Plans are adding the Roth 401(k) as a feature very
aggressively, says adviser Vince Morris, Vice President
of Retirement Plan Services at Kansas City-based Bukaty
Companies, but not many employees have gone for it.
"We have not seen it among our [clients'] plans,
and probably less than 10% utilize it," he
says.
Why not? A Roth 401(k) is complex for most people
to understand, Morris says. It got simpler for employers
when the Pension Protection Act of 2006 removed the
sunset provision that would have spelled the end for the
Roth option in 2010.
Moreover, while a lot of recordkeepers initially
could not handle these accounts, they are up to speed
now, says Brian Ward, Brentwood, Tennessee-based Managing
Director at Ward Financial Advisory of Wachovia
Securities.
Now, Ward says, whether employers want to add a
Roth 401(k) is mainly an issue of whether they have
concerns about the ability to educate employees
adequately on yet another topic.
"Now, there is one more extremely complicated
thing to go through," he says. Saving in a Roth
401(k) can affect issues such as estate planning, says
adviser Douglas Prince, Indianapolis-based Managing
Director of The Prince Group at Stifel, Nicolaus &
Co., Inc. Its value also depends a lot on an
employee's specific tax situation and on future tax
rates in general.
"You do not know what taxes will be next year, or
in 10 years," he says. Still, says Ward, "It is a great
tool and, for the right people, it is going to be the
right thing to do."
If you run the numbers on it, Prince says,
contributing to a Roth 401(k) benefits two distinct
groups of employees the most: Higher-income workers, who
perhaps would prefer to pay taxes at current known rates,
can contribute to a Roth and "basically shelter the
earnings on amounts that would otherwise be saved outside
the plan," he says.
It also can work for younger workers who are likely
in the lowest tax bracket they will ever be in during
their careers. "It is the two ends of the spectrum," he
says.
Among employers, it currently appeals the most to
professional organizations that have more
college-educated people who understand the tax
consequences, Prince says. "For manufacturing companies,
a lot of them do not want to complicate the savings
message." Because of different tax treatment, he says,
"The Roth runs counter to the longstanding 401(k)
message."
However, many firms and doctors' offices like it,
Ward says. "There is clamoring from the higher-comps," he
says, "and the young and educated are interested in
it."
A Sticky Wicket
Providers' Roth 401(k) Âofferings do not vary all
that much currently, Morris says, but employers should
make sure that their provider has good online tools such
as a Roth calculator that helps participants figure out
their contribution scenarios.
Sponsors generally utilize their existing provider
to handle a Roth 401(k). "Most providers offer it as a
plan-design feature," he says. "Typically, what we have
seen is that, since it is an amendment to the plan
document, there is not an added administrative cost from
the provider." However, employers do need to make sure in
advance that their payroll provider can handle it.
All Roth 401(k)s that he knows of have the same
investment options as the core 401(k) lineup, Morris
says. "To add it is relatively easy," he says. "It simply
takes a plan amendment to get started, and putting
together an education process to decide how to
communicate with participants."
Sponsors generally do not get directly involved
much in Roth 401(k) education, Morris says. "Typically, a
vendor or adviser would handle that."
However, be prepared to offer plenty of education.
"Face-to-face is typically the best way to do it, so that
they can ask questions," Prince says. "The Roth needs
more interaction than other pieces of the plan."
Education becomes more difficult, in large part
because participants contribute post-tax money to a Roth
401(k), as opposed to the pre-tax money contributed to a
401(k). "You are trying to educate people on a variable
you do not know: What are tax rates going to be in the
future?" Ward says. Getting into that complex area goes
against the current trend of simplifying retirement plans
for participants, he says.
Ward and his colleagues have designed customized
communications that talk about saving in a Roth 401(k),
but they have "disclaimers all over it" about how
employees need individual advice on the tax
implications.
"[Roth 401(k) education] is a sticky wicket for
sponsors, because sponsors cannot give them any sure-fire
answers," he says. "Sponsors do not want to be on the
line for giving tax advice. People working in an ERISA
environment are afraid of getting sued. So, sponsors say,
'Let's make it a plan provision and educate
people.'"
In this case, a sponsor's education efforts can only
go so far. "It is an individual situation," Morris says.
"The participant needs to access some additional advice
about the tax consequences."