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					    NAGDCA 2009 LEADERSHIP AWARD – EFFECTIVE PLAN DESIGN &
                       ADMINISTRATION

               State of Michigan 401(k) Plan - Addition of Roth Option

                                  Summary of Project

Overview. The State of Michigan offers employees a 401(k) and 457 Plan. Since a Roth
option is currently not allowed in 457 Plans, we decided to add it to our 401(k) Plan to
give our employees the option of saving for retirement with either pre-tax or after-tax
contributions. We had received a number of requests from our participants to add this
option. While this option has been available to 401(k) plans since EGTRRA in 2002, it
wasn’t until the PPA of 2006 that the Roth provision was made permanent.

Background. Our 401(k) Plan is available to virtually all State employees, as is our 457
Plan. Employees who are covered by the Defined Benefit Plan may use the 401(k) Plan
as a deferred compensation plan to supplement their pension. For those employees
covered by the Defined Contribution Plan (all new hires after March 31, 1997), the
401(k) Plan is their main retirement plan. It includes a 4% mandatory employer
contribution and a 3% matching employer contribution if the employee contributes at
least 3%. In restructuring our 401(k) Plan, Defined Contribution Plan participants
receive the State matching contributions regardless of whether they chose pre-tax, Roth,
or both types of contributions.

Process. To implement the Roth option, the State navigated through a number of
changes. These included updates to the State’s payroll system, changes to the software
utilized by our third party administrator, modifications to the contribution change process
through the Internet and automated phone system and revisions to paper forms as needed.

A major part of this process was effective participant communication, especially in light
of the complicated nature of our plan structure. The inclusion of the Roth provision
added one more retirement planning decision for participants to make. Our
communications included:

   A mass mailing to all plan participants who were current employees prior to the April
    21, 2008 implementation.
   Newsletter articles about the Roth 401(k) provision prior to, during and after
    implementation.
   Specific Roth content on the Plan’s web site including a Roth Estimator which helps
    participants decide if pre-tax or Roth contributions may be beneficial to them.
   Updates to our 401(k) Plan document, available online, to incorporate the Roth
    provisions. Participant statements were also redesigned.

Results. The State of Michigan’s initiative in providing employees expanded choice for
retirement with the addition of a Roth 401(k) option makes the State deserving of a 2009
NAGDCA Leadership Award for Plan Design & Administration.
    NAGDCA 2009 LEADERSHIP AWARD – EFFECTIVE PLAN DESIGN &
                       ADMINISTRATION

               State of Michigan 401(k) Plan - Addition of Roth Option

                                  Written Justification

I. Description of the Roth Project
The project to add a Roth provision to our 401(k) Plan was designed to provide
employees with choice and additional opportunities for effective retirement planning.
Participants are now able to decide whether pre- or post-tax contributions or a
combination of both is the right decision for them. Regardless of their choice, they are
still able to take advantage of the same benefits and features of the 401(k) Plan including
employer matching contributions and investment flexibility. Roth 401(k) contributions
were available as of April 21, 2008, and have been in place for over one year.

In deciding whether to implement this feature, we considered one of the possible
negatives which results from the law requiring that any Roth 401(k) balances be subject
to required minimum distributions whereas a Roth IRA does not require RMDs. This
could result in participants rolling the Roth balances out and, at the same time, they may
also choose to receive their other Plan benefits. However, we determined that the
benefits of adding this feature outweighed this potential negative.

The process to implement took about six months. We had numerous conference calls
with personnel from the State’s Payroll, Human Resources, Applications Services and
Retirement offices and ING, our third party administrator. Also, extensive testing was
required to test the State’s payroll system including the demographic and payroll files
that are sent to ING on a bi-weekly basis. ING also made changes to their software to
receive the new file information from us and process it correctly on their system. Since
our participants can change their contributions using either the web site or the automated
phone system, both of those systems also had to be upgraded and tested.

