Lack of familiarity with new plans an obstacle
Providence financial adviser Michael Raspallo has talked to six employers about the Roth 401(k) since it became available in January, and so far only one of them has decided to offer his workers the new retirement plan.
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In a national survey last year, only 7 percent of employers polled said that it was “very likely” they would offer workers the Roth option this year, and 28 percent replied that it was “somewhat likely,” according to Hewitt Associates, an Illinois-based human resources consultant.
Meanwhile, two-thirds of the survey’s respondents said it was either “very unlikely” or “somewhat unlikely” they would add the plans.
Why?
Raspallo, of Harbor Point Financial Group, said that his clients – mostly small-business owners – have passed on the plans because they require additional accounting for them, lack certain guidelines and are unfamiliar.
Thus far, the Roth option has been added at mostly large U.S. employers such as General Motors Corp., Delphi, Vanguard and A.G. Edwards, according to USA Today.
“I think that the popularity of it will grow,” Raspallo said. “I don’t think it’s popular now because it’s mostly made it to the desks of the biggest employers.”
Though triggered Jan. 1, Roth 401(k) plans were part of the Economic Growth and Relief Reconciliation Act that Congress adopted in 2001. The Roth IRA, with the same tax incentives, has been around since 1998.
Employees can put up to $15,000 in Roth 401(k)s this year, and those older than 50 years of age can invest an additional $5,000 in the accounts as part of a catch-up clause in the tax reform act.
Contributions in the new plans are made with after-tax dollars, unlike standard 401(k)s that take pre-tax dollars. Investments in Roths grow tax-free, and owners can withdraw funds from the accounts beginning at age 59? without paying taxes. Regular 401(k)s grow tax-free but are taxed on the back end.
Raspallo said that the Roths could be good for young employees, who would pay taxes on contributions presumably while they are in a lower income-tax bracket than in retirement, he said. He added that the plans also could benefit individuals who make $110,000 or more and couples with $160,000 in combined income, both of which are ineligible for Roth IRAs.
However, the new Roths are dogged with regulatory uncertainty, he noted. The government had not until this month issued guidelines for how to present the accounts to employees. And the plans may have a short life, he said, with a sunset provision in the tax relief act taking effect in 2011.
Still, Congress may decide to reauthorize the act beyond its current end date. In any case, Raspallo said that he expects that the government will honor the tax-free features of the Roths after the sunset date.
Small-business owners, he added, also are reluctant to add the Roths to retirement packages because of extra accounting required.
Another hurdle is educating employees about the features of the Roth 401(k), said Lisa Bleier, a senior attorney for the American Bankers Association in Washington, D.C. The difficulty, she said, is that employees are already familiar with the advantages of pre-tax contributions to traditional 401(k)s.
Due to low interest in the new Roths, Bleier said, the ABA has yet to provide its member banks with resources to help sell the plans to employers.
The current sunset provision on the plans may cause companies to question if it is worth the time to educate employees on the new plans.
“I think there certainly is an impact,” Bleier said. “That’s a lot of effort to put into something that may very well go away within four years.”
