Roth 401k - early disbursement

Correct. You can withdrawal what you have contributed penalty free. That money has already been taxed. The penalty applies when you withdrawal your earnings, which haven't been taxed.

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Unless I'm way off, the penalty and tax only apply to the 5% return in the account.

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The penalty and tax only apply to anything that is more than what was contributed. For example, suppose over the years you contributed $10000 and your company kicked in another $1000 on top of that that is vested. You can withdraw up to $11000 without any penalty. Anything more than that is subject to taxes and penalties.

Or ... you could just roll it over to a Roth IRA and pay no penalty or tax at all. That's usually the best way to go.

Sounds like there is no separation of employment so he's not eligible to roll this over unless his plan allows for an inservice rollover.

It would not be wise to cash out of a 401k bc of poor performance, it would be wise however to re-evaluate your plans investment options if you truly have only realized a 5% TOTAL return.

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you contributed $10000 and your company kicked in another $1000 on top of that that is vested

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You can withdraw up to $11000 without any penalty

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Aren't most matching contributions made on a pre-tax basis, even if the employee is contributing after-tax? I thought only the $10k would be penalty free.

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Aren't most matching contributions made on a pre-tax basis, even if the employee is contributing after-tax? I thought only the $10k would be penalty free.

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You're correct, only the employee contribution is post tax, employer match is pre tax just like a regular 401k. A Roth 401K segregates these 2 employee/employer components, which can be rolled over to a Roth IRA and rollover IRA, respectively, without penalty.

Not sure on the rules for qualifying for a rollover though on the employer match portion. I imagine if you're not participating going forward, you could rollover to a self directed traditional rollover IRA. The Roth 401k would work the same, it's just a Roth IRA on steroids (higher contribution limit, no income limitation) unless the investment choice is poor and expenses high. You should be printing money over the last ~4 years in even the most basic index fund.

Edit: I recommend everybody have a rollover IRA you control at a quality brokerage (Vanguard, Fidelity, etc.) where you can put all your accumulated qualified plan contributions over your career. No sense in leaving your money with someone who doesn't have your interest first.