The following overview is the first in a series of six Savant position papers dedicated to providing retirement

plan sponsors with a comprehensive framework of best practices regarding investment oversight, fiduciary

responsibility, and effective employee education. The mission of this series is to enable managers to aspire to

excellence in their role as investment stewards regarding their employee’s retirement plan assets.

10The Ideal 401(k) Plan

SM

10 Characteristics of The Ideal 401(k) PlanSM

The Plan Sponsor’s Perspective

All 401(k) Plans Are Not Created Equal...

W hile the share of employees

offered 401(k) plans is rapidly

growing, retirement plan

coverage is stagnatingi. This means that

though more employers are establishing 401(k)

plans, fewer employees are participating in

them fully. That’s a very troubling trend. Why

are employees failing to take full advantage of

all their retirement benefits? 401(k) plans have

proliferated since the first one was offered

in 1980ii, creating an industry that includes

excellence, mediocrity and plain malfeasance.

Now that the 401(k) plan is nearly 30 years old,

we are in a position to take stock, get back to

the fundamentals, and ask the question:

What would the Ideal 401(k) plan provide?

The Importance of Putting Participants FirstSome plans put the interest of the participants first, while others seem designed to maximize fees for the providers. That is, some 401(k) plans are clearly well intentioned, others less so. The best 401(k) plans encourage employees to save more while others have trouble doing so. Not only must management determine which 401(k) plans are really there to help, they must also distinguish effective plans from those that could leave participants disengaged, confused and insecure.

All 401(k) plans are not created equal. Employees rely on their management team to select and supervise an effective plan. The consequences of failure are grave: the wrong plan can lead to a substantial loss of quality of life for loyal employees. In the shorter term, a sub-par 401(k) plan can lower employee retention as employees realize other companies offer more exciting and financially secure options.

On the other hand, the right plan attracts employees, with top investment options and a track record of high rates of participant engagement. And why shouldn’t an excellent 401(k) plan impact employee migration? After all, an effective, fair 401(k) plan offers eventual financial independence to individuals and their families–a benefit whose importance can hardly be overstated.

The Ideal 401(k) plan advisor demonstrates experience and has a qualified management team, participant friendly policies, and a highly disciplined investment philosophy. In addition to these investment qualifications, the advisor should also offer effective educational programs and cutting edge technology solutions for communication and employee access to information.

Employees like 401(k) plans. People prefer them to traditional pensions and other retirement programs by a wide margin. Imagine the Ideal 401(k) plan from their perspective. What would be its essential ingredients? How would it work? How would it present itself? The following pages endeavor to answer these questions with a list of the 10 Characteristics of the Ideal 401(k) Plan. These 10 characteristics recognize the practical concerns of the three constituents of your 401(k) plan, namely, your company, your management team and your employees.

10 Characteristics for 401(k) Excellence

The Ideal 401(k) PlanSM

by Savant Capital Management

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Optimal Plan DesignOptimal plan design uses specific concrete tactics to pave the way to consistent participation. When all aspects of the plan are easy to administer and understand, participation increases. It is not enough to make it possible for employees to save. Optimal plan design anticipates potential challenges and prescribes courses of action for participants, encouraging them to allocate the appropriate percentage of their incomes to the plan. Effective engineering of 401(k) plans takes place upfront. Therefore, the Ideal investment advisor has to begin coaching the management team immediately. This early consulting process is designed to provide maximum benefits to participants, given your company’s constraining economics.

It is true that 401(k) plan flexibility is a virtue; nevertheless, concrete steps have to be taken to manage this flexibility if the plan is to provide consistent best practices over time. In the Ideal 401(k) plan, the advisor guides management through these steps, giving the best advice regarding decisions that guide the plan over the long haul.

Ideal Plan Optimization: A Dialogue Between the Investment Advisor and the Management TeamA successful dialogue between the Ideal advisor and your management team enables plan optimization that neither party can accomplish on a solo basis. The advisor needs to learn details regarding company goals and resources and understand the sophistication level of the employee group. The management team needs to be coached through various savings solutions, technical plan options and other plan features. This consultation culminates in a plan design that considers both the unique needs of participants and the evolving needs of the company. All final design decisions are compiled in “official” plan documents. The plan documents provide an overview of the key decisions resulting from the advisor/management dialogue. It is helpful to think of the plan documents as a kind of business plan for the three plan constituents: your company, your management team and your employees. They constitute a written and approved guide for the plan.

