First, we had the publication of distribution regulations (and the handling of taxability of distributions had been a stumbling block for many), and then, a new survey by the Vanguard Center for Retirement Research chronicled some of the characteristics of participants that had taken advantage of the option. Of course, the Pension Protection Act lifted the scheduled sunset on the Roth 401(k) (see Staying Power ).
This week, we asked readers if they had – or intended to implement – a Roth 401(k) in the near-term.
As it turned out, roughly a third ( 34.5% ) already had one in place (one reader noted, ” We had one as of 1/1/06, even before our provider was ready to handle them. We have Roth catch-up as well. Those that use them use them heavily–we often see 25-50% Roth contribution, but are relatively few people so far”) , and another 14% said they planned to do so this year. Several (these tended to fall in the “other” category) said they were planning to do so in 2008 (as one said, “We will be adding a Roth 401(k) on 01/01/08, because the top executives have asked for it” ). Maybe was a popular response, with nearly 6% saying “maybe,” 8% opting for “maybe next year,” and 12% said “maybe one day.”
About 16% said they would not do so this year, and just 1% said they “never” would. On the other hand, 8% opted for “other,” and most of those could be categorized as “I hope not.” Among that latter grouping was the reader who said, “I HOPE not – my manufacturing workforce has trouble understanding a regular 401(k). I can’t imagine the communication nightmare we would have for a Roth.” Another said, “I’d like to say ‘never,’ but sometimes we’re pushed to introduce new things if we’re not traveling at the speed of light with numerous projects. So, it’s really ‘maybe one day.'”
“The majority of our employees will be at a lower tax bracket at retirement than they are right now. It makes much more sense for them to pay the taxes at that time. Adding a Roth 401(k) provision will just cause a lot of confusion and possibly only benefit a few employees, but have the potential to cause a greater tax bill for many participants.”
“We don’t want the extra administrative cost or burden of tracking another contribution or distribution type,” noted one. “Too many choices seem to lead to people not doing anything at all,” opined another.
Here’s a sampling of other perspectives:
“We introduced the Roth April 1, 2006, and employees have responded well. It is especially attractive to our younger employees who have little or no tax liability with their entry level positions. Oh, to be 25 again and squirreling away tax-free money for retirement! Some of our high earners are splitting their contributions between the traditional and Roth.”
“I added the Roth option to our plan, but I haven’t done anything with it yet, since no one is interested. But I haven’t pushed it either because I ‘m not looking forward to the increased administrative work required.”
“The incremental benefits do not offset the confusion that the new plans would cause.”
“It’s on the strategic plan but is slowly being bumped down the priority list.”
“The interest is not here.”
“We thought about adding a Roth feature to our 401(k) this year, but we had so many other things to communicate, we have pushed it back to (e) maybe next year. However, my biggest fear related to the Roth 401(k) is that it adds yet another decision, and sometimes too many decisions can result in inaction.”
“We were warned that it would be too confusing to our people–too many tax complications. We’ve had about 10% sign up for Roth, and I think that’s a nice start. I expect it will only go up. Many of our people are low-income earners who get huge tax refunds every year, and once they figure out the net tax-expense is at or near zero, I expect they’ll be switching over more. That kind of ‘word’ has a way of getting around.”
“We will only add the Roth option if a lot of employees start requesting it. We don’t typically make changes unless there is a demand for them or a fiduciary reason to do so.”
But this week’s Editor’s Choice goes to the reader who said, “We’re waiting for all the other plan sponsors who’ve adopted the Roth option to work all the kinks out before we jump on the bandwagon. Just thinking about the participant education alone gives me a ‘pension’ headache.”
Thanks to everyone who participated in our survey!
For those who had already implemented a Roth 401(k), we asked how the participant take-up rate had been. More than a third (34.5%) said about what had been expected, while 12.5% said better than expected. For nearly one in five (18.8%), it had been less than expected, and most of the 15% who opted for "other" were really in this category as well. The remaining 6% had no expectations to benchmark the take-up rate against.
