When congress passed its fiscal cliff package for 2013, they included new provisions regarding Roth 401(k)s.  Unfamiliar with Roth 401(k)s?  They offer tax free withdrawals for retirees who invest with after tax funds.  The Roth is appealing to those who expect to pay more in taxes in the future than they do now.  Roth 401(k)s can also help to reduce retirees’  taxable income upon which Social Security is taxed and Medicare premiums are calculated.

The new provisions allow any participant in a 401(k) plan, regardless of how close to retirement they are, to convert all or part of their traditional 401(k) into a Roth 401(K) and continue to contribute to the Roth 401(k) with after tax income if the plan offers the Roth option. Participants would pay taxes on the funds they choose to convert and any company pretax matching funds would be maintained in a separate, traditional 401(k) where taxes would be paid out when the funds are withdrawn.

A few concerns for the Roth 401(k):

• The conversion to a Roth 401k is not reversible -  Unlike a Roth IRA that allows a participant to change his/her mind and avoid paying taxes, if a Roth 401(k)’s assets decline in value after conversion there is no way to reverse the movement and taxes are still owed on the original value.
• Participants cannot split the tax payment – Unlike a conversion from an IRA or traditional 401(k) to a Roth IRA that allows participants to split the payment of tax liability into two years, a 401(k) conversion to a Roth 401(k) is paid all in one tax year.

Is your plan sponsor considering offering a Roth 401(k)?

How are they planning to handle the additional responsibilities associated with ensuring participants are educated on the tax consequences and benefits of the Roth 401(k)?

Most of today’s professionals expect to work for more than one employer within their lifetime.  Multiple employers may mean multiple retirement accounts.  As participants move from one employer to the next, they may lose track of those accounts with smaller deferral amounts.  Plan sponsors should be motivated to help those inactive participants keep track of and recoup their deferrals.  Keeping only active participants in the plan can help keep the plan’s costs down and, if the plan falls below 100 participants, eliminate the need for an annual audit.

The best practice for plan sponsors is to remind terminating participants that they may have the option to rollover funds to an IRA or another employer’s 401(k).  If plan sponsors lose track of inactive participants and alternatives such as internet searches and emergency contacts don’t produce results, plan sponsors may post participant names to the National Registry for Retirement Benefits for free.  This might give the inactive participant the opportunity to collect the account if it occurs to the participant to search the database.   As a last resort, plan sponsors may employ the letter forwarding services of the Social Security Administration, but be warned, they will charge a non-refundable fee for this service and will not confirm delivery or tell the plan administrator the location of the inactive participant.

A recent Frontline documentary “The Retirement Gamble” aired on PBS preaching doom and gloom for 401(k) Plans.  It navigated its way through the turmoil of the stock market over the last 13 years emphasizing the risks that participants are “forced to shoulder as they struggle to save enough for retirement.”  According to the broadcast, many participants don’t know of the fees associated with their 401(k), fail to calculate the amount of savings they will need to retire, and take advice from brokers and agents, who may have monetary motivation for their recommendations.  With all these problems, the documentary leaves the impression that the system is broken and should be scrapped all together.

While it is true that the creation of 401k Plans transfers more responsibility for retirement savings to employees, all hope is not lost.  401(k) Plans are a tool better suited to a modern workforce where employees will often experience multiple job changes throughout their lifetime.  There are multiple methods and tools employers may use in connection with  a 401(k) Plan to help participants understand their 401(k) Plan and the risks related to retirement.   A well designed plan, administered by an employer that has the best interests of its employees in mind, helps mitigate the pitfalls within a 401(k) Plan.

With all the recent negativity in the news media surrounding the future of retirement in America, how do you keep plan participants motivated to secure their future?

How do you help with the pessimism that can lead them to stop planning for the future?