= 0.25% - which seems like a lot relative to Vanguard TR institutional class or CIT, but is a lot less than the 0.99% all-active fund in the original post. Presumably the other date tiers of the SmartRetirement Passive Blend line have a similar fee.

Since the decision was revealed in a meeting last February I think you would be wasting your breath to try to keep the changeover from happening.
But if you like, sue.
Last edited by ofckrupke on Wed Oct 02, 2019 4:03 pm, edited 1 time in total.

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Re: UMN System Switch from Vanguard Target Date to expensive JPMorgan SmartRetirement Funds, Fiduciary?

Post by goodenyou » Wed Oct 02, 2019 4:02 pm

Welcome to the Club. I have the same lousy lineup of JP Morgan funds :(
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

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William4u
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Re: UMN System Switch from Vanguard Target Date to expensive JPMorgan SmartRetirement Funds, Fiduciary?

Post by William4u » Mon Oct 07, 2019 9:12 pm

ofckrupke wrote:
Wed Oct 02, 2019 3:54 pm
Just as there are costly active Fidelity Freedom target date funds and cheap passive Fidelity Freedom Index target date funds, and similar at Schwab, it looks like JPMCB has at least two and maybe three strata of funds under their SmartRetirement service mark.
The fund/product line linked in the opening post appears to be the most active one, just "SmartRetirement (year)"
There's another fund line called SmartRetirement Blend.
Then I believe there's another line that based on a quick google search may exist only in "collective investment trust" (aka CIT) form so doesn't have convenient tickers, and the members of this line have "Passive Blend" in their names. Since that is what was shown in the minutes PDF from the retirement plan subcommittee meeting, this is what I think the UMN participants will probably be getting (here I follow your example in the OP of linking to the 2025 "fund"):

NetBenefits page for JPMCB SmartRetirement® Passive Blend 2025 Fund CF

Its er= 0.25% - which seems like a lot relative to Vanguard TR institutional class or CIT, but is a lot less than the 0.99% all-active fund in the original post. Presumably the other date tiers of the SmartRetirement Passive Blend line have a similar fee.

Since the decision was revealed in a meeting last February I think you would be wasting your breath to try to keep the changeover from happening.
But if you like, sue.
Thanks everybody. I learned a lot. Here are a few thoughts:

1. The SmartRetirement Passive Blend fund is just a less diversified but more expensive version of the Vanguard Target Date Fund. Both JPMorgan and Vanguard have a mix of 3 things: (A) Domestic Equity, (B) International Equity, and (C) Fixed Income/Bonds. From looking it over, JPMorgan replaces Vanguard Total International with a developed large cap blend index and an emerging large cap blend index. Vanguard’s Total International also contains mid/small caps, whereas the JPMorgan international fund is just large cap stocks. So the JPMorgan international lineup is less diversified than Vanguard's. Vanguard's international fund consists of a more comprehensive large-mid-small cap index.

2. Apart from the lack of diversification, in the essentials the JPMorgan retirement funds and the Vanguard retirement funds are functionally identical, except the 3-times higher expense ratio for the JPMorgan funds. So JPMorgan is charging MORE for LESS (less diversification).

3. The UMN meeting minutes seem inaccurate, since the claim is that the JPMorgan funds cost more because they consist of actively managed mutual funds. That cannot be the case. Most of the JPMorgan retirement funds are largely index funds just like Vanguard’s funds. There are some actively managed bond funds and a REIT fund, but those funds are a small proportion of the overall makeup of the fund (e.g., in the 2055 retirement fund), and yet the cost is still 3-times higher than Vanguard. The fact is that JPMorgan is charging significantly more for the (less diversified) passive index funds themselves. Most of the higher cost comes from those passively managed index funds, which make up most of the retirement funds (especially as the dates get farther out). And we all know that actively managed funds systematically lose out to passively managed funds after fees. Only about 2% of actively managed funds beat passive index funds after 20 years, and much of that is survivorship bias.

4. The fact that the UMN committee does not seem to understand that the JPMorgan retirement fund is mostly made up of passive index funds (and that the added price mostly comes from overcharging for those non-actively managed index funds) makes me concerned that the UMN committee is ignorant of the basics of mutual fund pricing. Obviously they seem ignorant of the importance of keeping fees and expense ratios (ERs) low. According to one Vanguard study, a 0.25% increase in ER can lower one's retirement nest egg by 9.5% over a 40 year investment period. Spread that pointless 9.5% retirement loss over billions of employee assets, and it becomes millions in employee retirement funds lost to JPMorgan fees for no good reason.

5. The only true justification for the higher cost of the JPMorgan funds, I suspect, is that UMN is pushing costs for managing the retirement plan onto unsuspecting employees, who will be paying more for less.

6. The brokeragelink option is a good one for sophisticated investors, but most people will stick to the default retirement funds. And I suspect many will use the brokeragelink option to trade too often in poorly understood products (as the research on individuals actively trading suggests).

