Roth 401(k) and Brokerage Accounts

[KateSmithPA]

One of our physician groups added the Roth 401(k) feature. The assets are held in self-directed brokerage accounts at Schwab. Schwab insisted that the Roth contributions go to a separate brokerage account, even though we do the trust accounting for the plan and the other sources are co-mingled in one brokerage account.

Does anyone know if there is a federal requirement that Roth contributions be held in separate brokerage accounts? It doesn't make sense since the funds are comingled when invested in platforms like American Funds or MassMutual.

Thank you.

[J Simmons]

Never heard of such being required--provided recordkeeping keeps separate track of the Roth from other benefits accrued. Scwhab may be institutionally insisting on it to keep the Roth assets separate and prevent the possibility that recordkeeping will be inadequate at future distribution and cause extra taxation to the employee. This may be a liability avoidance measure that Schwab has chosen to take.

[Guest retirement planner]

Never heard of such being required--provided recordkeeping keeps separate track of the Roth from other benefits accrued. Scwhab may be institutionally insisting on it to keep the Roth assets separate and prevent the possibility that recordkeeping will be inadequate at future distribution and cause extra taxation to the employee. This may be a liability avoidance measure that Schwab has chosen to take.

I too agree on this, they are certainly doing this to avoid their liability which is not a good practice .

[Appleby]

Brokerage houses are requiring that Roth assets be maintained in separate brokerage accounts, and have made programming changes to that effect, and the account opening and statement issuing process for those accounts have been designed accordingly (the account registrations and statements usually reflect ‘Roth’ in the account title fir ID purposes).

Maintaining the assets in a pooled account may make it seem like it should be a non-issue from our perspective, especially if they (the brokerage firms) are not performing the tax reporting; and from our POV the question may be ‘why should they care’ since all they are doing is custodying the assets? However, there are at least two key reasons why it may make sense from their perspective:

 The tax-reporting requirements, which requires a separate 1099-R for DRA amounts. There could be circumstances when they are required to (perform the tax reporting) for the plan - such as for certain orphan accounts if they are designated Qualified Termination Administrator.

 They had to build the system for the plans for which they perform tax-reporting, and to make it easier for everyone, they apply the rules to plans for which they perform tax reporting as well as those for which they do not perform tax reporting. No sense in having two set odf rules for the same type of account- it is hard enough to explain the rules that apply to one

 A big part of what they do is track assets for marketing purposes, which means they will want to know ‘how they are doing’ in the Roth-K market.