PSCA
Join our Community

Are You Still Avoiding Roth!?

02/21/2019
By Jack Towarnicky

 PSCA’s 61st Annual Survey 
Roth is available in 70 percent of surveyed plans!

Roth keeps rising: Pre-tax 401(k) contributions are available in 95 percent of surveyed plans; the rest are traditional profit-sharing plans. And, Roth is now available at 70 percent of surveyed plans, among all sizes of employers – a significant increase compared to 2016, especially among plans with fewer than 50 employees – up from 55.6 percent of plans in 2016 to 67.7 percent in 2017.

So, 25 percent of surveyed plans offer pre-tax 401(k) contributions but not Roth 401(k). Interestingly, even today, statutes limit the offer of Roth 401(k) only as an alternative to traditional, pre-tax 401(k) contributions.

Why Congress Added Roth 401(k)
2019 marks the fourteenth year in which Roth 401(k) contributions are permitted within 401(k) plans.

Roth has been available in Individual Retirement Accounts (IRA) for more than 20 years – long before access was approved for 401(k) plans.1 When first introduced, the Roth IRA was named after then-Senator William Roth (R-Del). Why did Congress approve the Roth alternative, first in the IRA and later in the 401(k)? Budget considerations often dominate the federal government’s perspective. So, contributions taken on an after-tax basis are not contributions taken on a pre-tax basis, meaning the loss in revenue during the 10-year budget window effectively gives Congress more money to spend without adding to the federal deficit.

Tax revenue considerations dominated Roth IRA design. It was the same when Roth 401(k) was added as a temporary feature between 2006-2010. As scored by the Joint Committee on Taxation,2 Roth 401(k) features were estimated to increase revenues to the federal government by $320 billion between 2001-2011. Roth later was made an indefinite feature of the tax code.3

Why Plan Sponsors Add Roth 401(k)
Typically, there are no identifiable financial benefits to plan sponsors who add Roth 401(k) features – only added cost and complexity in administration and communication. To the extent workers add assets, through contribution increases, asset retention or rollovers into the plan, it is possible that the initial cost to add Roth 401(k) features may be offset throughout time by the lower fees associated with plans that have more participants and assets under management.

Simply, plan sponsors offer Roth 401(k) because it is a more valuable option for some, but not all, participants.4 It may favor workers who:

  • Are in a low federal/state marginal tax bracket today, but who expect higher marginal and effective tax rates tomorrow, 
  • Plan to build a significant nest egg of retirement assets (“middle class millionaires”) given federal deficits, debts, entitlement funding needs and existing (and potential) taxation and income based surcharges for Social Security benefits as well as Medicare Part B and Part D, and 
  • Wish to transfer retirement wealth to future generations in a tax-savvy manner. 

And that is the most important thing to remember. Roth 401(k) is a more valuable option compared to pre-tax 401(k) contributions for some, but not all participants. It also is true that pre-tax 401(k) is a more valuable option compared to Roth 401(k) contributions for some, but not all participants.

Remember the No. 1 maxim for plan sponsors: The only certainty when you provide participants choices and control is that some will make the wrong choice.

Only your participants can know for sure. The question is whether you, as a plan sponsor, feel comfortable making the decision for them.  

If You Don’t Offer Roth – Read This 
With prevalence now at 70 percent, a supermajority of plans offer the Roth feature. And, based on audience response, we now have anecdotal evidence that some plan sponsors use Roth as their default in deploying automatic features for new hires. So, for the majority of plan sponsors, the pros apparently outweigh the cons. How about you? In my last plan sponsor role, we added Roth capability when it was first eligible – Jan. 1, 2006. We did so after extensive internal discussion and debate. In fact, we had decided to add Roth in 2002, even though legislation would only make it available in 2006, and, initially it was only expected to be available for five years from 2006 through 2010. Obviously, we decided that the pros outweighed the cons by a substantial margin to justify introducing this unproven option into our already successful 401(k) plan. So, perhaps after so many years, I have forgotten most of the cons surrounding adding Roth features. If you can, please take a couple of minutes and send me an email at jtowarnicky@usaretirement.org to share the reasons why you, as a plan sponsor, offer a 401(k) plan without the Roth 401(k) feature.

 

If You Offer Roth – Read This 
Only 20 percent of participants who have access to a Roth feature made Roth 401(k) contributions in 2017.

Why? 

I don’t know, do you? 

I wonder why individuals made Roth contributions. I wonder why individuals did not make Roth contributions. 

I would like to find out. If you know why, send me an email at jtowarnicky@usaretirement.org. 
If you don’t know why and you want to find out, also send me an email.

 


 

1Roth Celebrates Its 20th Anniversary, 2/27/18, Accessed 1/2/19 at: https://www.psca.org/blog_jack_2018_9
2Joint Committee on Taxation, Estimated Budget Effects of the Conference Agreement for H.R. 1836, Fiscal Years 2001 – 2011, JCX-51-01, 5/26/01, Accessed 1/2/19 at: https://www.jct.gov/publications.html?func=download&id=2001&chk=2001&no_html=1
3Pension Protection Act of 2006, Pub. L. 109–280, 8/17/06
4Roth Will Be 21 Years Old Next Year, 3/6/18, Accessed 1/2/19 at: https://www.psca.org/blog_jack_2018_11

comments powered by Disqus