In Plan Roth Conversions

The Small Business Jobs and Credit Act, which was signed by President Obama in September 2010, permits 401(k) and 403(b) plans that have a Roth deferral program in place to also provide for an in-plan Roth rollover provision. This will be extended to 457(b) plans for plan years beginning after December 31, 2010.

An in-plan Roth rollover feature allows a participant who is eligible for a distribution to roll any vested amount to an in-plan Roth rollover account. If amounts are converted in 2010, the taxpayer can choose to recognize the income in 2011 and 2012 instead of in the year of the roll over.

Previously, a participant who wanted to convert to a Roth had to do this outside the retirement plan by rolling the money to a Roth IRA.

For more general information on implementing this feature, please follow the link to more frequently asked questions. Click here.

Senate Passes Roth 401(k) Rollover Provision!

Today, the Senate passed a small-business jobs bill, H.R. 5297, which among other things would allow employers to amend their 401(k) plans immediately to allow participants to roll over pre-tax account balances into Roth 401(k) plan accounts.

The House has not yet acted on the proposal, and it remains to be seen if this will make into law. However, this step by the Senate is a very encouraging sign that this feature will at some point make it into law whether attached to this bill or some other.

According to the bill, it would also allow for some spreading of immediate tax over several years. For example, if a participant were to convert their pre-tax deferrals to a Roth 401(k) this year, taxation could be elected to be paid in 2011 and 2012.

We see this as a big step in increasing tax flexibility to be in line with what is currently available in IRAs. Additionally, another very real benefit is that in 401(k)s, often times the institutional pricing structure of the underlying investments makes this a better deal than for those in IRAs where mutual funds and the like are generally retail priced and thus more expensive. If passed, this could be a strong incentive for investors to finance their retirement from their 401(k) Plans rather than rolling to IRAs and financing that way. Every bit helps especially with the coming wave of retiring baby boomes.

Hodge Podge, Loose Ends and Good Ideas....

Over the past few months there have been a lot of topics being discussed as various bills get proposed, some get passed, many sunset and others get extended. Some of the topics that have been written about repeatedly include “Roth or Not Roth”, the issues of the proposed participant-level advice regulations, the old argument of passive vs. active and even a resurgence in the question of which is better Collective Trusts or Mutual Funds. Each one of these could render itself to lively debate on its own. Instead, what we thought we’d do is put together a few different, smaller thoughts, in one place that on their own aren’t enough to make a full discussion. Here goes:

Idea #1: For those of us operating in environments where we are fiduciaries or permitted to act as fiduciaries, a good idea is to create a value statement that acts as a good faith agreement. This idea was cited recently online called a Fiduciary Oath. This type of statement, signed by you and by the client is a great way to cement expectations. Click here to view a sample of what that could look like.

Idea #2: Preaching process and procedure to Plan Sponsors is a great idea. Giving them a process and procedure is a better idea. Performing the process and procedure for them is the best idea. Click here to access a guide to good Plan Sponsor health and a list of best practices from which every plan can benefit.

Idea #3: Little known or discussed, but very important is ERISA §411 which discusses the limitations imposed by the code on who may or may not serve as a fiduciary to an ERISA plan. Most plan sponsors do not routinely perform background checks on providers they hire to perform services to their company, while they do when hiring someone internally. Coaching plan sponsors and providing them a mechanism to ensure that ERISA §411 is adhered to is a value-add service that also helps in cementing the trust relationship. Click here to view a form for this use.