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Re: UMN System Switch from Vanguard Target Date to expensive JPMorgan SmartRetirement Funds, Fiduciary?

Post by Dottie57 » Mon Oct 07, 2019 9:54 pm

William4u wrote:
Wed Oct 02, 2019 2:50 pm
The university system manages $50 billion in retirement assets. 76% of new employees use the default Target Date Funds for their retirement investments. Currently, those target date investments go into a Vanguard Target Date Institutional Fund with an ER of as little as 0.08%. A university system committee recently decided to switch all target date funds to the more expensive JPMorgan SmartRetirement Passive Blend Funds, which will be the new default retirement investment for university system employees.
https://conservancy.umn.edu/bitstream/h ... _02_04.pdf

The committee noted that this JPMorgan fund is more expensive, but seemed to suggest that this added expense is justifiable because it consists of actively managed funds. It is well known here that active funds lag behind index funds after fees. One Vanguard study found that 95% of active funds lag behind equivalent index funds (in the same asset class) after a couple of decades. Active funds that have higher returns than index funds tend to have survivorship bias and the like.

A number of boglehead threads have noted that the JPMorgan SmartRetirement fund is expensive and consists of an odd and large array of sub-funds.
viewtopic.php?t=149937
viewtopic.php?t=261184
viewtopic.php?t=232248
viewtopic.php?t=247943

The JPMorgan Smartfund holds 29 mutual funds within it (yes 29, that is not a typo). And it has 4 fund managers. Talk about unnecessary! No wonder it is more expensive than the Vanguard Target funds (which have 2 managers and 4 funds, and more assets under management). The Vanguard Target funds consist of total domestic and international stock index funds, and total domestic and international bond index funds. Here is the seemingly random, disorganized JPMorgan fund lineup.
https://am.jpmorgan.com/us/en/asset-man ... /portfolio

My understanding is that the university system retirement plan is supposed to function in a fiduciary manner for university system employees. Vanguard offered their target date funds (as did other companies) to the committee, but for no obviously apparent reason was rejected by the committee. There are many non-Vanguard target date funds that seem better than the JPMorgan ones as well.

If I were to go in front of the committee and argue against this change, what are the best evidence and arguments I can use? My own investments would be better, I believe, if this change were not made.

Thanks.

1). Creat a spreadsheet to compound returns (4%) over 10,20, 30 years. Each year would have the ER deducted. Show it for Vanguard and JP Morgan. And show the resulting end balances.
2). As a Minnesotan I want to know if JP Morgan is sharing profits or giving any benefit to the UMN in exchange for collecting higher ERs.
3). What evidence is there that active funds do better than index funds?
4). How can you see the RFP requirements? (i would really like to know - as aMinnesotan.
5). Ask for a justification for using a higher cost product.
6). Compare the higher ER to thievery of employee retirement funds - does the U have a fiduciary responsibility?
7). How well did JP Morgan do during the great recession? I believe they had problems. Do you really want to trust this entity?

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Re: UMN System Switch from Vanguard Target Date to expensive JPMorgan SmartRetirement Funds, Fiduciary?

Post by bsteiner » Mon Oct 07, 2019 10:10 pm

You might remind them of some of the lawsuits on this. You might try to find stories about some of them and use the most relevant examples.

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Re: UMN System Switch from Vanguard Target Date to expensive JPMorgan SmartRetirement Funds, Fiduciary?

Post by HomeStretch » Mon Oct 07, 2019 10:16 pm

+1.

Surprising move in light of the recent retirement plan lawsuits. Is JPM making large donations to the university? MIT just settled a 401k plan suit alleging it hurt participants by packing the plan with high-fee funds while receiving large donations from Fidelity.

Will the plan still offer low-fee equity/bond funds as an alternative for you?

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Re: UMN System Switch from Vanguard Target Date to expensive JPMorgan SmartRetirement Funds, Fiduciary?

Post by Watty » Mon Oct 07, 2019 10:43 pm

One thing to watch out for is that the expense ratio that you are paying may not be the same as you see when you look the funds up on the internet.

Before I retired the company I worked for switched 401k plans from Fidelity to Principal and the first high level notice from HR listed the funds but not the details. When I looked up the Principal S&P 500 fund in the internet it had an ER of something like 1.6%. I was livid and contacted HR to complain but it turned out that the expense ratios that we were paying was something like 0.1%. There were also about 20 other non-index funds that had high expense ratios but they did actually have a good set of index funds to do a three fund portfolio.

(Technically they were some sort of "shared account" and not a mutual funds which made getting information on them difficult.)

Are you sure that you have you found out what the actual expense ratios are of the target date funds in the your JPM plan?

sawhorse
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Re: UMN System Switch from Vanguard Target Date to expensive JPMorgan SmartRetirement Funds, Fiduciary?

Post by sawhorse » Wed Oct 09, 2019 9:31 pm

Is this for a 403 or 457? The other one might have better options.

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