Ideal plan documents formalize the plan design and address a number of specific questions, such as:

• What is the right percentage for matching employer contributions, given available company resources?

• What are the best loan features to offer, if any?

The plan documents also record decisions on whether to offer a Roth option, in-service distribution features, as well as decisions about vesting and the flexibilities the company offers employees.

Advanced Administration Technology In the Ideal 401(k), plan sponsors and participants use state-of-the-art information technology that provides easy-to-use applications for plan administration and employee communication. This technology allows your company varying levels of daily account access and capabilities. For instance, distributions can be approved on-line, and email notifications can be sent to any or all employees with ease. Also, documents and notices can be stored and accessed in the system’s library. A variety of tracking and management reports are available.

The participant center provides easy access to information and clear

guidance for the employee. Each participant is able to view his or her account by logging on to a password-protected online portal. Once logged in, participants can access their daily account balance, review relevant account information and request a

number of transactions, such as changing their investment

elections and reviewing their specific allocation.

The portal also lets participants interact with an intuitive, ergonomic interface, where they can easily communicate with the advisor. Participants can check rates of return, up-to-date share prices, as well as historical returns of individual funds. Finally, the portal presents world-class educational materials.

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3.The 10 Characteristics of The Ideal 401(k) Plan

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3.CEFEXFiduciary Governance ProcessCEFEX certification is the latest industry credential that clarifies and vouches that investment stewards (i.e., your trustees and investment committee members) have adopted industry best practices in their role as an investment fiduciary. CEFEX is the acronym for The Center for Fiduciary Excellence. CEFEX certified plan advisors meet fiduciary standards of excellence and best practices. CEFEX certified advisors develop a governance process that includes guidelines and qualifications for the investment committee, a set of investment committee bylaws, meeting agendas, minutes and other security mechanisms. With the assistance of a CEFEX certified advisor, the Ideal 401(k) plan develops effective documentation and processes to manage the governance process. This allows your investment committee to follow global standards of fiduciary excellence.

Investment Policy Statement A key document in CEFEX governance is the Investment Policy Statement (IPS). The IPS formalizes plan policies, procedures, and control mechanisms. While the law does not technically require an IPS, the document provides a decision-making framework for fiduciary committee members to ensure that all legal obligations are met. The document outlines the key parameters investment advisors need to follow when selecting, implementing, and monitoring investment and portfolio options. The IPS protects all parties concerned by formalizing best practices and documenting adherence to a sound and prudent process. A certified fiduciary places participants’ interest at the center of decision-making.

Timely and relevant documentation reduces your risk. Documentation needs to be a primary focus of your advisor — at every stage of the process.

Fiduciary Consulting

Co-Fiduciary Protection When you have the legal and moral responsibility to manage someone else’s money, you are a fiduciary. The word fiduciary derives from the Latin fiducia, which translates as trust or, remaining true. Investment fiduciaries endeavor to stand in the shoes and look through the eyes of those they serve. They provide the same coaching and advice to clients that they would to their own family members, close friends, or managing their own money. The opposite of a fiduciary relationship is a conflict of interest, which is a relationship structured in such a way that it becomes difficult for the advisor to “remain true.”

An Ideal 401(k) plan advisor likewise embraces serving your plan as a co-fiduciary—sharing in the responsibility to properly steward participant assets. It is important that your Ideal advisor acknowledge this co-fiduciary status in writing and diligently eliminate any conflicts of interest that may otherwise bias their ability to provide optimal and prudent advice.

Troubling Trends in 401(k) Investment AdviceA study by the U.S. Government arrived at several troubling conclusions with regard to 401(k) advisors’ failure to live up to their fiduciary responsibilityiii. Many 401(k) advisors have consulting relationships with both employers and with the mutual funds they recommend. This is a classic

example of the conflicts of interest prevalent in the 401(k) industry. Perhaps more worrisome, the

government study showed how some 401(k) advisors have affiliated broker-dealers

that offer incentives for the consultant to recommend certain products over more appropriate ones. No 401(k) plan advisor should ever accrue any benefit from commissions, finder’s fees, soft-dollars, or the splitting of money management fees. In fact, it is impossible to receive commissions while serving as a fiduciary.