Most of our employees are on our central payroll system, but a small number are paid
through various county and other government-related systems. These entities were
notified that if they chose to offer Roth contributions to their employees, they would have
to make appropriate changes to their separate payroll systems. Paper enrollment forms
are used for these individuals and these forms are revised as needed.

Our participant communications were revised and expanded to describe this new feature.
In addition to a participant mailing, we drafted newsletter articles about the Roth 401(k)
provision prior to, during and after implementation. We also included specific Roth
content on the Plan’s web site featuring a Roth Estimator which helps participants decide
if pre-tax or Roth contributions may be beneficial to them.
We also developed a comprehensive brochure entitled “Your Guide to Roth 401(k)
Contributions.” This brochure provides participants with helpful information including:

      What Roth contributions are and how they are different from regular pre-tax
       contributions.
      Some guidelines regarding when Roth contributions may be appropriate.
      How to receive the full State match for our Defined Contribution Plan
       participants.
      What a qualified withdrawal is and what penalties will apply if a withdrawal is
       not qualified.
      A reference to the web site and the availability of the Roth Calculator.

Other Plan-related materials were also updated. The participant 401(k) statements were
expanded to add information about Roth contributions and balances, and additional
improvements are planned for the 2 nd quarter 2009 statements. Payout forms were
revised to include the Roth payout option. Our 401(k) Plan document was amended to
incorporate relevant language regarding the Roth option.

II. Significance of the addition of the Roth option
The State of Michigan has always tried to include provisions in our plans that are allowed
by law, are beneficial to our employees and provide flexible choices to help in effective
retirement planning. Like most government employers, we have a very diverse
population of employees and not all of our plans’ provisions are appropriate for all
employees. The addition of the Roth option to the 401(k) Plan will benefit many
employees who prefer to contribute on an after-tax basis and take advantage of the
benefit of having all earnings accrue tax-free and all qualified distributions paid out tax-
free.

III. Benefits realized by the plan participants
Having the Roth option in our 401(k) Plan offers significant benefits to our participants:

      There is no income limit imposed for Roth contributions when made to the 401(k)
       Plan as there is in a Roth IRA.
      Employees are allowed to contribute up to the full 401(k) annual limit in either
       pre-tax, Roth or a combination of both types of contributions.
      Defined Contribution participants still receive the employer matching contribution
       to the 401(k) Plan regardless of the type of contributions they choose to make.
      Both pre-tax and Roth information are included in one account statement, broken
       out by separate Roth sources.
      Participants enjoy the benefits of our low-cost plan for both their pre-tax and Roth
       after-tax monies.
      Our Advisor Service includes any Roth participation and can offer advice for the
       entire portfolio.
      Roth contributions can be transferred to a Separately Managed Account if the
       participant wants more flexibility in investment options.
      The Roth option allows our participants to have tax-free earnings growth and
       payout, a significant savings especially for long-term employees.

IV. Feasibility of use by other governments of a similar size
Most government plan sponsors who maintain a 401(k) plan for their participants could
benefit from the addition of the Roth feature to their plans. It is another way for them to
demonstrate their flexibility, and their willingness to add favorable features for their
employees. If other government plan sponsors do not have matching contributions like
we do, the process to implement this option may involve less work than it was for us.

NAGDCA has as one of its priorities the support of legislation which would include a
Roth 457 provision. When this happens, a large number of government plan sponsors
may want to add the Roth provision to their 457 Plans and the State of Michigan would
be willing to share our experiences, insights and any assistance as appropriate.

V. Measurable results
Within the first two months following implementation, 1,109 participants were making
Roth contributions to the 401(k) Plan. After one year, there are now 1,883 Roth
contributors. This represents 4.4% of our almost 43,000 active 401(k) Plan participants.

This type of ancillary feature encourages employees to take advantage of all the options
the State of Michigan offers to facilitate effective retirement planning.




Elaine Lewter
June 9, 2009

				
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