Insurance and Government

Slow start predicted for Roth 401(k) plans: Many companies, employees likely to take wait-and-see attitude regarding new retirement-savings vehicle

January 9, 2006

So when the Roth 401(k) debuted Jan. 1, he gave his 24 employees at Thurston Springer Miller Herd & Titak Inc. the opportunity to sink a percentage of their earnings in the new option.

The idea draws upon the standard 401(k) plan that is the vehicle of choice for millions of working Americans saving for retirement. But a distinct difference between the two might scare some employees away.

Unlike a traditional 401(k), the money diverted into a workplace Roth is taxed upfront, resulting in smaller paychecks. But after the initial shock wears off, the long-term benefit could be well worth the loss in take-home pay. That's because no taxes are owed once the Roth 401(k) is tapped in retirement. Savings in the standard 401(k) are taxed upon withdrawal.

For Titak, president of Thurston Springer, a local financial planning and investment management firm, the decision to offer the option is simple.

"As an employer, I think it's critical to give the employee as much flexibility as you can with their retirement accounts, and the Roth 401(k) does that," he said. "We're empowering them to make their own choice."

The Roth 401(k) was introduced with the Economic Growth and Tax Relief Reconciliation Act of 2001, which stipulated a Jan. 1, 2006, start date. The plans, however, will be phased out in 2010, unless legislation extends the deadline.

Roth 401(k) accounts are subject to the contribution limits of regular 401(k) plans-$15,000 for 2006, or $20,000 for those 50 or older by the end of the year. That allows individuals to stash thousands of dollars more in tax-free retirement income than they would through a Roth IRA, in which contributions are limited to $4,000 a year, or $5,000 for folks 50 and older.

For those who expect their tax rate to be the same or higher in retirement than it is now-mainly young people who expect their incomes to rise significantly in the future-a Roth 401(k) might be the answer. For instance, employees in the 15-percent or 25-percent tax bracket might want to pay the taxes now and not worry about what tax brackets will be in the future, said Steve Kritzmire, a manager at the local office of the BKD LLP accounting firm.

But for members of an older generation that are in their peak earning years, he said, the Roth 401(k) might not be as attractive because their tax bracket likely will be lower in retirement.

Predicting what tax rates will be in the future is difficult, although financial experts think they are likely to rise to help the government offset growing budget deficits and pay for rising Social Security and Medicare costs. For that reason, employees can play it safe by contributing to both accounts.

"If I knew what the marginal tax rates were going to be, I could be exact on what someone should do," Titak said. "But since no one knows, the Roth enables the employee to play both ends against the middle."

Many employees won't get the chance to choose anytime soon, though, if a survey conducted last year by Lincolnshire, Ill.-based Hewitt Associates is any indication. The global human resources outsourcing and consulting firm reported only about 30 percent of the 458 firms surveyed said they are likely to add a Roth 401(k) option to their benefit plans.

The percentage might be lower locally, judging from the tepid interest received by several investment and benefits firms. They cited sundry reasons, ranging from the extra burden it will place on payroll functions to pending rules that have yet to be finalized by the federal government.

Many employers are choosing to kick the tires rather than jump in head first, said Hans Kraabel, a vice president of locally based Key Benefit Administrators Inc.

"We don't have any clients who want to go live Jan. 1, come hell or high water," Kraabel said in December. "They're asking what others are doing. It's a wait-andsee approach."

Karyn Dzurisin, manager of the Indianapolis office of Baden Retirement Plan Services LLC, said she can count on one hand the employers who are committing to the Roth.

Both Kraabel and Dzurisin have made their clients aware of the new offering, but said many business owners have been preoccupied with end-of-year obligations. Employers can opt to start the Roth at any time.

And for some companies, especially smaller ones struggling to offer their employees health insurance, retirement programs are low on the list of priorities, Kraabel said.

Others question why they should invest the time and money if the provision might sunset in 2010, said Kelly Clevenger, an investment provider at the Fort Wayne office of Lincoln Financial Group.

"There's already the issue of educating your employees about tax deferral and saving for retirement," Clevenger said. "Now this adds a new element. Which way do I go-the Roth or the regular 401(k)?"
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