As a steward to your employees, it is critical that you confirm that your advisor is

well-positioned to avoid real and perceived conflicts of interest. This is critical to minimize

liability under ERISA, Pension Protection Act, and other Department of Labor regulations.

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Top Investment OptionsThe Ideal 401(k) plan delivers low cost, asset class funds. Ideal strategies avoid market timing and de-emphasize strategies designed to attempt to “beat the market” through speculative security selection. Ideal plans offer a menu of index and index-like funds designed to provide maximum returns, given participants’ personal risk levels. The plan’s risk, return, and liquidity posture are, in large part, a function of the asset classes included in the portfolio. Research shows that more than 90% of participants’ volatility and return in their portfolio is due to their asset allocation decision. Accordingly, the Plan’s investment program should make available a variety of investment classes and diversified portfolio options.

The plan’s investment goal should be to provide a menu of investment choices that allows participants to earn the highest possible rate of return commensurate with their risk tolerance and personal constraints. The advisor ought to identify an optimal menu of funds by searching both institutional and retail fund universes. Meanwhile, your investment committee needs to know that a sound procedure for identifying funds (and replacement funds) is in place.

Maintaining top investment options requires a monitoring system to perform qualitative and quantitative reviews of each fund. These reviews include annual performance summaries that detail current and historical trends in performance and risk. The goal must be to assure that funds continue to be good choices for participants and to provide the building blocks to allow participants to develop and maintain truly diversified portfolios. Summary reports should highlight issues related to performance, costs, turnover, portfolio composition and style analysis, fund management issues, fund portfolio statistics and additional commentary.

Cost-Effective & Transparent Investments The lack of transparency in many 401(k) plans is tightly connected to high fees and commissions. Lack of transparency is such an important issue that Congress and the Department of Labor have committed to enacting transparency regulations to help solve the problem of cost disclosure for plan participants.

Costs matter. When 401(k) plans fail to make costs clear, costs inevitably escalate. Yet lower costs almost always result in better returns. Indeed, the only thing guaranteed in investing is that if you spend less you keep more. Participants should always understand their investments and their related costs. Plan sponsors should understand and minimize hidden costs. Providers should deliver annual summary reports that highlight short-term changes and long-term trends in fund cost data.

Total internal investment expenses must be reasonable and adequately disclosed by the

fund providers. Internal expenses include management fees, administrative

expenses, 12(b)-1 fees, transaction costs, bid-ask spreads and other

trading related costs. Bottom line, in the Ideal 401(k), mutual fund and other costs should be kept extremely low.

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7.Participant Success Kit Brand Name Recognition

There should be no mystery surrounding any fund or fund family offered to participants. Offering good, low-cost investment options from well-known investment companies helps increase participation. In the context of 401(k) plans, brands are very relevant. They are far more relevant than with private investors, who have the option to delegate investment decisions to advisors having the liberty and time to research a broader array of options that often include less familiar names. Participants are more confident and impressed when their plan includes well-known brand names they recognize. Two examples of fund families with excellent brand recognition are Vanguard and Fidelity.

Vanguard manages approximately $1.3 trillion in assets. They offer no-load mutual funds to individual and institutional investors in the United States and abroad. Founder and former chairman John C. Bogle is credited with the creation of the first index fund available to individual investors, the popularization of index funds, and for driving costs down across the mutual fund industry.

Fidelity Management & Research Company is the largest mutual fund company in the United States and serves more than 23 million investors through individual and institutional accounts. They are a household name—even for non-investors.

Brands increase confidence, provide familiarity, deliver consistency, assure certain quality standards, and allow management to highlight that they are pursuing excellence. Brand recognition ties in directly with the overall proactive approach to participant success in the Ideal 401(k).

