Roth 457/Roth Conversions

Transcription

1 Continuing Education Credits Be sure to sign the Sign In/Sign Out sheet outside of the room when applying for Continuing Education Credits for the following certifications. (Check the appropriate certification) CFP CPE You do not have to sign in and out for InFRE credits InFRE tracking forms were included in conference registration materials. Roth 457/Roth Conversions Moderator: Gay Lynn Bath, State of Oregon Featured Speakers: Jake O Shaughnessy, Arnerich Massena, Inc. Laurel Ludden, VALIC Patti Björk, Aon Hewitt Roth Contribution Timeline January 1, 2006 January 1, 2011 January 1, 2013 Roth introduced to 401(k) and 403(b) plans Roth introduced to 457(b) Conversion of beforetax, after tax, company, and rollover contributions to a Roth accounts only permissible for assets that are distributable from the plan The new Roth in plan conversion rule allows participants, regardless of age, to convert all or any portion of their vested qualified defined contribution plan assets from a before tax or after tax basis to a Roth account 3 1

2 Communication 4 Jake O Shaughnessy, CFA Advisor Arnerich Massena, Inc. 5 Roth vs. Pre tax 457 Roth & Pre tax Savings Model Q: Are Roth contributions simply a bet on current versus future tax rates? $2,000,000 $1,500,000 A: Not necessarily. If the portfolio is invested entirely in the Roth or Pre tax source, or prorata between Roth and Pre tax, the after tax Pre Tax Piggy Bank $1,000,000 value of the account will be equal (assuming $500,000 Roth Piggy Bank no change to tax rates and the same rate of return on assets). However, consider a $ scenario in which the more aggressive assets Age (e.g. equities) are invested in the Roth source and the more conservative assets (e.g. fixed income) are invested in the Pre tax source. Pre tax source: Pre tax source taxes Roth Source Portfolio Value at 65 $1,650,477 $1,155,334 $1,155,334 Note: Assumptions discussed on a subsequent slide 6 Savings 2

3 A Roth Feature Provides Flexibility Savings Roth & Pre tax Savings Model $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 Pre Tax Piggy Bank $600,000 Roth Piggy Bank $400,000 Total $200,000 $ Age Q: Are there savings strategies that a Roth feature provides? A: Consider a scenario where contributions are split evenly and the more aggressive assets (e.g. equities) are invested in the Roth source and the more conservative assets (e.g. fixed income) are invested in the Pre tax source. Pre tax Pre tax source: After tax source taxes Roth Source Total Portfolio Value at 65 $499,133 $349,393 $982,734 $1,332,127 Note: Assumptions discussed on a subsequent slide 7 Assumptions 1. Annual Pre tax contribution amount of $10, Tax Rate of annually 3. Return on Equity of 8% 4. Return on Fixed Income of 4% 5. Portfolio is rebalanced to Equity/ Fixed Income annually 6. Investment horizon of 40 years 8 Questions to ask a recordkeeper regarding Roth 457 capabilities 1. Do you allow participants to allocate their assets differently between a Roth or Pre tax source within their accounts? 2. Can you provide custom communication materials regarding the Roth feature for our Plan? 3. How do you provide participants with appropriate information regarding the tax effects of initiating a conversion from a Pre tax to Roth 457 within the Plan? 4. What types of calculators or decision making tools do you provide to participants in order to assist them with making prudent decisions regarding the Roth feature? 5. Are your participant representatives trained to educate/assist participants with regard to the merits and potential drawbacks of a Roth feature? 9 3

4 Laurel Ludden SVP, Relation Management VALIC 10 Low Utilization Contribution Feature 880 plans out of 20,000 offer (4.4%) 2,200 participants out of 261,000 eligible (.8%) 11 Low Utilization Conversion Feature 280 plans out of 20,000 offer (1.4%) Negligible usage 12 4

5 Latest Transfer Feature Recordkeeping/Design Concerns Are there restrictions on the kinds of contributions that can be transferred? Can a participant make multiple transfers in a year? Must distribution restrictions continue to apply? Does a transfer begin the 5 yr clock towards a qualified distribution? What reporting is required? 13 Patti Björk Director of Retirement Research Aon Hewitt 14 What type of plan do you administer? (Check all that apply) Do you currently allow Roth contributions in your plan? % No interest in 9 8 No, do not plan to offer 14.7% offering % No, plan to in % 5.3% next 12 months 18.7% 457(b) 401(a) 401(k) 403(b) 62.7% 15 5

6 If your plan does not allow Roth contributions, what would make you consider offering that feature? (Check all that apply) % 55.6% 44.4% 44.4% 33.3% 2 1 Employees requesting Administrative It is determined that it More IRS Costs to implement it complexity must be is needed to attract guidance must be lowered reduced new participants 16 How do you communicate the availability of your Roth feature to your participants? 65.3% % 10.2% 4.1% Custom communication Recordkeeper materials Staff handled, no assistance Minimal to no campaign from recordkeeper communication 17 If you currently offer a Roth feature, are your participants able to invest their Roth contributions differently than their pre-tax contributions? Have you had any participants convert their account to a Roth at retirement? 36.7% 23.3% No 63.3% No 76.7% 18 6

7 How many participants are in your plan? What are the assets in your plan? Over 20, % Less than 1, % Over $1B 34.2% $100M or less 15.8% 1,001 5, % $101M $250M 19.7% 10,001 20, % 5,001 10, % $500M $999M 14.5% $251M $499M 15.8% 19 If your plan offers a Roth feature, did you implement the recent in-service Roth conversion provision that allows participants to convert their pre-tax account while still employed? Please tell us why you do not offer the new in-service Roth conversion. (Check all that apply) 20.4% % 27.3% 27.3% No 79.6% % 3. IRS Not Administrative Roth Costs to guidance requested complexity utilization implement too high too low are prohibitive 20 Questions? The AON Survey summary can be found at: capitalconsulting/consulting/retirement_2013 pulsesurvey.jsp 21 7