Reader Poll: Would Rothification Wreck Rising Rates for Roth?

A recent survey found the biggest one-year increase in Roth contribution offerings among its clients in 2016, and another recently chronicled the potential impact of a switch to Roth for 401(k)s. What are NAPA Net readers’ reactions?

For more than one in five (21%) of this week’s respondents, the adoption of Roth provisions over the past two years had increased “a lot,” and another 60% said it had increased some. That left about 1 in 10 who said it had been pretty flat, and a like number also said it had been flat – since their entire customer base had had Roth prior to that two-year “window.”

Those results mirrored the experience reported earlier this month among plan sponsors recordkept by Vanguard, where the percentage of Vanguard plans offering a Roth feature increased to 65% at year-end 2016, compared to 49% that offered the feature in 2012.

T. Rowe Price’s Retirement Plan Services unit saw the biggest one-year increase in Roth contribution offerings in its clients’ 401(k) plans in 2016 – up 10 percentage points, to 61% of the plans for which it provides recordkeeping services – a shift they said was driven in part by participants who now have a better understanding of the benefits of the Roth approach to saving.

The participant take-up rate by those plans was pretty well split between 5%-10% (27%) and 10%-15% (30%), with a full 22% in the “more than 15%” camp. Roughly one in eight said the take-up had been under 5%, and the rest – weren’t sure. Though, as one reader noted, “Many are concerned that the govt will change the rules so I am seeing less use than when it first came out.”

Rothification Response

The talk, certainly here in the Beltway of our nation’s capital, has been about so-called “Rothification” – the elimination or reduction of the current pre-tax treatment that 401(k) plans enjoy. Asked how their plan sponsor clients would respond to the imposition of a mandatory Roth, readers mostly (50%) said that they would be worried about participant response. About 19% said that the plan sponsors would “ramp up education,” while another 12.5% acknowledged that the responses would vary. Other responses were:

  • status quo, as long as the preferences for providing the plans didn’t change (6.25% ); and
  • they’d consider reducing employer contribution (3.13%).

The rest admitted they had “no idea.”

What Would Participants Do?

Speaking of participant reactions, we also asked about that in the wake of a mandatory Roth. At that point a plurality (37.5%) said that while some would likely reduce contributions, most would leave them be, though 21.9% said that “many would reduce their contributions. Just over 15% said it wouldn’t affect their savings rate, and the rest said they didn’t know. “They would be confused,” noted one reader. Another said “I would be concerned that some participants would consider reducing their contributions to make up for the reduction in their take home pay. This change would need a lot of education leading into it.”

Among this week’s respondents, 87% said they had a Roth feature in their workplace retirement plan, and roughly two-thirds took advantage, including 13% who made all their contributions on a Roth basis. However, one reader noted that while they had used the Roth, they now “…need the tax deferral.”

As for what readers would do if those 401(k) pre-tax treatments were replaced with a mandatory Roth, nearly 81% said it wouldn’t affect their contribution rate, and another 7% said it wouldn’t because they were already 100% Roth. The rest split between those who said they would reduce their contribution, and those who weren’t sure.

Reader Response(s)

As usual, we got some interesting comments on the survey; here’s a sample:

  • “Most plans have also added in-plan Roth conversion options when available through their recordkeeper. A few plans have added after-tax deferrals as an option as well for employees who would like to save more in their plan.”
  • “Roth is a tremendous feature that should be explored by all to help mitigate potential retirement income tax implications. The notion of us being in a lower tax bracket because our retirement income may be lower is a nice thought but we are at all time low tax rates and in a country thirsty for tax revenue. I hope studies that show Roth deferral increases are not used against participants and plan sponsors by mandating Roth contributions or limiting the benefits of the pre tax deferral and employer contributions. I think that this would have a largely negative impact on the overall retirement planning landscape.”
  • “I believe there needs to be a choice. Some really need some sort of tax deduction. It’s too hard to find tax deductions now. Eliminating a 401k tax deductions for a mandatory Roth will make it impossible.”
  • “Roth is regularly discussed at Committee meetings and reactions to it vary. Of my clients that offer it, few participants take advantage of it because they either want the pre tax deferral or they don’t understand it.”
  • “I still firmly believe in having both options for saving. The decision really comes down to each participant’s personal financial situation, age, and other factors to determine whether pre-tax or Roth is a better fit.”
  • “It’s important to have both options available as lower wage earning individuals benefit greatly from the tax deduction.”
  • “I believe a compromise would be to default to Roth contributions while continuing to allow for pre-tax elections. The Roth contributions would greatly benefit younger and/or lower paid workers while allowing the higher paid workers/executives to opt in to the pre-tax deferral if this is their preferred method. This could allay fears of Plan Sponsors discontinuing 401(k) plans if they can’t personally get the level of desired personal deductions, while increasing tax revenues and providing a more robust retirement savings program for those who may need it most.”
  • “I am fearful that even though Roth accounts are funded with after-tax money, the laws will be changed and Roth accounts in excess of a certain amount will wind up getting taxed when distributed. I do not trust the government to change the tax laws, even on existing money. I’ll take the tax deduction now, when funds are contributed, when it’s a sure thing.”
  • “I would worry that participants who have been auto enrolled in their plans would take note of the difference in their paycheck if their contribution was switched from pre-tax to Roth and would potentially change their deferral rate or take the opportunity to opt out altogether.”
  • “Clients have expressed concerns a forced Roth feature would undermine efforts for participation and auto increase programs.”

Thanks to everyone who responded to this – and every  – week’s NAPA Net reader poll!

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