Participant-Friendly ProvisionsWhen employees choose to participate in your company’s retirement plan, they should not be saddled with tough decisions and deadlines. Rather, the Ideal 401(k) makes employees feel like they have stepped on a conveyor belt that will take them to their ultimate destination: financially independent retirements with the same quality of life they enjoyed during their working years, if not better. The Ideal 401(k) plan eases the minds of participants by taking the effort out of saving.

Automatic Rebalancing & EnrollmentThe Ideal 401(k)’s automatic rebalancing feature can systematically maintain a participant’s chosen asset mix. To ensure the allocation strategy remains close to allocation targets, the Ideal advisor routinely and automatically rebalances the portfolio weightings on a scheduled basis. The benefit: rebalancing reduces risk and enhances returns. Automatic enrollment is a feature used to increase participation up front, providing yet another opportunity for employees to save more for retirement.

Innovative Savings Programs: A Brief Case StudyThe SMarT™ Program is an example of another proactive

approach to automatically increase participation. In a nutshell, The SMarT (Save More Tomorrow) Program

is a savings strategy in which participants commit in advance to allocating a portion

of future salary increases to their 401(k) account. Each time participants receive a pay increase, the program automatically increases the amount they save in their 401(k). Participants see their pay and savings increasing at the same time.

The SMarT Program is easy to administer and includes educational materials

designed to help participants understand the importance of abiding by their

commitments. It is important to note that such a program is easy for employees to commit to

since it costs them nothing today. Instead, they save more only when their pay increases. It is far easier

to save more in the future as opposed to realizing a reduction in take home pay today.

Specific studies provide evidence of SMarT’s success. The average saving rates for program participants increased from 3.5 percent to 13.6 percent over the course of 40 monthsiv. SMarT has many features that make it attractive to employees who want to save more to attain financial independence.

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Interactive Participant EducationIn the Ideal 401(k) plan, an educational program for employees provides learning opportunities at every stage of the planning and contribution process. Group enrollment meetings to discuss plan features are followed up with online education to lead participants to Ideal investment decisions for retirement. Webinars teach the step-by-step process of investment selection and decision-making.

Face TimeThe availability of advisors for face-to-face participant meetings is necessary in Ideal 401(k) plans. Here’s why: on-site meetings allow individualized questions from participants regarding funds, asset allocation, risk, return, savings levels and direction. To complement the face-to-face advisory meetings, the Ideal advisor should deliver a quarterly investment review letter to all participants, shedding light on market events, investment results and offer a market outlook. An interactive participant blog and direct access to personal investment information maintains participant enthusiasm and involvement.

The fundamentals of retirement investing are not difficult to grasp and can be very exciting to discover with the right material. Asset allocation, the risk-return connection and what diversification really means to your employees are basic concepts that well-educated employees can embrace to increase their likelihood of achieving financial independence.

Managed Participant ChoiceManaging participant choice means helping employees

make good choices without feeling as though they must become investment experts.

An Ideal plan engineers the options, technology and election process to

guide participants into automated solutions that deliver optimal

investment results. Of course, automation should not come at the expense of flexibility, and it is crucial to maintain a balance between the two, particularly as key employees will have unique circumstances that call for unique

solutions.

Employees should expect customized plan materials to communicate

investment options in a way that guides them through the election process. Participant

guidance can be achieved with colorful graphics of model portfolios and fund options that show the relationship between risk and return and the difference between aggressive and conservative options. Just as it is not enough merely to give employees the possibility to save, management must be skilled in proactively managing participant choice for the benefit of employees.

Turn-key Model PortfoliosUnfortunately, most 401(k) plans merely offer a wide array of fund options and leave it to the employees to figure out how to build an expert portfolio. Yet most of your employees do not have time or interest to become investment gurus. Recognizing this void, the Ideal plan also provides a variety of model portfolios engineered to maximize projected long-term returns at varying risk levels. These portfolios incorporate broadly diversified global asset classes and range from very conservative (low risk) to aggressive (potentially higher reward). The model portfolios are designed using Modern Portfolio Theory and behavioral finance. Instead of becoming an investment expert, your employees can elect pre-designed and well-diversified model portfolios appropriate to their age, risk and return preferences, income needs, and time until retirement. With no ongoing time commitment, they end up with an Ideal investment allocation tuned to their family’s unique needs and circumstances.

