Improve Your 403(b) Plan by Adding the Roth Option

Richard H. Ford

In its “How America Saves” 2017 report, mutual fund giant Vanguard makes it clear that adding a Roth option to the plan makes an important difference in improving participation in the plan.

According to the report, 30% of Roth participants are age 34 or younger. Often, it is the younger participants who generally are not motivated with the income tax deferral benefit when saving their dollars on a pre-tax basis. This is most likely because it is the younger participant who is in a lower income tax bracket. These are the employees who take advantage of the after-tax contributions to their 403(b) plan in exchange for tax-free distributions in the future. 

Interestingly, however, 12% of the Roth participants are age 55 or older. These are likely employees who have already accumulated pre-tax savings and are interested in balancing retirement savings so that a portion of their retirement assets won’t be subject to income tax when withdrawing money from their account in retirement. Finally, the report tells us that the percentage of plans offering the Roth option have increased in 2016 to 60%, compared to 49% offering the plan feature in 2012. 

Plan sponsors that have hesitated to make the Roth option available in their plan are said to be making that decision based on the perception that adding and managing the option is simply too complicated, when, in fact, it is not complicated at all.

Steps to Follow

1. Check your plan document to be sure it does include the Roth language. If it doesn’t, ask your document provider to add that provision. In many cases, the language will already be in your plan document, and you simply need to use the Adoption Agreement to make the option available.
2. Notify your product providers that you are adding the option. At the same time, require their signature on the language in your Service Provider Agreement which requires the provider to segregate the Roth assets from the pre-tax values in the account.
3. Let your employees know that the option is now available to them.
4. Remind your payroll staff to treat the Roth contributions as after-tax so that federal and state (in some states) income taxes are withheld. Ask payroll staff to add the Roth option to the 403(b) Salary Reduction Agreement as separate check box.

There are additional optional steps you can take to ensure the success of your Roth option, including your requirement that the financial advisors servicing your employees provide comparisons of pre-tax contributions versus after-tax Roth contributions. And, you may want to offer a series of educational workshops on the Roth option. Those workshops can also be designed to promote financial education for your employees.

The final result will be a greatly increased level of interest and satisfaction with the 403(b) plan without creating an extra level of administrative burden. Additionally, the activities surrounding the addition of the Roth option will help satisfy the IRS requirement that Plan Sponsors offer an education program to comply with the effective “meaningful opportunity” requirement of the universal availability rule. 

Your designated TPA can offer an IRS pre-approved plan document with the Roth language, as well as a sample 403(b) Salary Reduction Agreement which permits both pre-tax and after-tax Roth contributions. 

Richard H. Ford is Senior VP Chief Marketing Officer at PlanMember Services. 

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.

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