Improved Participant Experience: Roth Contributions

This is part of a series of posts focusing on how plan sponsors can improve participant outcomes and simplify participant choices through plan design considerations. You can find the introduction here and the piece on re-enrollment here.

As a primer, adding a Roth feature to a plan simply allows participants to choose to contribute after-tax money to the plan; then, upon retirement, the distributions from the Roth contributions, and any earnings are not subject to ordinary income tax. If you’re interested in more details, a good place to start is our Roth 403(b) FAQ or Roth 401(k) FAQ.

Adding a Roth feature to a retirement plan generally comes up for one of two reasons. One, a participant asks if the option is available. Or two, it is part of a checklist during a plan transition, either through a change in recordkeeper, a 403(b) move from individual annuity contracts to group/custodial contracts, or during a plan document restatement. Generally, the adoption of Roth features in plans has grown, while utilization among participants remains relatively low. By way of example, in Vanguard’s recent survey How America Saves 2019 they note that at the end of 2018, 71% of the plans recordkept at Vanguard had a Roth feature and 11% of participants in those plans had elected to use the option.

Adding Roth can have positive benefits for both the plan sponsor and participants.

  • Roth contributions can allow participants to diversify their future tax liability of their retirement account and potentially hedge against taxation risk
  • Highly compensated participants who are not eligible for Roth IRA contributions are not subject to the same adjusted gross income restrictions when making Roth contributions to a 401(k) or 403(b) plan
  • Those participants not subject to the adjusted gross income restrictions could make contributions to a Roth IRA and Roth contributions in a 401(k) plan or 403(b) plan
  • Participants interested in making Roth contributions can choose to make those contributions into their retirement plan account rather than an outside Roth IRA – benefiting from institutional investment pricing of qualified plans
  • If the plan allows, participants can consolidate Roth retirement accounts by rolling over prior Roth 401(k) or 403(b) balances, respectively.

However, there are other considerations, most of which are administrative in nature, but some of which may be cost prohibitive to the plan.

  • Adding a Roth feature increases the complexity of the plan’s administration slightly by adding an additional money source to be contended with in the payroll file and recordkeeping platform.
  • It would likely require a change to the payroll file provided to the recordkeeper or TPA; for example, an additional column(s) may need to be added to the payroll file, which may result in additional one-time fees from the payroll provider.
  • It adds complexity and increases the number of decisions required of participants enrolling in the plan.
  • It would require a plan amendment which may incur extra fees.
  • It would also require additional notices as well as an updated Summary Plan Description or Summary of Material Modifications.
  • Depending on the payroll deduction set-up, the website or a paper form will need to be updated to reflect the opportunity to make Roth contributions.

Ultimately, Roth utilization by participants remains low, but if changes are already being made to the plan document and/or the payroll file, adding a Roth feature it is a fairly simple change that may benefit participants.

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

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