Navigating the New Realities of 401(k) Participant Education Presented by Marcia S. Wagner, Esq. Sponsored by: All investments involve risk, including possible loss of principal.

2 Introduction How should investment assistance be provided to plan participants? Education to help them make informed decisions? Advice that tells participants exactly how to invest? A new way to think about participant education: Incentives for providing education Choosing Education Only or Education and Advice Best practices

3 Incentives to Provide Participant Education For discussion purposes, education may be categorized as follows: Plan Menu Disclosures Investment Concepts Allocation Decision Support

4 Plan Menu Disclosures Under Existing Rules Plan Menu Disclosures are not an absolute requirement...but ERISA Section 404(c) provides an incentive to make Plan Menu Disclosures Fiduciary liability protection for participant-directed losses Compliance with Section 404(c) is not mandatory

5 Case Law Alternative to 404(c) Compliance Fiduciary protection is available without Section 404(c) compliance Jenkins v. Yager (7 th Cir. 2006) Court’s favorable ruling took into account annual informational meetings arranged by plan’s advisor Jenkins ruling is inconsistent with DOL’s position DOL asserts that 404(c) compliance is necessary for liability protection But Jenkins decision remains “good law” Provides another incentive to make Plan Menu Disclosures

6 Plan Menu Disclosures Under New Rules DOL adopted new participant-level disclosure rules (Sec a-5) Rules become effective with first plan year beginning after Oct. 31, 2011 Sponsors must provide new Plan Menu Disclosures annually For plans with calendar plan year, initial Plan Menu Disclosures must be provided to participants by May 31, 2012 Requirements for newly enhanced Plan Menu Disclosures Must identify each menu option’s asset category and benchmark index Must include standardized performance data and expense information Glossary must be included or posted on website

7 Investment Concepts Education DOL’s participant-level disclosure rules include a format requirement Must be understood by “average” plan participant Similar to format requirement for SPDs Pegged to typical participant’s level of financial literacy SEC has a different type of format requirement Plain English standard is based on objective writing principles (e.g., short sentences, no legal jargon)

8 The “Average Plan Participant” Standard Participant-level disclosure rules impose format standard on Plan Menu Disclosures Format standard applies to every plan DOL assumes that average participant in all plans has capacity to understand But is this assumption flawed? Illustrative Examples Elite accounting firm with 500 professionals Small furniture moving company with 10 young employees

9 The Need for Financial Literacy Many participants may be confused by labels or concepts in Plan Menu Disclosures For example, participants may need education on benchmark indices (e.g., Barclays Capital Intermediate Government/Credit Index) Glossary may not be enough Improve financial literacy with Investment Concepts education “Average Plan Participant” standard encourages plan sponsors to provide participant education

10 Broad Education Program With Allocation Decision Support Plan sponsors should consider providing Investment Concepts education Can be incorporated into broader program with Allocation Decision Support Allocation Decision Support can reduce poor decision- making by participants Broad-based education can serve as risk mitigation tool Reduces likelihood of legal action by plan participants Even if plan offers advice, education can help participants who decline advice

11 Special Considerations for Target Date Funds DOL has proposed TDF-related changes to participant-level disclosure rules Must include appendix that explains TDF’s “Glide Path” and “Landing Point” Appendix must also explain intended age group, relevance of stated year in fund name, and key assumptions

12 TDF Disclosures and the Glide Path Illustration Participant-level disclosures must include Glide Path illustration Glide Path illustration must be included in appendix Illustration must not obscure participant’s understanding of Glide Path explanation Plan sponsors should consider providing Investment Concepts education on TDFs Explain “fund of funds” structure of TDFs Provide Allocation Decision Support to help participants make informed decisions

13 Deciding Between Education Only and Education and Advice Considerations when deciding upon an advice program: Any advice program should be in addition to education program Two types of advice are available Three basic choices for plan sponsors: Education Only (with no advice) Education and Non-discretionary Advice Education and Discretionary Advice

14 Implications of offering fiduciary investment advice to participants Provider of “investment advice” is a plan fiduciary Plan fiduciary must not receive variable compensation (e.g., 12b-1 fees) Variable compensation only permitted for non-plan clients Fiduciary Rules for Providing Investment Advice

