Roth 401(k) Survey 2007

Survey shows Roth 401(k) off to a solid start

With Roth permanency finally cemented into the tax code through the passage of the Pension Protection Act of 2006 (PPA), plan sponsors are now in a position to make long-term decisions about adopting Roth provisions in their 401(k) plans without the worry of this feature expiring in 2011. Prior to PPA’s passage, plan sponsors choosing early adoption of Roth were effectively playing a game of “chicken” with the U.S. Congress, risking the administrative hassle and expense of adding Roth in 2006 only to have to take it away five years later if Congress did not revoke the 2011 kill-date. PSCA first documented plan sponsors’ anxiety over the Roth 2011 sunset in our previous Roth survey (published in 2005), in which 42 percent of companies that were not planning to add a Roth cited concern over the Roth sunset as a factor in their decision. Now, they no longer have to worry.

Exhibit 1: Percentage of Plans Currently Offering Roth

Plan Size by Number of Participants
	1-49	50-199	200-999	1,000-4,999	5,000+	All Plans
Percentage of Plans	36.4%	32.1%	17.4%	18.1%	13.6%	22.4%

Exhibit 2: Average Percentage of Eligible Employees Making Roth Contributions

Plan Size by Number of Participants
	1-49	50-199	200-999	1,000-4,999	5,000+	All Plans
Percent Contributing	12.8%	7.7%	7.5%	6.3%	1.3%	7.9%

Plan Sponsors Adopt Roth 401(k)
Approximately 22 percent of the 401(k) plans we surveyed in early 2007 offer Roth designated accounts, with many more plans considering Roth adoption in the future. Clear size trends in Roth implementation are evident, with smaller companies taking the forefront in adopting Roth (Exhibit 1). Among plans offering Roth accounts, an average of approximately 8 percent of eligible employees made Roth contributions in 2006 (Exhibit 2). Plan size trends show up again in these participation numbers, with the highest participation rates occurring in the smallest plans. This is not surprising, as small plans tend to have higher participation rates in general and also tend to benefit from more personalized educational programs. (See PSCA’s 49th Annual Survey of Profit Sharing and 401(k) Plans for more information on the correlation between plan size and type of plan education.

Intention to Add Roth in the Future
Approximately 78 percent of companies surveyed do not currently offer a Roth in their 401(k) plan. For many of these plans, Roth is still very much on the table. Nine percent already intend to expand their plan to include a Roth, and 52 percent are considering doing so in the future (Exhibit 3).

Exhibit 3: Intention to Add Roth in the Future

Plan Size by Number of Participants
	1–49	50–199	200–999	1,000–4,999	5,000+	All Plans
Yes	7.3%	7.5%	7.9%	8.1%	13.2%	9.0%
No	39.0%	47.2%	38.2%	25.6%	27.6%	34.0%
Considering	43.9%	37.7%	50.0%	62.8%	57.9%	52.4%
Have not thought about it	9.8%	7.5%	3.9%	3.5%	1.3%	4.5%

Obstacles to Implementing Roth
Among companies that have not added Roth accounts, the most common reasons cited are concerns about participant education, lack of demand, and administrative burden. Companies’ concerns vary significantly based on their size, with small companies most frequently citing lack of demand and large companies most frequently citing concerns about the additional education that would be necessary (Exhibit 4).

Exhibit 4: Reasons for Not Implementing Roth 401(k)

Plan Size by Number of Participants
	1–49	50–199	200–999	1,000–4,999	5,000+	All Plans
Concerns about the additional participant education necessary	33.3%	39.6%	64.5%	70.9%	69.7%	59.5%
Lack of participant demand	69.0%	66.0%	64.5%	48.8%	44.7%	56.8%
Additional administrative burden	38.1%	60.4%	57.9%	53.5%	57.9%	54.7%
Insufficient regulatory clarification	24.6%	9.5%	22.6%	21.1%	30.2%	31.6%
Cost	0.0%	9.4%	10.5%	8.1%	11.8%	8.7%
Not available through current service provider	4.8%	1.9%	0.0%	2.3%	1.3%	1.8%
Other	16.7%	13.2%	19.7%	18.6%	25.0%	19.2%

Effect of EGTRRA Permanency on Plan Sponsors’ Roth Decisions
Among companies not already offering Roth, the majority (69 percent) indicated that EGTRRA permanency has increased the likelihood that they will adopt Roth in the future (Exhibit 5).

Exhibit 5: EGTRRA Permanency Increasing the Likelihood of Adding Roth

Plan Size by Number of Participants
	1–49	50–199	200–999	1,000–4,999	5,000+	All Plans
EGTRRA permanency has increased likelihood of adding Roth	55.6%	80.0%	68.4%	66.7%	72.7%	69.0%
EGTRRA permanency has not increased likelihood of adding Roth	27.8%	10.0%	7.9%	11.1%	11.4%	12.1%
Uncertain	16.7%	10.0%	23.7%	22.2%	15.9%	19.0%

Conclusion
Roth 401(k) sprung to life in 2006 backed by the momentum of several years of steady anticipation. Because it was enacted into law in 2001 but did not take effect until 2006, companies had a lot of time to contemplate whether they should add this feature to their plans. With the specter of the 2011 expiration date out of the way, Roth 401(k) is finally poised to take off. However, companies still have a number of concerns that will ultimately determine the future of Roth 401(k). Educational needs top the list, with the majority of companies wondering how they would effectively teach their employees to make the best choice between regular pre-tax 401(k) and the after-tax Roth. For many companies, touting the benefits of pre-tax deferrals has long been the cornerstone of their retirement plan education program. Suddenly promoting the benefits of an after-tax program throws a bit of a wrench into that approach, particularly since there is no simple formula for determining whether employees would be best-served by making regular pre-tax, or Roth after-tax, deferrals. The variables in such a decision are many and include unpredictable unknowns, including how income tax rates will be structured many decades in the future. Companies adopting Roth will need to take a philosophical stance on whether to launch their Roth loudly, perhaps with a major education campaign aimed at helping employees choose between Roth and regular 401(k) deferrals, or whether to initiate their Roth with less fanfare, which at one extreme might involve little more than making it available to those employees who want it, without actively promoting its use. 

The level of participant demand, another factor that respondents cited as influencing their choice not to add a Roth, may trend higher as more information about Roth 401(k) filters into the mainstream press. Meanwhile, the roots of employers’ other concerns will likely diminish as the regulatory environment for Roth becomes clearer and updated service provider systems reduce administrative and cost burdens. 

PSCA will continue to collect and publish information documenting the evolution of Roth 401(k). More data on Roth 401(k) will be published in September as part of our 50th Annual Survey of Profit Sharing and 401(k) Plans.