Transcript PRESENTATION GUIDELINES AND SLIDE GALLERY

PROMOTING AND EVALUATING
THE SUCCESS OF YOUR PLAN
Presented by
Marcia S. Wagner, Esq.
MAY
2013
Sponsored by:
Legg Mason
INTRODUCTION
Voluntary goals can help plan sponsors
evaluate and promote plan success.
Improve plan’s performance
Mitigate legal risks
Economic rewards for employer
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LEGAL STANDARDS FOR
PLANS AND PLAN FIDUCIARIES
Federal requirements for plans enforced by IRS and DOL
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.
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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.
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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Legal benefits for promoting plan success
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.
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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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Economic benefits for promoting plan success
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.
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USING PLAN-RELATED METRICS
TO EVALUATE LEVEL OF PLAN SUCCESS
Plan sponsors should consider using 5 plan-related metrics
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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.
Using plan-related metrics
to evaluate level of plan success
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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.
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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).
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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Establishing goals to measure a plan’s success
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).
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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-escalation
o Reducing maximum number of loans
o Minimizing in-service withdrawals
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How service providers can help plans succeed
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.
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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 Recordkeeper
o 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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Checklist for evaluating plan’s level of success
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?
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Checklist for evaluating plan’s level of success
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
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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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Presented by:
Sposored by:
Marcia S. Wagner, Esq.
99 Summer Street, 13th Floor
Boston, MA 02110
(617) 357-5200 Tel
(617) 357-5250 Fax
[email protected]
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