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The Ideal 401(k) Plan
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The following is the second in a series of six Savant position papers.
The mission of this series is to enable managers to aspire to excellence in their role
as investment stewards regarding their employees’ retirement plan assets. This
edition will provide assistance in packaging and administrating a 401(k) plan by
giving technical counsel on effective plan design and best practices.
www.savantcapital.com/ideal401k
Savant Plan Design & Coordination Tools
Characteristics of
The Ideal 401(k) Plan
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Optimal Plan Design
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uilding an ideal 401(k) plan starts with a well-designed
custom blue print. Just as a one-model floor plan
doesn’t fit the needs of all home builders, so too is the
case with Plan Design. Each plan sponsor, their management team,
and participants have varying needs and wants. The goal is to find
a balance that benefits all constituents.
Deciding which building blocks are appropriate can be
burdensome, confusing, and time consuming. Savant’s seasoned
professionals provide the technical counsel to assist in making
the appropriate decisions to meet the objectives of all plan
constituents; ultimately providing an optimal structure.
Choices, choices, and more choices can drive a plan sponsor crazy.
Making the right choices can have a great impact on the success of the plan.
Plan Design: Where To Start?
Decisions That Should Not Be Taken Lightly
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Eligibility - What age should an employee attain before entering the plan? Age 18 is the most common. An age limit is not
required, but if imposed, cannot exceed age 21. Consider the demographics of your employees. It is important to determine if
and at what age you would be excluding or including a sizeable group that could impact non-discrimination testing or employer
contribution requirements.
How long should an employee work for the company before having the ability to benefit from the plan? Does it make sense to
have them immediately eligible or to attain a year of service (a typical selection)? Does the same eligibility apply to employer
contributions and what impact would that have on the company’s funding? Providing an accelerated eligibility period for
employees to defer their own contributions may be viewed by prospective employees as an immediate benefit they receive
upon being hired. Many key employees (particularly professionals) appreciate this benefit.
Even something as simple as an entry date can have a big impact on the operation and administration of your plan. Early
admittance of employees can be more costly, however, if these same employees are likely to contribute and increase deferral
averages, the cost may be worth it.
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Employer Contributions - What level of financial commitment can the company afford to dedicate to the plan? Perhaps it makes
sense to include a Safe Harbor contribution to avoid non-discrimination testing challenges. Discretionary contributions are
more appropriate for companies with less predictable profits. Company objectives are vital to this area. Does the benefit entice
an employee to take advantage of the plan? Are key employees given the opportunity to maximize their account? Does providing
a Safe Harbor contribution assure that highly compensated employees can fully participate?
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Vesting Schedules - Being too generous can be costly to an employer with a great deal of personnel turnover. A more liberal
schedule may be needed to attract and retain highly qualified employees, minimizing the desire to gravitate to the competition.
The maximum term schedule is a 6 year graded schedule. This requires an employee to remain with your company for 6 years in
order to receive full benefit of any discretionary employer contributions. You can establish a more liberal vesting schedule such
as a 5 year (20% per year), 3 year immediate, or anything in between.
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Withdrawal Options - A very common question asked by new participants is “When can I get my money out?” Seems like an
odd question when they don’t have money in the plan yet, but portability can be important in their minds. Features such as loans
and hardship withdrawals can be an administrative burden, but may be necessary to increase participation. Before considering
these options it is helpful to know your participants and how they would use these features; in dire circumstances or habitual
abuse of the availability. In-service withdrawals at age 59.5 are very common, coinciding with the elimination of the 10% early
distribution penalty.
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Accessibility - The traditional (balance forward) plan seems a bit archaic with today’s technology. Receiving an annual, semiannual, or even quarterly statement doesn’t seem to be enough anymore. Because of the informational world we live in, plan
participants expect to have plan data at their fingertips 24/7; this is known as a daily valued plan. Daily valued plans allow
participants to access their account balances online and trade any business day if they desire.
