MAY 2013

Presented byMarcia S. Wagner, Esq.

PROMOTING AND EVALUATINGTHE SUCCESS OF YOUR PLAN

Sponsored by: Legg Mason

Voluntary goals can help plan sponsorsevaluate and promote plan success.

INTRODUCTION

Improve plan’s performance

Mitigate legal risks

Economic rewards for employer

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Federal requirements for plans enforced by IRS and DOL

LEGAL STANDARDS FOR PLANS AND PLAN FIDUCIARIES

IRS Nondiscrimination test

• Covers contributions made by employer’s workforce.

• No disproportionate benefit for highly compensated employees (HCEs).

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Legal standards for Plans and Plan Fiduciaries

IRS Nondiscrimination test

• Compares average payroll contributions of HCEs and non-highly compensated employees (NHCs).

• Failure may result in heavy tax penalties or disqualification.

DOL rules govern offering of investment choices to participants.

• Fiduciary duty to prudently select and monitor investments.

• Participants must receive sufficient information.

• Failure may result in personal liability and civil penalties.

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LEGAL BENEFITS FOR PROMOTING PLAN SUCCESS

Legal incentives for plan sponsors

• Improve contribution rates (as necessary for IRS rules).

• Manage plan’s investment menu prudently.

• Ensure participants have sufficient investment information.

Alignment with economic incentives

• Benefit as many employees as practicable.

• Help participants save for retirement.

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Economic incentives for plan sponsors

• Promote participation and improve contribution rates.

• Offer appropriate selection of investment options.

• Equip participants with necessary investment knowledge.

Mitigation of risk for potential liability

• Satisfied employees less likely to file legal claims.

• Financially literate participants more likely to accept short-term volatility.

Legal benefits for promoting plan success

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ECONOMIC BENEFITS FOR PROMOTING PLAN SUCCESS

Rewards for employers managing successful plans

• Increased worker productivity.

• More workforce loyalty (with less turnover and absenteeism).

• Other productivity gains.

Problems arising when employees lack financial security

• Personal concerns may distract employees.

• May feel that employer has failed them.

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Consequences for when employees cannot afford to retire

• Employee morale and productivity are hurt.

• Employees less likely to accept retirement offers.

Benefits for plan sponsors who promote plan success

• Avoid legal penalties and mitigate potential liability.

• Enjoy economic gains.

Economic benefits for promoting plan success

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Plan sponsors should consider using 5 plan-related metrics

USING PLAN-RELATED METRICS TO EVALUATE LEVEL OF PLAN SUCCESS

Participation rate based on number and proportion of eligible employees who actually contribute.

Contribution rate based on average rate of payroll contributions made by eligible employees.

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More suggested metrics

Portfolio risk based on historical volatility (or other risk-related metric) of participant’s portfolio.

• Some recordkeepers measure portfolio’s standard deviation (e.g., 64%)

• Other recordkeepers categorize based on risk-based portfolio type (e.g., conservative, aggressive).

Investment education and financial literacy of participants often measured indirectly.

Using plan-related metrics to evaluate level of plan success

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Last of suggested metrics

Retirement Readiness measures financial wellness or readiness for retirement.

• Some recordkeepers can convert participant’s account to a multiple of annual income (e.g., 16 times income).

• Other recordkeepers can calculate a projected replacement rate (e.g., 85% of pre-retirement income).

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ESTABLISHING GOALS TO MEASURE A PLAN’S SUCCESS

To evaluate plan’s key metrics, plan sponsors should consider obtaining benchmarking data.

• Useful for evaluating plan’s performance.

• Establish appropriate goals for plan’s operation.

Illustrative goals for hypothetical plan

• Plan should attain participation rate of 90%.

• Contribution rate for employees earning less than $50k should be 5% of pay.

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More illustrative goals for hypothetical plan

• Plan sponsor observes that young employees (under age 25) have disproportionately conservative portfolio risk.

• Goal is for 90% of young employees to attend investment education session.

Final illustration

• Retirement readiness goal is for older workers to have higher projected replacement ratio (70% of pre-retirement income).

