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Among 401(k) or similar defined contribution plans, 61.6 percent have incorporated Roth contributions, compared to 31.1 percent in 2007, according to a recent report from financial services firm T. Rowe Price.
But the percentage of employees making Roth contributions remains low—at around 10 percent—research findings from consultancy Willis Towers Watson reveal. That's because many employers have yet to appreciate and, in some cases, communicate effectively the full potential of the Roth 401(k) option.
In Roth 401(k) plans, employees make contributions using after-tax dollars and are able to take tax-free withdrawals at retirement. Consequently, Roth contributions can offer tax diversification for retirees as they begin to take taxable distributions from regular 401(k) plans or receive taxable payments from defined benefit pension plans. And, unlike with regular or “traditional” 401(k)s, contributions to a Roth 401(k) are not subject to minimum distribution requirements after age 70½ if they are rolled over to a Roth
“A Roth 401(k) account can be a tremendously valuable vehicle for employees to save for retirement,” said Marina Edwards, a senior retirement consultant at Willis Towers Watson in Madison, Wis.
“Unfortunately, many employers have yet to appreciate and, in some cases, communicate effectively the full potential of the Roth option,” added Kevin Wagner, a senior retirement consultant in the firm’s Atlanta office.
When the Roth 401(k) option was first allowed starting in 2006, under a provision in the Economic Growth and Tax Relief Reconciliation Act, it was often viewed as administratively cumbersome, Edwards and Wagner said. Now, retirement plan providers and payroll companies have largely eliminated many of the hurdles.
“When employees bypass Roth 401(k) contributions, they unnecessarily narrow their tools for tax-effective retirement savings,” said Wagner. “Roth contributions can help some retirees keep their marginal tax rate low and avoid triggering taxes on their Social Security benefits,” since money that comes out of a Roth is not considered taxable income, he pointed out. Another consideration is that for an employee who retires before age 65, “Roth 401(k) distributions may enable them to qualify for health care subsidies under the Affordable Care Act,” he added.
To help boost employees’ understanding of the savings opportunity the Roth option provides, a recent report by Willis Towers Watson, Capturing the Opportunity of Roth 401(k) Contributions, suggests that organizations:
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.
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