Full steam ahead: Face to Face with Tom Kmak
Tom Kmak is often recognized and kidded by his staff for his passion when speaking about participants reaching their retirement goals. "I do tend to get fired up and excited. This is very important, what we're dealing with. We are dealing with millions of peoples' financial health and their ability to live comfortably in retirement," he said.
Mr. Kmak's background in retirement services spans 16 years. He started the retirement services business at 20th Century Investments in 1990. In 1998, J.P. Morgan & Co. acquired a 45% stake in American Century Investments, Kansas City, to establish the retirement plan services division. In 2003, Morgan acquired American Century's share in the retirement plan services division, and Mr. Kmak was named president and CEO.
"The retirement industry has changed a lot in 20 years. It's gone from simplicity to complexity to elegance," he said, citing the current programs that involve lifecycle funds and managed accounts.
JPMorgan Retirement is focused on reaching its 401(k) plan participants with customized services, said Mr. Kmak. Through its products — Audience of One and the recently launched Best Plan in America — JPMorgan is creating personalized investment strategies for investors and is allowing plan sponsors to benchmark their plans.
Mr. Kmak discussed JPMorgan's acquisition strategy, his plans to target the middle market, and the Pension Protection Act, during a September interview at the firm's headquarters in Kansas City, Mo.
What is driving JPMorgan's success in record keeping? We have over $100 billion in assets under advisement. The main reason for success has been our Audience of One service. The personalization of that product is driving our success.
Tell me about Audience of One. The ultimate customization doesn't occur at the company or plan level, but at the participant level. Audience of One takes a three-tier approach: doers, delegates and sophisticates. For the "doers," they want a simplification of fund options, but they are up on what's going on. They want to know what you offer in real estate and private equity and other esoteric asset classes. The "delegates" are interested in age-based lifecycle funds and managed accounts; and the "sophisticates" are after brokerage options. The Audience of One Program takes a personalized look at each participant and their needs.
JPMorgan recently acquired CCA Strategies in Chicago. What role do acquisitions play in your retirement business? I wouldn't say it's the most important part of doing business. This is the first acquisition in the history of our retirement business. I will tell you that we will continue to focus on organic growth, but will look at acquisitions in the future. But if you don't grow organically, you have a fundamental problem. CCA is a consulting firm that provides retirement and actuarial services to DB plans. They have about 230 DB clients. It adds something new to JPMorgan.
Are you finished acquiring for now? There are 88 record keepers out there now and 22 are on our target list.
Any firms you could name? (laughs) Unfortunately, no.
What do you look for in a potential acquisition? We think about whether it provides us with additional capabilities. With CCA, we had the pension addition. If a company could add total retirement solutions, pension services or stock option services, we'd think about it. We also think about whether it adds to scale to lower costs. We have to make sure it makes sense for JPMorgan, whether they (the target firms) fit culturally.
The majority of your clients are larger DC plans, would you consider moving down-market? We have a limited number of clients, about 200, with 1.3 million participants. The average size plan has about 6,000 participants. I think you will see us targeting clients with $20 million to $100 million in assets in the next two to three years. I don't want to call that down-market, but more of a midmarket solution.
Do you have many midsize clients now? We have a couple with under $100 million in assets. We will move to the midmarket one client at a time. We only have 200 clients and they're all important. To move to the midmarket, the service delivery and technology has to be there.
Which industry trends are you following? There are four major trends as I see it. The first is the rise of behavioral finance in the DC industry. We now have data that tracks participant inertia and we can see why participants are making the decisions they are. Secondly, there is now a stark realization by the industry that it's been 20 years of educating participants to be the next Warren Buffett, and it hasn't worked. So there has been a huge uptake in the lifecycle and managed account arena. The third trend is using an Audience of One type program; more than 50% (of participants) are delegators. These solutions figure out what type of person you are when it comes to investing. And the last (trend) is that the government is truly trying to help. All the talk in Washington and the eventual signing of the Pension Protection Act has been great for the industry.
What is your take on the Pension Protection Act? We know 401(k)s are becoming more important and the government is responding. I was very happy to see the EGTRRA (Economic Growth and Tax Relief Reconciliation Act of 2001) provisions made permanent. I think the uptake for Roth 401(k)s will be higher because of that. I also applaud the auto-enrollment and auto-escalation provisions. Auto-enrollment is just great for the industry.
Is there anything you wish was clarified that wasn't included in the PPA? I wish there was guidance on missing participants and refunds for flexible spending accounts. But for the most part, the government was truly trying to help. The PPA is a great thing; great timing.
What is the most appropriate default option? It will, of course, apply to those that are new to the plan and I think age-based funds are the best solution. It's easy to understand; very simple for the plan participant. If the plan has more (highly compensated) employees, a managed account makes the most sense as the default.
Do you offer age-based lifecycle funds and managed accounts to plan participants? Yes, we have lifecycle funds and we partner with Financial Engines for our managed account solution.
Which products and services are you considering? Are annuities on your radar? Annuities are a natural thought for anyone. Am I convinced that most plan sponsors want it as an option in the plan? Not yet. I think most of the focus has been on the distribution side. An annuity as a distribution option is a good idea. I can't talk about what we're doing yet (regarding annuities), but we're about to pull the trigger on that.
Where do you see JPMorgan Retirement Plan Services in five years? Well, five years is a very long time. I can tell you that three years from now you will see us much bigger. We will possibly be twice as large if we find the right acquisition or two. Our capabilities will be much broader and we will have more clients with under $100 million (in assets under management).
What keeps you up at night? It keeps me up at night thinking about how much emphasis is on cost instead of value. The focus on costs, at the governmental level, providers and plan sponsors … it shows how far we have to go in this industry, when all the focus is on costs and fees.
What is your view on the recent lawsuits regarding revenue-sharing fees? All our fees are fully disclosed. Our clients are focused on how to get participants to meet their retirement goals because that's the ultimate fiduciary responsibility. I don't want to comment on the lawsuits out there now. But that's what we do; we fully disclose everything.