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Investment Options - What type of options do you give your plan participants, if any at all? Some plan sponsors still use a trusteedirected option, providing a managed pooled account for all participants. This is more typical for employer contribution sources
such as a profit sharing account. This gives the plan sponsor more control over how the contributions are invested. More often
than not, 401(k) plans are participant-directed whereby the employee can choose among a menu of investment options to invest
all or a portion of their account balance. It is important to give your participants choice, but not too much choice. Make sure
all appropriate asset classes are covered for participants to be able to build an efficient portfolio. An optimal mix of asset class
funds could include 12-15 different options.
Safe Harbor: A regulation that protects individuals or corporations from the legal consequences of certain actions.
One common safe-harbor provision allows employers to make a fixed employer contribution (flat percentage or match)
that must fully vest immediately. This eliminates certain non-discrimination tests to assure key employees are able to
maximize annual contributions.
In-Service Withdrawal: A distribution from the plan before the participant reaches a triggering event (e.g. retirement,
termination, disability, or death).
Plan Design Considerations
The following chart gives a sample of the types of selections you need to make in order to design an ideal 401(k)
plan. Of course we don’t expect a plan sponsor to do this on his own. By obtaining some key pieces of information
regarding the obstacles you have faced with your current plan and the objectives of providing a better plan to
employees, your retirement plan consultant can assist in selecting the features that complement one another and
provide the optimal design to accommodate the needs of all constituents.
ELIGIBILITY
None
AGE
Employee base should be considered
such as turnover of younger employees.
18
21
None
If high turnover rate exists, would want
longer service requirement to avoid
short-term participants. Early eligibility may
also result in higher employer contributions.
1 month
SERVICE
3 months
6 months
1 year
Immediate
1st of month following
ENTRY DATE
Consideration should be given to the
administration necessary to monitor
participant entry. Missing a participant
can be costly due to mandatory correction
methods and penalties imposed.
1st of quarter following
Semi-Annual
Annual
Other
EMPLOYEE CONTRIBUTIONS
Offered
Allowing employees to defer up to the
maximum allowed is most beneficial.
Not Offered
No reason to not allow unless employer looking
for straight profit sharing only plan.
Offered
Allows employees to defer on post-tax basis.
Not Offered
No reason to not allow; some providers
charge additional fees to administer.
Offered
Permits employees to transfer other
plan balances into the plan.
Not Offered
No reason to not offer unless employer is covering
costs and doesn't want the expense.
401(k) DEFERRALS
ROTH DEFERRALS
ROLLOVERS
VESTING
Immediate
Employees are 100% vested immediately upon entry into plan.
3 year cliff
Employees are 100% vested after completing 3 years
of service; any service less than that is 0% vested.
5 year graded
A five year schedule provides 20% vesting for each year of service earned; thus
after 3 years an employee would be 60% vested with full vesting after 5 years.
6 year graded
The maximum vesting schedule allowed is the 6 year graded. Much like the 5
year schedule except no vesting is earned during the 1st year of service.
DEATH
Immediate
It is optional to provide immediate 100% vesting upon
a participant's death regardless of the years of service.
DISABILITY
Immediate
It is optional to provide immediate 100% vesting upon the
disability of a participant regardless of the years of service.
EMPLOYER
CONTRIBUTIONS
EMPLOYER CONTRIBUTIONS
Providing a Safe Harbor contribution eliminates the ADP and possibly the ACP test, thus allowing maximum
deferral rates for highly compensated employees. Contribution is automatically 100% vested.
Basic
Requires 100% match on up to 3% deferrals and 50% on next 2% deferrals.
Only those deferring receive the contribution.
Enhanced
Must be at least as aggressive as the basic, but can
provide larger amount. Again, only those deferring
receive the contribution.
Non-elective 3%
Requires a 3% contribution to all eligible employees. This option is widely used
when discretionary profit sharing contributions are made especially with a New
Comparability feature.