Establishing goals to measure a plan’s success

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USING GOALS TO IMPROVE PLAN’S PERFORMANCE

Goals are intended to help define plan success.

• Failure to attain goal should not necessarily be viewed negatively.

• View goals as tools to help monitor and manage the plan.

Deteriorating metrics may be symptom of a more serious problem.

• Investigate if plan is at risk for violating IRS or DOL rules.

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HOW SERVICE PROVIDERS CAN HELP PLANS SUCCEED

Consider recordkeeper that can track key metrics.

• Ability to monitor plan’s progress with respect to goals.

Consider third party administrator (TPA) that can implement changes to plan design.

• Design changes may boost Participant and Contribution Rates, and improve Retirement Readiness.

• Examples:o Auto-enrollment and auto-escalationo Reducing maximum number of loanso Minimizing in-service withdrawals

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Consider financial advisors who can assist plan’s fiduciaries.

• Help establish participant-friendly menu of investments.

• Help establish goals for managing plan’s success.

• Improve financial literacy of participants.

• Assist in selection of recordkeeper with appropriate capabilities.

• Support plan design changes.

How service providers can help plans succeed

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CONCLUSION

Consider using plan-related metrics to evaluate performance.

• Establish goals to help monitor and manage plan success.

• Work with providers that have appropriate capabilities.o Recordkeepero TPA o Financial advisor

Consider using our checklist.

• Checklist provides procedural overview of how plan-related metrics and goals can be used to promote plan success.

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Checklist for evaluating plan’s level of success

Key metrics

Have the Plan’s fiduciaries used key metrics to establish specific goals for the plan?

•Participation rate

•Contribution rate

•Portfolio risk

•Investment education

•Retirement readiness

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Qualifications for recordkeeper

Is provider able to provide following data for key metrics?

•For entire plan population

•Different segments based on age

•Different segments based on income

Establishing and monitoring goals

•Has benchmarking data been obtained?

•Have appropriate goals been set?

•Have annual review dates been established?

Checklist for evaluating plan’s level of success

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Qualifications for TPA

Does provider have qualifications to implement plan design changes?

Qualifications for Financial Advisor

Does provider have necessary qualifications to help plan fiduciaries?

•Prudently manage plan’s investment menu

•Improve financial literacy

•Help plan meet goals

Checklist for evaluating plan’s level of success

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The Wagner Law Group has prepared this presentation on behalf of Legg Mason & Co., LLC. This paper includes suggested practices and metrics that plan sponsors, and the financial professionals who work with plan sponsors, may wish to consider in promoting and evaluating the success of their plans. It is important to note that the suggested practices and metrics are not the exclusive means of promoting and evaluating the success of a plan. Other combinations of practices and metrics also may be effective. Plan sponsors and other fiduciaries should consult with their own legal counsel concerning their responsibilities under ERISA in the administration and management of their respective plans. Future legislative and regulatory developments may significantly impact the legal analysis provided herein. Please be sure to consult with your own legal counsel concerning such future developments. This white paper is intended for general informational purposes only, and it does not constitute legal, tax or investment advice on the part of The Wagner Law Group or Legg Mason & Co., LLC and its affiliates. Plan sponsors and financial advisors should consult with their own legal counsel to understand the nature and scope of their responsibilities under ERISA and other applicable law.

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Marcia S. Wagner, Esq.

99 Summer Street, 13th FloorBoston, MA 02110

(617) 357-5200 Tel(617) 357-5250 Fax

marcia@wagnerlawgroup.com

Presented by: Sposored by:

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www.leggmasonfunds.com

1-800-822-5544

youtube.com/leggmason

linkedin.com/company/legg-mason

@leggmason

Batterymarch

Brandywine Global

ClearBridge Investments

Legg Mason Global Asset Allocation

Legg Mason Global Equities Group

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Royce & Associates

Western Asset Management

Legg Mason is a leading global investment company committed to helping clients reach their financial goals through long term, actively managed investment strategies.

All investments involve risk, including possible loss of principal.

* As of March 31, 2013.

The Wagner Law Group is not a Legg Mason, Inc. affiliated company.© 2013 Legg Mason Investor Services, LLC. Member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc. FN1311424 5/13