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plan account provides an assurance that
the individual has a future hedge against
taxes upon retirement. According to
Murphy, most participants will choose a
specific dollar amount, for purposes of
tax diversification.
Taxes can play a part in considering
how much money to convert, notes Jana
Steele, senior vice president and defined
contribution consultant at Callan in
Sandy, Utah. " If you're going to convert
your entire balance, depending on what
that balance is, [taxes] can be a significant
amount, " she notes.
Once participants complete a
conversion, they are issued a record of
the amount, which will be included as
income for that year, says Murphy. Going
forward, dollars converted will be treated
as Roth dollars, as well as any earnings
on that money. As long as the money
remains invested for five years, it will stay
tax-free for retirement.
Roth DC plan accounts can serve as
a notable benefit for some participants.
For those in a low tax bracket now who
expect to be in a higher bracket in retirement,
a Roth could be preferable to a
traditional 401(k)-Roths can get tax
obligations out of the way.
Steele says lower taxes are dependent
upon legislation, such as the Tax Cuts and
Jobs Act passed in December 2017. " The
way the act was written, individual tax
rates will increase over five years, which
means that participants know they're
paying a lower tax rate now than in the
future, " she says.
Although distributions may be
taken from a Roth individual retirement
account (IRA) at any time, if participants
want a penalty-free distribution from a
Roth DC plan account, they must meet
specific requirements.
Steele reiterates the need to keep
money invested in a Roth for at least five
years in order to receive the tax efficiencies.
" And, as with all retirement vehicles,
the account holder must be 59 1/2 or
older, " she says.
Sponsor Considerations
For plan sponsors that are thinking
about adding a Roth feature to their
plan, Steele says, it is important to
amend their plan document and update
their summary plan description (SPD).
She recommends a strong educational
outreach to help participants comprehend
the complicated benefit.
Even before adding the feature, plan
sponsors should run a " test " to determine
the Roth's impact on deferrals being
made to the plan, Steele suggests.
" We'd recommend doing a cost
analysis or a cost review in order to
understand if there'd be any implications
as to the actual cost to the plan or
any as to [discrimination] testing from
ongoing Roth contributions, " she says.
Unlike other after-tax contributions made
by participants, Roth contributions are
included in the actual deferral percentage
(ADP) test and not the actual contribution
percentage (ACP) test.
Understanding how conversions
may affect the plan will help the sponsor
formulate the amendment, Steele says.
The document should include what
sources of assets participants may
convert-a plan may permit amounts in
pre-tax, match, after-tax and/or profitsharing
accounts to be converted-and
when the actual converting will take
place. Further, the sponsor should determine,
and cite, what actions the recordkeeper
will take in the process, she says.
" Not all recordkeepers can administer
KEY POINTS
* A Roth conversion takes defined contribution retirement account
assets that have been saved on a pre-tax basis and converts them
into Roth dollars; these are taxable that year.
* Before adopting this feature, plan sponsors should run an overall
operational analysis, plus a " test " to determine the impact of Roth on
deferrals being made to the plan, experts say.
* Because of Roth's complexity, experts suggest participants receive
comprehensive education, plus individual advice, about the
accounts and conversion.
Roth in-plan conversions with the same
degree of flexibility, so plan sponsors may
be curtailed somewhat, depending on who
their recordkeeper is, " Steele observes.
" We always explain the process and
how long it takes, for the most part, " says
Murphy, " and we work with employers
on communicating to their employees
how it works. We would want to develop
a campaign so that employees are aware
of their options and are getting the education
they need to make the right decision. "
Educating Participants
Given the complexity of Roths, Murphy
recommends sponsors provide ample
opportunities to clarify how the accounts
work. " Roth is an area where we always
advocate for more education-not only
about conversions but Roth in general. "
Steele says the typical approach is
to forge a large educational campaign
that explains Roth's features and how
the vehicle can be used. To that end, she
believes in adding personalization and
customization, to increase the impact.
" By providing the specific account
balance or [citing] the different [financial]
sources the participant currently has
in the plan, it becomes a more intimate
conversation, rather than a less specific
blast that doesn't address the participants'
current needs, " she says.
Murphy agrees, saying it all boils
down to understanding participants'
needs- " getting the right message to the
right person, " she says.
-Amanda Umpierrez
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