Fixed Formula
A fixed contribution is committed; such
as 25% on the first 6% of deferrals.
Discretionary
The deferral rate considered may be fixed, but the
level of contribution may vary from year to year.
Comp to Comp
Formula provides allocation based on employee’s
compensation to total eligible compensation.
Integrated
A method to provide employees earning over the
taxable wage base a larger share of the contribution.
Age-Weighted
Larger contributions may be available to older employees.
New Comparability
Allows contribution rates by defined groups. Substantially
larger contributions may be available for key employees.
This formula requires special non-discrimination testing.
SAFE HARBOR
STANDARD MATCH
DISCRETIONARY
PROFIT SHARING
WITHDRAWALS
LOANS
Offered
An optional feature that can be burdensome to administer,
but tends to be a desired option among employees.
Not Offered
An optional feature with restrictions available to minimize usage.
Permitting withdrawals only from selected sources of money, for Safe Harbor
purposes only (reasons as defined by the IRS), and/or available upon obtaining a
certain age are some examples of restrictions that may be imposed.
Offered
HARDSHIPS
Not Offered
IN-SERVICE
Offered
Permits an employee to withdraw from his/her account while still employed.
Typically a specific age (59.5) must be reached before eligible to request.
NORMAL RETIREMENT
Age 65
The normal retirement age stated provides full vesting and distribution options
upon obtaining. Age 65 is the maximum age permitted.
EARLY RETIREMENT
Age 55 and 5 years
An early retirement age may be selected and provides the same benefits as
normal retirement. This normally requires both an age and a service period.
ACCESSIBILITY
Daily
A cash basis reporting system with account values available as
of close of market each day. Typically participants can access,
view data, and process transactions via website.
Balance Forward
An accrual-based reporting system with account values available
following the completion of a specified period (e.g. quarterly, semi-annual,
or annually) with a hard copy statement provided to each participant.
VALUATIONS
INVESTMENTS
INVESTMENT
CHOICES
Trustee Directed
A pooled investment option with all participants’ investments
aggregated together. Can be utilized for specific types of
contributions such as employer profit sharing.
Participant Directed
Provides for a menu of funds and/or model portfolios from
which a participant may choose. The menu should provide
adequate investment options to comply with 404(c) regulations.
QDIA
A Qualified Default Investment Alternative provides
a plan sponsor 404(c) fiduciary liability protection when
a participant fails to make an investment election.
This is a large sample of the choices available when designing a plan. There are other options available and other criteria that must be decided in completing the plan documents.
The highlighted options above indicate the most popular choices made among retirement plans.
This does not necessarily mean it is the best option for your plan as plan objectives vary by employer.
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Advanced Daily Administration
and Recordkeeping Technology
How do you build the right platform to deliver the ideal 401(k) plan?
Cutting-edge technology and attention to detail enhance the results, efficiency, and communication central to an effective plan.
Providing ideal 401(k) plan administration and technology means offering a safe, quality, and accurate plan management system.
For the system to be an effective tool to all three plan constituents (plan sponsor, management team, and plan participants), it
should include:
Flexibility - ability to provide the parameters of your plan design. A plan should not be designed around system limitations. An
open fund architecture should be available to accommodate the investment menu.
Simplicity - paperwork and manual processing often associated with the day-to-day administration of a 401(k) plan should give
way to streamlined processes including on-line initiation and approval of plan activities.
