Roth 401(k) Plans Popular But Scarce: Providers Push Seven-Month-Old Program
July 17, 2006
Employees at Associated Agencies, an insurance company in Rolling Hills, Ill., have joined the small, but growing, number of workers with a new option for retirement savings: the Roth 401(k).
First approved by Congress in 2001, but only available as of Jan. 1, 2006, the Roth 401(k), like its traditional defined contribution counterparts, allows employees to save for retirement as they work.
Unlike typical 401(k) plans, through which employees contribute savings on a pre-tax basis, deferring tribute to Uncle Sam usually until after retirement, workers enrolled in a Roth 401(k) plan stow away post-tax earnings now, but pay no taxes when they take distributions later.
"We looked at this, and we saw no reason why we shouldn't offer it," said Robert Schrayer, the president of Associated Agencies, which employs 120 people. The company's existing plan already had a remarkably high participation rate of 92%, he said. "For some, this is a better time for them to pay taxes than it will be when they take the money out," he said. "People were very interested."
But Schrayer is among a minority of plan sponsors to add the new 401(k) option. In fact, although employees whose companies offer the new Roth 401(k) have readily selected it, employers have been slower to catch on, according to a recent study by Hewitt Associates, a human resources consulting firm based in Lincolnshire, Ill.
"A lot of business owners will take the position, If it's not broken, why fix it?'" said Jim Huller, president of Maximum Wealth Advisors in Roanoke, Ind.
Huller began promoting the plans before they kicked in on Jan. 1 but said he only got a lukewarm reception from would-be sponsors. Those that already had plans saw no reason to add another. Others that had plans in the past, but failed to generate enough interest among employees to clear discrimination tests, had already given up on the idea of going to the trouble of qualifying yet again.
Then came tax time. "Around April 15, it sunk in," he said. Since then, Huller has begun developing Roth 401(k) programs for three companies, including a medical office and a construction company.
The Hartford Financial Services Retirement Plan Group of Simsbury, Conn., sees financial advisers like Huller as its front-line offense in the continued promotion and popularity of Roth 401(k)s.
Not only can advisers, equipped with information and research about the benefits of these programs, help increase participation for plan providers, but they can garner business for themselves, said Tom Foster national spokesman for The Hartford.
"We'll educate them in the technical aspects and how to turn those technical aspects into selling opportunities," Foster said. After all, when people retire or leave a company, the person they are most likely to turn to for help will be the adviser who first introduced them to the program, he said.
The second-line offense consists of employers, or plan sponsors themselves, Foster said. Plan providers must assure sponsors that the added program will not bring with it burdensome paperwork or extra expenses.
"The main choice an employer has to make is whether the Roth 401(k) is an option they should be offering," Foster said. The Hartford ensures employers incur no added costs and offers the same products to employees in both plans. Employees can choose a Roth 401(k), a traditional 401(k) or both.
In the case of Associated Agencies, which uses Transamerica Retirement Services of Los Angeles for both its traditional and Roth 401(k) plans, Schrayer described the added costs for the sponsor-mainly separate payroll and benefits accounting-as "very, very, minor." Transamerica handles the time-consuming year-end paperwork and employee statements, Schrayer said.
"Once they understand it really isn't that big a deal, you're going to see more and more employers jumping on this," said Foster. The Hartford has signed on 1,000 plan sponsors in the seven months since the law took effect.
As for the employees who opt for a Roth 401(k), Hewitt found the plans most popular among younger, lower-wage earners, who hope to see their compensation-and their tax brackets-rise as they approach retirement, but are not as concerned about reducing their tax liabilities just yet.
In fact, in its survey of 60,000 employees across three large companies that offer Roth 401(k)s, Hewitt found that 90 days after the Roth 401(k) was introduced, about 8% of employees had chosen to enroll. Of those who opted for the Roth, 14% were in their 20s, compared to 4% in their 50s. Nearly 25% were first-time participants, or those who had not already enrolled in the company's existing, traditional 401(k).