Surveys continue to indicate that while growing numbers of plan menus incorporate a Roth 401(k) feature, participant adoption remains tepid. What have NAPA Net readers seen?
Sure enough, among this week’s respondents, more than a third (35%) said that somewhere between 75% and 99% of their plans had a Roth option, and another 6% said that all of their plans did. About 12% said that between half and three-quarters of their plans had the option, and half that many said that somewhere between a quarter and 49% did.
On the other hand, nearly 18% said less than a quarter of their plans offered it, and just under a quarter 23%) said that fewer than 10% did.
Promoting the Option
Only about half (53%) of this week’s respondents say they actively promote the Roth option, with another third (35%) indicating they did, depending on the situation/plan demographics. The remaining 12% said they didn’t actively promote Roth. As one reader noted, “Can be confusing to participants, makes enrollment meetings too long, takes up time describing pre and after tax…”
So, what has the participant take-up been?
- 53% - weak, less than 10%
- 29% - only about a quarter have taken advantage
- 12% - about half take advantage
- 6% - strong – better than 75%
How do plan sponsors feel about Roth? Well, about a third (35%) of this week’s respondents said plan sponsors liked the option, just under 3 in 10 said that most did, about 18% indicated that some did, and a like number indicated that most of their plan sponsors don’t.
Participant Utilization
So, how did the participant utilization match up with plan sponsor expectations? Nearly two-thirds (65%) said it was in line with those expectations, though nearly 18% said it was well below expectations. As for the rest? They said their plan sponsor clients didn’t really have prior expectations. “Roth is the flavor du jour,” noted one reader. “Everyone wants to add it to their plans. Just like self-directed brokerage accounts were a few years ago, the actual uptick in Roth is equally low.”
As for why plan sponsors like the option:
Roth represents another low cost benefit to participants and more flexibility for funding
Plan sponsors see it as another viable investment/tax strategy available to the participants in their plan
Like the option to control taxes
On the other hand, the reasons offered in opposition were:
Most sponsors feel it adds to the complexity of plan. It requires more forms, more explanations, and is not worth the additional time.
It represents more administrative procedures
Some plan sponsors do not like the idea of having a Roth option. They think it will add an extra step with administration. They may not want/have the time to have multiple money types. Additionally, plan sponsors are a little skittish with the different distributions rules for Roth.
Most see it as an additional administrative headache.
Mainly if the business owner wants because they make too much for Roth IRA and want a mix of pre tax and after tax savings.
Some sponsors feel like it's more payroll / administrative work that the benefits of offering Roth in the plan.
Like the tax deduction today of a traditional deferral
Poor participation rates
See no cost benefit to employees
Other Insights
This week’s respondents had lots of different notions about Roth, and the pros and cons. Here’s a sampling:
The biggest deterrent to Roth deferrals, even when they would otherwise make sense, is that people do not trust that the tax rules will stay the same, and that the Roth money will eventually get taxed. Social Security benefits provide the paradigm. People remember that Social Security benefits were not taxed before 1984 because they were paid for with after-tax money. But since then Social Security benefits get taxed again for individuals whose income exceeds certain limits. Taxpayers foresee legislation that will effectuate the same treatment for Roth deferrals.
The most common use, and in my opinion, the best feature of the Roth option, is that it effectively increases the maximum amount an individual can save for retirement. If you're in a 35% tax bracket, the $18,000 you put away now as a traditional deferral will only net you 65% of the amount it grows to when you take it out of the plan; if you put it away as a Roth deferral you will get the full 100%.
I would never recommend Roth as the default.
It took a while but many of the plans I work with now understand that Roth is not a good fit for everyone, but a great fit for some. The expectations for most of my clients represent this and they are comfortable that adding the Roth provision was a good move even though there may not be a lot of utilization in some plans due to the demographics (primary a participant’s age, net worth and current need) of the participants.
I think it would help if participants were better informed of some of the benefits of Roth being a part of their retirement planning strategy. However, in a time when many participants do not have access to an individual account advisor, I don't see this changing anytime soon in the micro plan market where I have most of my clients.
We have written the Roth conversion option into plans (PPA restatement), but no participants have acted on it yet.
Most participants expect to be in a lower tax bracket when they retire. They also prefer to take the pre tax deduction now.
When tax benefits are explained most see the benefit especially if the may take out lump sums in retirement such as paying off home loan, buying a vacation home etc.
Thanks to everyone who participated in this week’s NAPA Net reader poll!
Got a question you’d like to run by the NAPA Net readership? Post it in the comments section below, or email me at [email protected].