As for what that take-up rate was - there was quite a bit of variety, as high as 28%, as low as 2% - but 5% looked to be about the median. Here are a few pertinent verbatims
|Bonus Question: If you already have a Roth 401(k) option in place, how's the take up rate?|
|1.||It's gotta be a secret; we are "knot" in the know, so our hands are tied.|
|2.||I HOPE not - my manufacturing workforce has trouble understanding a regular 401(k). I can't imagine the communication nightmare we would have for a Roth.|
|3.||Because this plan is a 457 plan, I need to wait until they are approved at the federal level. Oregon's Senator Wyden added language to allow Roths in 457 plans as part of a Supplemental Emergency bill in March, and it was passed by the senate, but I haven't heard anything else about it.|
|5.||I'm not a decision-maker on this, but I hope not. I see a lot of people jumping on the Roth bandwagon because they see "tax-free", not taking any account of the many, many restrictions on those funds. For that reason alone, I consider the Roth option in 401(k)s the worst plan design option out there right now, followed closely by not allowing participants to take distribution of their rollover accounts at any time.|
|6.||I'd like to say "never", but sometimes we're pushed to introduce new things if we're not traveling at the speed of light with numerous projects. So, it's really "maybe one day".|
|7.||I honestly don't know if XYZ offers a Roth option. I don't recall hearing about it, but now you make me wonder.|
|1.||WE have very high participation in our pre-tax regular 401 (k) and some in our post-tax. We are not limiting any contributions except as required by the IRS. For the most part our employees would either not participate or would not be eligible for any additional deferrals.|
|2.||We implemented it this last January, and had a decent number sign up.|
|3.||Roth option was added effective yesterday, May 1.|
|4.||Participants don't understand what it means. To me it's a no brainer. In retirement income years when I withdraw say $7,000, I get to spend $7,000. I also believe tax rates will be higher, but I didn't let that influence my decision. I rested on take dollars out and spend them all (i.e. no tax liability). I'm sold and thank you Roth.|
|5.||We introduced the Roth April 1 2006 and employees have responded well. It is especially attractive to our younger employees who have little or no tax liability with their entry level positions. Oh to be 25 again and squirreling away tax free money for retirement!Some of our high earners are splitting their contributions between the traditional and Roth.|
|6.||I think we want to add this, but..... Overall, we think participants can benefit from this. The idea of asset allocation and asset location (taxable, tax-deferred, non-taxable, etc.) seems to make sense. Our administrator has other clients with Roth 401(k) and say they have the cabibility, but its expensive to add. We also want to see how's it going with existing plans. We are worried about how to educate people to make informed decisions. Informed people now need to factor in a lot more info on both current and future personal tax rates along overall rates than before. (Who's selling chrystal balls?) Ironically, trying to educate people to make informed decisions is counter to the whole new trend of plan automation. Plus we've spent decades trying to explain that 401(k) is pre-tax money out of their paycheck. Now when we try to tell them it can also be after tax, won't their heads just spin? Somebody please just give me the magic bullet to add Roth 401(k) and make it work out for everyone. The tax code has gotten so complex, that now the majority of personal returns are prepared by someone other than the taxpayer. I see a trend coming that 401(k) plans are so complex that they are managed by someone other than the participant. P.S. I really want to see the comments from the people that already have a Roth 401(k).|
|7.||We're waiting for all the other plan sponsors who've adopted the Roth option to work all the kinks out before we jump on the bandwagon. Just thinking about the participant education alone gives me a "pension" headache.|
|8.||we had one as of 1/1/06 even before our provdier was ready to handle them. We have ROTH catch-up as well. Those that use them use them heavily- we often see 25-50% ROTH contribution, but are relatively few people so far.|
|9.||The majority of our employees will be at a lower tax bracket at retirement than they are right now. It makes much more sense for them to pay the taxes at that time. Adding a Roth 401(k) provision will just cause a lot of confusion and possibly only benefit a few employees but have the potential to cause a greater tax bill for many participants.|
|10.||We added Roth 401(k) in July 2006 and have over 13% participating to date (out of 25,000) and the numbers keep rising - You can share anonomously|
|11.||We aren't receiving any requests from employees to add the Roth option, so there's no need to inflict the complexities on our payroll manager at this time.|