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7.The 10 Characteristics of The Ideal 401(k) Plan

The Ideal 401(k) PlanSM

SummaryThe Ideal 401(k) Plan

solves the problem of poor participation by executing

an organized, focused, and comprehensive range of retirement planning

services. Savant is committed to proving that The Ideal 401(k) Plan can be a reality.

The Ideal 401(k) Plan offers an integrated approach and optimal service based on prudent fiduciary

practices. This delivers better investment results along with higher employee satisfaction and retention.

An Ideal advisor coordinates plan design, fiduciary and investment consulting, manages your custodian

and administrator, and provides an employee education process that encourages participation. The

Ideal advisor bundles the appropriate providers and serves as your liaison and quarterback.

They simplify your employees’ lives. In keeping with prudent investment practices,

The Ideal 401(k) Plan provides select, low-cost investments within a fully

transparent, well-packaged and intuitive investment

process.

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1. 2. 3. 4. 5.EmployeeSatisfaction

FinancialSecurity

EmployeePeace-of-mind

Effective Education

Savant’s Retirement Plan Processes Work in Tandem to Deliver ...

The 10 Characteristics of The Ideal 401(k) Plan

Widespread Buy-in

Five Key Benefits of The Ideal 401(k) Plan

EmployeeSatisfaction

FinancialSecurity

EmployeePeace-of-mind

Effective Education

Widespread Buy-in

9.

Savant’s marketing material should not be construed by any existing or prospective client as a guarantee that they will experience a certain level of results if they engage the advisor’s services; and includes lists or rankings published by magazines and other sources that are generally based exclusively on information prepared and submitted by the recognized advisor. The advisor does not attempt to furnish personalized investment advice or services through this publication.

866.489.0500 | savantcapital.com

Savant Capital Management

Savant is a fee-only Registered Investment Advisor. Founded

in 1986, our mission is to help our clients maximize assets,

enhance the quality of their lives, and achieve personal and

financial goals.

Savant clients include investment stewards, retirement plans,

trustees, not-for-profits, and high-net-worth individuals.

Advising retirement plans, including 401(k) plans, is a core

competency. We have assembled one of the most experienced

teams of retirement plan professionals in our marketplace.

Savant has consistently received local and national

recognition. For the past seven years Savant has been named

by Barron’s magazine as one of the 100 Best Independent

Financial Advisors in the United States. In addition, Savant

has earned a place on the Bloomberg/Wealth Manager/

AdvisorOne “Top Dog” list for the past 10 years. Our hard

work and commitment to provide the best service and value

to clients has also earned us recognition by publications

including InvestmentNews (one of the 50 Largest Wealth

Management Firms in the Nation), Financial Advisor magazine

(A Top-Growing Independent RIA), BusinessWeek (Most

Experienced RIA List), Forbes (Top 50 Registered Investment

Advisor), and The Washingtonian (Top Money Advisors List).

Savant is the first investment steward in the world to have its

own internal employee 401(k) plan certified by The Centre for

Fiduciary Excellence (CEFEX) as “meeting fiduciary standards

of excellence and best practices.” Savant assists clients in

fully complying with ERISA, PPA, and Department of Labor

regulations.

We invite you to contact us to learn more about how we can

serve your company, management team, and employees. You

can also learn more about Savant, our team, and our firm’s

unique capabilities at www.savantcapital.com.

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i Teresa Ghilarducci, When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them, (Pinceon, 2007)

ii Entrepreneur and consultant Theodore Benna designed a simple plan to comply with the new tax code and marketed it to employers as a way their employees could delay paying taxes by making contributions to a non-taxable retirement account. He successfully marketed his first plan in 1980.

iii Staff Report Concerning Examinations of Select Pension Consultants, The Office of Compliance Inspections and Examinations, U.S. Securities and Exchange Commission, May 16, 2005

iv SMarT Program (Save More TomorrowTM) © Copyright 2004 by The University of Chicago. All rights reserved

Your Ideal Advisor:

Savant Capital Management

866.489.0500savantcapital.com

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