Plan Sponsor Portal - Plan sponsors and management
should expect and demand…
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electronic access to plan documents and signature
ready forms
the ability to edit and view employee information
capability to upload or key payroll information directly
into the system
potential to electronically approve or deny requests
along with automated notification of requests made
a complete menu of reports to print or download in a
variety of formats. Information available should include
plan statements, investment activity, distributions, and
participant statements
an internal e-mail system to provide communication
with plan participants, plan advisor, and other service
providers as desired
Plan Participant Portal - Your employees should have access to…
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online data entry or printed materials (dependent on electronic
capabilities) with step by step tutorials offering in-depth content
and a variety of tools to maximize participation
an education center with investing and retirement savings materials
including articles, guides, interactive calculators, glossary of terms,
market research, and fund charts
an interface to initiate various activities with ease; with the system
allowing only those transactions applicable to the participant to
avoid confusion and misunderstanding
the prospectus and information available for each investment to
help participants make educated investment choices to meet their
objectives
performance applicable to their activity during any specified period
on-demand statements and trade history
Data Accuracy and Security - Look for a system that applies high standards in protecting
the confidentiality of your plan information. For site security, the system should provide
encryption for all data transmitted and employ firewall software programs that monitor
network traffic.
Servers located within a secure, caged environment at a premier hosting facility typically
provide 24-hour defense, power, and communication systems to prevent unauthorized
access (physically and electronically).
Does your plan measure up to the Ideal 401(k)?
Plan Services
Ideal 401(k)
Plan
Plan Design and Documentation
Seasoned Professionals with Plan Design and Administrative Expertise - at your
fingertips to assist you with engineering features and capabilities that are attractive to plan
participants; meets the corporate objectives; and simple to operate and maintain.
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Continual Coaching - an advisor available to guide you along the way as company
dynamics evolve, regulations change, and participants' knowledge and needs develop.
Auto-enrollment capabilities - a proven method of increasing participation, recruiting and
retaining qualified personnel, and improving non-discrimination testing. Attractive incentives
may be available with the right plan design.
“SMarT” program - offering a prescriptive savings plan to afford participants the ability
to reach retirement goals with a regimented process for maintaining and increasing
contributions.
Compliance with ERISA, PPA, DOL, and 404c - keeping the plan document and operations
in compliance with regulatory policy is a critical aspect to the success of a plan. This includes
executing mandatory amendments, providing participants and beneficiaries timely notices and
disclosures, while insuring the plan provisions are being followed as intended.
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Advanced Technology
Participant Account Access and Management
Online Access - easy to use applications for enrolling into the plan, reviewing account
information, performing account maintenance, and requesting information from a stateof-the-art facility utilizing 24-hour defense, power, and communication systems to prevent
unauthorized access.
Education - a retirement center to help participants with fundamentals of investing,
understanding plan concepts, a suite of interactive calculators, and a gateway to market and
fund research.
Fund Descriptions/Prospectuses - with the quick click of a mouse a display of all the
funds available including the prospectus and fact sheets.
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Statements, Forms, and Processing - on-the-spot access to view account activity, request
a statement with user defined dates, initiate various transactions including distributions and
loans (based on plan provisions) , and access to plan documentation such as the Summary
Plan Description and current event newsletters.
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Plan Sponsor Access and Management
Online Access - an effective, flexible system providing streamlined administrative
processes, reducing paperwork and manual handling.
Plan Reports and Statements - detailed reports including on-demand statements,
contribution logs, distribution processing, and other activity history. Reports available in a
wide variety of formats for printing, saving, or exporting. Access to an online library of plan
specific documents including adoption agreements, amendments, and government filings.
Contribution Processing - allowing authorized user(s) to upload or key in data to a user
friendly system with an automatic validation service that identifies any errors or violations.
Investment Activity - detailed listings of trade activity available to participant with filtering
capabilities.
Employee Census - add and modify employee data timely and easily through an import
filter or manually through a web interface. Employee data would include address, dates, and
communication data with the ability to manage by divisions, locations, departments, or other
venues.
Distributions, Transfers, and Loans - requests reviewed, approved, or denied online.
Ability to view pending applications as well as initiate transactions on behalf of the
participant.
Plan Messaging System - portal to post bulletins and interact with participants, advisors,
and other interested parties through an intuitive communication system.
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Current Plan
Provider
Savant Capital Management
866.489.0500
savantcapital.com
Revised 1/14