|12.||We have had the Roth(k) in place since August 2006, only offering it to our Non-Union population. Employee feedback has been positive, they like having tools that give them flexibility. Since then the Union population has been very vocal about getting this option during the next contract negotiations.|
|13.||We added the Roth 401(k) feature effective Jan. 1, 2006.|
|14.||We are a State DCP and must wait on a major payroll system upgrade by the controllers office. This project may not be fully operational until 2010.|
|15.||We don't want the extra administrative cost or burden of tracking another contribution or distribution type.|
|16.||Too many choices seem to lead to people not doing anything at all.|
|17.||we will put it in effective 1/1/08.|
|18.||Might do it in a couple of years. Right now we already have after-tax contributions as well as before-tax, and so we're worried about confusing our participants more than they already are!|
|19.||Management is likely to add a Roth(k)for the 2008 plan year - they are currently reviewing several vendors.|
|20.||I added the Roth option to our plan, but I haven't done anything with it yet, since no one is interested. But I haven't pushed it either because I 'm not looking forward to the increased adminstrative work required.|
|21.||We are making plans to add a Roth provision as of 1/1/08, subject to retirement committee approval.|
|22.||One of my clients is adding the Roth effective 1/1/2008, I am excited to be setting this up for them. I am very glad they waited|
|23.||We added the Roth option as of January 1, 2006. Our 401(k) and payroll providers were ready to go, as well.|
|24.||We are considering the Roth option but want to start with education to see if there is any interest and to help reduce confusion later.|
|25.||We plan to add the Roth provision as of 1/1/08.|
|26.||Can't afford to take advantage of it right now, I need all the tax deductions I can get right now. However, I do put money into a ROTH IRA when I get my quarterly bonuses.|
|27.||Our plan already offers almost 20 choices of investment options. I fear adding another choice will already stymie the decision making capabilities of our employees when they look to allocate their deferrals. While it may seem easy to say "sure, let's add another option, what's the harm", the difficulty is maintaining the right balance of choice so as to encourage diversification while minimizing the chance that employees will simply give you the "deer in the headlights" stare as they allocate 100% into Fixed Income (safe choice).|
|28.||The incremental benefits do not offset the confusion that the new plans would cause|
|29.||It's on the strategic plan but is slowly being bumped down the priority list.|
|30.||The interest is not here.|
|31.||Our employees don't enroll in the 401k even with an intense educational initiative, so why bother with a new option?|
|32.||We'll add it January 1, 2008. The bigger challenge will be confirming our payroll vendor does it correcty.|
|33.||We have amended our plan and will implement after we program our payroll system, probably end of 3rd quarter.|
|34.||Employees with less than 5 year retirement target dates are the only interested (401k)participants. A weekly "Roth" Information Flyer is generating more interest.|
|35.||The benefits are not clear. The additional administrative effort may not be worth it.|
|36.||We will only add the Roth option if a lot of employees start requesting it. We don't typically make changes unless there is a demand for them or a fiduciary reason to do so.|
|37.||HR told us a year ago that they were considering adding a Roth 401(k). I guess that fell by the wayside, along with another idea they floated -- adequate short-term disability insurance that reimburses more than $700 a month. Stay healthy!|
We will be adding a Roth 401(k) on 01/01/08, because the top executives have asked for it.
b) - finally coming July 1! The trustees really dragged their feet on this decision, despite repeated requests for it by employees and despite the recordkeeper's readiness.
We thought about adding a Roth feature to our 401(k) this year, but we had so many other things to communicate, we have pushed it back to (e) maybe next year. However, my biggest fear related to the Roth 401(k) is that it adds yet another decision, and sometimes too many decisions can result in inaction. We have done all we can to simplify matters for our participants by adding some automated features, such as an auto-increase feature - subject to the participant's election, and lifestyle portfolios to make investment elections easier and ensure rebalancing. I am afraid the Roth feature will add complication back into the plan. However, I am sure we will add it eventually. It just makes sense for a lot of our participants. Hopefully they will be able to figure out who they are!
In response to your survey, (f) maybe one day. I haven't had an overwhelming demand for it yet.
no roth ira for us (can't say never but that's what i hope)