Roth 401(k) Knowledgebase

Plan Sponsor Information

To determine if and when a Roth 401(k) is a desirable option for a new or existing plan, employer/plan sponsors and their advisors should focus on the technical and operational requirements as discussed in the previous chapter as well as the following important issues.

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

Sample Implementation Schedule

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