QOTW: Roth Defaults

A handful of organizations (6.4 percent) have considered Roth after-tax contributions as the default deferral type for automatic enrollment – none have made the switch from pre-tax contributions, yet. Those that have considered it shared:

• Considered but traditional 401k was preferred as the default.
• These are popular options for our employees who max out the pre-tax contributions.
• Thought about it but haven't really looked into it thoroughly.
• We have auto-enrollment, but only discussed Roth as the default, did not go that way.  We default into pre-tax.
• We have not adopted Roth, but have discussed it.  A Roth default could have negative tax implications for low wage earners who are might otherwise qualify for the Earned Income Tax Credit.  Also, by continuing to use before-tax as the default, we preserve the participants' ability to choose to convert the funds to Roth.

Most respondents indicated they have not considered it, but they had a lot of thoughts on the topic. Reasons for not switching the default to Roth ranged from not appropriate for employee base to pre-tax is a perceived participation benefit and Roth is not well understood, to they simply haven’t thought of it.

• After -tax may discourage employees to continue to participate.
• After-tax contributions are not the best option for most people; we would prefer to allow people to make their own choice.
• Curious to see the results of this one! We may want to consider.
• Employees are attractive to the idea of tax saving on pre-tax plan.  It's hard to convince to employees the benefits of Roth option.
• Good idea!
• Hadn't thought about it.
• Has not been any interest in this option.  However, individuals are using the Roth as their main savings option.
• I am uncertain if that would be the best option as we employ physicians at various career levels.  I like the question though to ponder.
• Many of our new hires are young and it would not be appropriate for them. Our default is a target date fund.
• Most employees are not as familiar with the Roth feature in a 401k, 403b plan than they are the pre-tax advantage.  The Roth feature should be more of an employee election vs. a feature of the auto-enroll.
• Most of the employees are more familiar with the tax savings on the traditional side, however, we provide Roth information as enrollment.
• Never crossed our minds!
• Never thought about it but probably because it's after tax
• Never thought of that.
• Not on our radar.
• Not that I know of - we've only used pre-tax for this and have not considered Roth
• Only one employee has ever even inquired about this.
• Our age groups of hires varies vastly - but we'll look at in the future.
• Plan only accepts pre-tax contributions. It's a voluntary supplemental plan to a mandatory defined benefit plan.
• Pre-tax is the most commonly used contribution by the majority of our population. It's also safest relative to new hires who might be within 5 years of retirement.
• Roth is too individual a choice and is not right for everyone. Saving pre-tax is a better default.
• We do not currently auto-enroll, but I am sure we would not consider Roth contributions as the default. Pre-tax contributions are the traditional way most think of investing in a 401(k). There aren't enough participants that are knowledgeable about Roth. More importantly, the majority of our participants elect pre-tax contributions.
• We do try to educate savers on the options but a default to a tax deferred option is still our preference for our population
• We feel it is important to have the default maximize the near-term tax benefits associated with pre-tax and make an educated decision to use Roth as appropriate for their own tax situation.
• We generally follow most common practice; would like to see if this is a leading trend in the future before we consider.
• We provide education to our participants regarding their plan options.  We feel they are capable of making an informed decision.
• When we added the Roth feature we chose to keep the default auto election as the traditional 401k election.
• With the deductions being taken on an after-tax basis and the requirements for qualified distributions, I'm not sure that Roth is a good option for automatic enrollment.
• Would like to hear about other companies doing it.

   

We are not likely to see companies jumping on this bandwagon anytime soon, but with the increased popularity of Roth and the increased awareness and education around the benefits of Roth, the continued innovation and reevaluation in automatic enrollment defaults, and the reconsideration of the tax benefits of pre-tax contributions, we may see some companies embracing Roth as the default in the future.