This article originally ran on October 7, 2014.
By Ellie Lowder, TGPC, Consulant
We acknowledge that most 403(b) non-ERISA plans do not include employer matching contributions, which may decrease motivation for employees to enroll. In a recent article, we talked about the importance of increasing participation rates in 403(b) plans, as being vital to the success of the plan. We offered several suggestions that employers can implement to encourage more employees to participate in those plans.
Are there other recommendations for increasing participation in the plans? Yes! Adding the Roth 403(b) option to the plan will appeal to a wider audience of employees. As an example, we know that younger employees, currently in low income tax brackets, may not be particularly interested in income tax deferral (because they tend to believe they will pay higher income taxes when distributions are taken many years down the road).
Those same employees, however, will be motivated with the opportunity to save after-tax dollars in the Roth option, in order to look forward to a significant number of years in which growth or earnings can be accumulated, and ultimately, distributed tax free. We also find employees who have accumulated substantial amounts in their pre-tax accounts, and are now looking for a way to balance retirement savings with tax-free distributions. In an Aon Hewitt research report we also learn that employees are likely to save more in the Roth option than in the pre-tax option (10.2% when using the Roth account vs. 7.7% when using the pre-tax account).
Yes, I agree that I should add the Roth option to my plan. How difficult is that to do?
Fortunately, it is not difficult at all. Your TPA and your product providers will help you take the steps, including:
- Adding the Roth option to your plan by checking that option on the adoption agreement which is a part of your plan; then, double checking plan document language to be sure it includes the Roth.
- Communicating the addition to your product providers. Ask your providers to sign an amended service provider agreement in which it is agreed that the product provider will, as required by the law, segregate and separately account for the Roth contributions and growth or earnings. In that communication, you should require that the financial advisors representing each of the product providers offer comparative information for pre-tax contributions versus contributions to the Roth. You may find that some of the providers do not offer the Roth option, and you will want to, in the communication which announces the addition to your employees, include a list of the approved providers, along with a note for each of the availability of the Roth option from that provider.
- Communicating the addition to your employees. Of course, it is important to let your employees know the Roth option is now available. Ask your TPA or product providers to help with preparation of that communication so that an overview of the Roth features is included. At the same time, add information about the Roth option to the financial literacy or financial wellness workshops you are offering your employees as a part of your employee education program (which, incidentally, also contributes to IRS satisfaction that you are providing meaning opportunity for employees to participate as required under the universal availability rule).
- Be sure your salary reduction agreement reflects the addition, and familiarize your payroll department with the treatment of Roth contributions requested on that agreement. (Your TPA and product providers will be happy to conduct a “mini” training session for your payroll staff).