PSNC 2010: Roth Accounts, not Just for the Highly Compensated

August 3, 2010 ( – There has been a lot of talk since Roth 401(k)s and 403(b)s have been introduced that these options will only benefit the highly compensated.

But Steven W. Glasgow, Senior Vice President, Avondale Partners LLC, and Brett Howell, Wealth Management Advisor, The Howell & Sharp Group at Merrill Lynch, disagree. Speaking on a panel at the PLANSPONSOR National Conference, both agree that taxes are likely to go up.  

Glasgow noted that whether a Roth account will be an advantage depends on the circumstances of each individual, but he pointed out that it is likely that tax rates even on lower incomes will be higher in retirement, i.e. the tax rate on a $2,000 deferral is likely lower now than the tax rate on a $2,000 distribution will be in the future. Glasgow provided examples showing that the effect on an individual’s paycheck from whether they contribute to their retirement plan pre-tax or after-tax is not much different.  

In addition, for most workers, income is likely to increase, and providing to a Roth account can hedge against higher taxes, according to Glasgow. For the highly compensated there is an assumption that they will accumulate so much for retirement that their income in retirement will be the same or more as in pre-retirement, but that could also be the case for other plan participants, Glasgow noted.  

Howell added that deferring into a Roth, with the employer match going into a pre-tax account can also hedge against higher taxes now and in the future for participants of all income levels.  

But, Howell said, participants should think about the benefits of a Roth account after retirement. At age 70 ½ participants can roll their required minimum distribution from their Roth plan account into a Roth IRA. In addition, when individuals draw on either type of account, it doesn’t add to their taxable income.   

Finally, noting that trends show lower income participants tend to withdraw from their plan accounts prior to retirement, any penalties to a Roth account will be assessed on only income, so that could possibly be an advantage.  

Glasgow said that for sponsors adding a Roth account, there is not much change in administrative cost because recordkeepers have already programmed for it, but there could be costs upfront for changing internal payroll processes, educating participants, or changing the plan document and SPD.   

Howell noted that Roth education for participants is complex, and suggested that sponsors do that separately from general plan and enrollment education. That way it won’t add to the information participants are taking in about how much to save and how to invest. With a separate Roth education, sponsors or advisers can spend more time explaining different income and tax scenarios.  

Audio of the panel discussion is here.