The Roth 401(k)/403(b): What Plan Sponsors Need to Consider - October 19, 2005Employer/plan sponsors and their advisors should consider the following important issues in determining if a Roth feature should be included in a new or existing plan. Employee Communications In addition to required disclosure requirements (e.g., SPD, SMM, Safe Harbor Notice), employers must be prepared to distribute comprehensive employee communications describing the new Roth feature. The single most important issue relative to communicating the Roth 401(k) option is to keep it simple. How the information is framed is the key to avoiding information overload.Employers should consider including some or all of the following information in the communications materials: 1) The amount of the 402(g) and catch up contribution limits, including that participants can contribute, if the plan so permits, to both the Roth and pre-tax accounts subject to the same overall limits as pre-tax only; 2) Roth contributions are subject to the same investment options and participant’s rights under the plan (e.g., matching and catch-up contributions, deferral change frequency, hardship and in-service distributions, if applicable) as are pre-tax 401(k) deferrals; 3) The net out-of-pocket difference between contributing a similar amount to either a pre-tax or Roth 401(k) account, and/or the after-tax equivalent contribution to a Roth as compared to the pre-tax contribution amount; 4) How changes in the participant’s marginal tax rate at the time of distribution may impact the value of the type of deferral; 5) If applicable, how an after-tax versus a pre-tax deferral may impact the participant’s ability to qualify for the maximum employer match; and 6) The rules to qualify for tax-free distributions from Roth 401(k) contributions. A chart comparing the features of the Roth versus the pre-tax option may be helpful as well, depending on the intended audience but again, the key here is to keep it simple. Similar to when the pre-tax 401(k) first became available in the early 1980’s and the Roth IRA first became available 1998, plan participants eventually will come to understand the nuances between Roth and pre-tax 401(k) choices as the lay press and institutional providers write more about these new options. View Sample Communications for Employees Business Owner and Key Personnel Needs Advisors and plan sponsors should consider if the addition of a Roth 401(k) feature is beneficial to the business owner and/or key personnel typically responsible for making plan design decisions, and those individuals charged with the responsibility to implement the requisite changes.What Will It Cost An employer/plan sponsor should expect to incur costs associated with some or all of the following relative to adding a Roth 401(k) feature to a new or existing plan.Employer Feasibility Study The representatives of the plan sponsor charged with the responsibility to make decisions of this nature should request a formal feasibility study from their service providers prior to implementation of this feature. The study should outline all issues and costs associated with the actions necessary to add the Roth 401(k) feature to a new or existing plan, and the subsequent ongoing administrative services including:Implementation ▪ Advisor and/or internal senior or administrative personnel time to research and outline all relevant issues relating to implementation, and ongoing recordkeeping and administrative services requirements ▪ Preparation of plan amendments ▪ Preparation of revised SPD or SMM ▪ Preparation of modified forms ▪ Preparation of Employee Communication ▪ Presentation of Employee Communications Recordkeeping and Administration Reprogramming for: ▪ Payroll processing ▪ Compliance testing ▪ Reporting ▪ Participant accounts
View Table of Contents of for Plan Sponsor Feasibility Study View Sample Employer Communications Commentary Many practitioners and service providers continue to sit on the fence relative to discussing the Roth option with their clients while waiting final guidance from the IRS. Nothing in the final guidance will change the fact that the Roth option provides a unique opportunity for savings. In presenting the Roth option to our clients, their only question is why shouldn't I do this? We answer that cost for implementation and ongoing compliance services is a consideration. However, considering the opportunity to invest in taxable investments within a tax-free environment, the Roth option is a no-brainer for any participant interested in maximizing retirement benefits or any HCE whose contributions are limited by the "test." Think about it... just compare the outcome when investing after-tax dollars in a tax free bond or taxable stock account (subject to capital gains tax) vs. investing in taxable stocks and bonds (that pay higher interest rates absent higher investment risk) within the tax-free Roth environment. View article: Maximum Roth 401(k)/403(b) Limit Equates to a $30,769 Pre-tax Contribution Journal of Pension Benefits features articles on Roth 401(k)/403(b) If you want to learn more about the Roth 401(k)/403(b) pick up a copy of our guidebook: Pay Uncle Sam Now or Pay Him Later? or the Autumn 2005 issue of the Journal of Pension Benefits. The Journal features an article by yours truly on the benefits of the Roth, another by Lawrence Starr on why it may not be such a good idea, a third by Melanie Knox on unanswered questions and a forth article on administration issues by J. Reed Cline. Kudos to the editors, Joan Gucciardi and Ilene Ferenczy, for a great compilation of differing views on this timely subject. Copies of the Autumn issue can be purchased at: www.aspenpublishers.com. Roth 401(k) or 403(b) Employer Guides
ERISA Expertise LLC offers employer guides in 3 different formats:
© 2005 ERISA Expertise LLC All Rights Reserved The information provided is intended as a general resource, not as investment or retirement planning, or legal plan compliance advice or counsel. If you consider any actions discussed in this update, we suggest that you consult a qualified planning, tax or ERISA professional. ERISA Expertise LLC and Barry R. Milberg do not warrant and are not responsible for any errors and omissions from this update. Any tax advice included in this written or electronic communication is not intended or written to be used, and it cannot be used, by the taxpayer for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.
| ||||||||||||||||||||||||