15 ERISA does not require plan sponsors to offer participant advice But if any advice is offered, fiduciary standards apply Co-fiduciary liability if plan sponsor imprudently selects advice provider DOL’s existing proposal would broaden “investment advice” definition Broader types of non-discretionary advice would become subject to fiduciary standards New proposed rule expected in early 2012 Providers of individualized advice would most likely continue to be viewed as fiduciaries under new proposed rule Potential Liability for Providing Improper Participant Advice

16 Provider of “investment education” is not a plan fiduciary DOL Interpretive Bulletin 96-1 has 4 safe harbors for non-fiduciary education: Plan Information (e.g., plan terms, menu information) Investment Information (e.g., financial concepts, risk tolerance) Asset Allocation Models Interactive Materials (e.g., worksheets) Non-Fiduciary Nature of Investment Education

17 Investment Education as an Alternative to Providing Advice Education provider is not a plan fiduciary Plan sponsor is not subject to co-fiduciary liability for education provided Existing proposal to broaden “investment advice” definition would not impact DOL’s 4 “education” safe harbors New proposed rule unlikely to impose fiduciary responsibility on providers of safe harbor education Many participants may not want investment management responsibility Consider adding lifestyle fund or TDF to plan’s menu Can also offer advice, even if menu includes lifestyle fund or TDF Note: When a Target Date Fund reaches its target date, fund assets should decline and expenses will increase.

18 Best Practices for Delivering Investment Education Plan sponsors have incentives to provide different types of education Consider providing all 3 types (Plan Menu Disclosures, Investment Concepts and Allocation Decision Support) Consider adopting best practices for providing education

19 Best Practice #1 Education Program Should Engage Participants Consider providing active education through a provider, rather than passive education through written materials Education should not be too “generic” Consider delivering meaningful education, including Allocation Decision Support, through DOL’s “education” safe harbors

20 Best Practice #1 (cont’d) Using DOL safe harbors to deliver Allocation Decision Support to participants Questionnaire for determining time horizons and risk tolerance (Investment Information safe harbor) Sample asset allocation portfolios for hypothetical individuals (Asset Allocation Models safe harbor) Worksheet to guide participants to closest sample portfolio (Interactive Materials safe harbor) Education provider can not provide “investment advice”...but can provide personalized guidance on time horizons and risk tolerance Asset Allocation Models can reference plan’s particular menu options, if disclaimers are included

21 Best Practice #2 Investment Concepts education should cover enhanced Plan Menu Disclosures Review all Investment Concepts necessary to understand the new Plan Menu Disclosures Relevant Investment Concepts might include asset classes, risk and return, benchmarking and historical returns Consider reviewing fundamental characteristics of plan’s TDFs, including Glide Path illustration If possible, refer to actual Plan Menu Disclosures from recordkeeper

22 Best Practice #3 Any advice offering should not replace education program Investment advice should supplement education program Financial advisor for plan can serve as plan’s education provider, even if unable to serve as advice provider Financial advisor can also assist in selection of plan’s advice provider

23 Best Practice #4 Establish an Education Policy Statement (EPS) for the plan Manage education program in accordance with a deliberate process Consider adopting EPS with program objectives, meeting guidelines, and education topics Use EPS as tool to evaluate provider’s performance and assess program’s effectiveness

24 Conclusion Plans sponsors and participants can both benefit from education programs Consider Investment Concepts education as supplement to newly enhanced Plan Menu Disclosures for participants Allocation Decision Support can help plan sponsor reduce its exposure to fiduciary liability Education program should engage participants, and supplement any advice offering EPS can help ensure program is designed and managed properly

25 The Wagner Law Group has prepared this presentation on behalf of Legg Mason & Co., LLC. This paper highlights recent and proposed changes in the law, which are expected to significantly impact defined contribution retirement plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the financial advisors who support and advise sponsors of these 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.

26 Navigating the New Realities of 401(k) Participant Education Marcia S. Wagner, Esq. 99 Summer Street, 13 th Floor Boston, MA Tel: (617) Fax: (617) Website: Sponsored by Legg Mason The Wagner Law Group is not a Legg Mason, Inc. affiliated company. © 2011 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC, is a subsidiary of Legg Mason, Inc. FN /11