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In-Plan Roth Conversion Feature

Data from some of the largest 401(k) providers suggest that the majority of plans now allow Roth contributions: both Vanguard and Fidelity have overall adoption rates of 60% and 55%, respectively (see “Plans Offering Roth Contributions Continues to Increase”). If Roth Elective Deferrals are allowed, a Roth In-Plan conversion feature may also be added, which allows participants to convert their existing pre-tax contributions and employer contributions as well as after-tax deferrals to a Roth Source Account.

For the funds converted, distributions and earnings are tax-free, provided they meet several requirements: including that the distribution is made after age 59 ½ or upon disability or death, and is not made within five years of first making a Roth 401(k) contribution.
In a March, 2017 PEI survey of major recordkeepers, the percentage of plans offering the In-Plan conversion feature, of those that allow Roth contributions, generally ranged from 12% to 25%. One vendor was an outlier at 44% due to the fact that its client base is heavily comprised of lawyers and doctor groups.

Some considerations when contemplating adding the feature include:

  • Tax planning is essential since taxes are owed on the amount converted in the year of conversion. One vendor noted that some participants had not consulted with a tax advisor and did not understand the full impact of the change.The number of participants utilizing the feature will likely be very low. PEI survey data indicate that less than 2% of the participant population has taken advantage of the feature when offered.
  • The process may include a number of steps, some of which may be manual.
    • Plan document would need to be amended accordingly.
    • Communication and education around the feature when added is very important; and such may be burdensome on HR staff when fielding employee inquiries.

For plans that already allow a Roth contribution, PEI encourages plan sponsors to learn about their vendor’s capabilities and process around this feature, including the support for participants, to see if it makes sense to adopt.