These days most retirement plans offer a Roth contribution option – and yet few, if any, have that as a default – this week NAPA-Net readers weigh in on Roth.
Starting with the here and now, asked about their clients’ current Roth offerings, 35% said most of them offered Roth, 31% said “nearly all” did, and 15% said that all of their clients now offered Roth (12% said it was “some,” 4% classified it as “a few of them,” and the remaining 2% said none did.
That’s quite different from the perspective of five years ago, when the percentage of respondents that said all of their clients offered a Roth option – and those that said none of them did – was equal at 2%. However, respondents note that five years ago, the percentage of their clients that offered a Roth option:
35% - some of them
23% - most of them
21% - a few of them
17% - nearly all of them
Commenting on those trends, readers explained:
“The trend is to add the Roth feature but not too many participants are electing the option.”
“Some had not added, but all (save 1 or two) added when it was time for the PPA plan restatement,” noted another. Another reader echoed that impact, noting that, “When the PPA restatement happened in 2014, we encouraged plans that didn't have the Roth provision to add it at that time. Any new plans we start, we automatically add it.”
“The main reason I have any 401(k)s without Roth is it’s the only document change needed and a few clients don’t want to pay for an amendment. Will probably pick them up on the next restatement,” commented another. “It's becoming more and more of a surprise that when going through plan design when you DON'T see a Roth option, whereas 5 years ago it was much more sporadic,” noted one reader. “Almost fits in the same bucket as the auto-enroll/auto-escalate or CIT availability. Just becoming more and more common.”
“Uptake has definitely increased on the plan level,” noted another.
“Sponsors who have not adopted Roth continue to be added to the ranks on a steady basis, but there are still some holdouts. Less education is needed for retirement committees on the advantages of Roth versus a few years ago.”
“It's more prevalent today than 5 years ago, but I for one have been 'checking the Roth box' since the advent of Roth 401k,” commented another. “Though not utilized much by participants, it has become essentially a mandatory feature of retirement plans over the last several years,” commented another.
Participation Rates
Speaking of which, we also asked about that participant take-up rate, and respondents indicated that among the plans they work with, the take-up rate was:
25% - 10-15%
23% - 5-10%
21% - 15-20%
12.5% - 20-25%
11% - 25-50%
7% - 0-5%
“Depends on demographics. Younger people get it if you take the time to explain it properly. Older people don't want to give up the immediate tax break,” noted one reader. “An interesting theme that I've been noticing is how participants are making the decision to split money sources between Roth and pre-tax,” commented another.
“Adoption rates are ticking up but it’s still an underutilized option,” noted another reader. “Definitely appears to be a small subset of the population that understands the feature and utilizes it.”
“Utilization is quite low, due to participant inertia and the fact that it is a complicated exercise to determine whether a Roth is beneficial for an individual participant.”
“Pre-tax is still king, because most auto-enrollment plans default to pre-tax. Also, on an enrollment form or website, pre-tax is still always listed first. There is a lot of ‘default bias’ with pre-tax. We’re actually starting to set defaults to Roth where the plan document allows. If it’s a non-auto-enrollment plan, we find the Roth uptake much higher. We emphasize it in education meetings,” commented another.
Talking the Roth
As for whether they’re talking more about Roth options than two years ago:
31% - Yes
25% - Definitely
18.75% - In some situations, not all.
12.5% - No, I've been talking it up for awhile now.
10.25% - No.
2.5% - Only when it comes up.
“A little more,” one reader explained, “but not with clients. I’m talking more to providers and TPAs about the possibilities and difficulties in making Roth the default contribution type for auto enrollment. Or, the possibility of segmenting an employee population by income level and making Roth the default for lower earners only ($50K and below for example).”
“Essentially it is becoming more of a plan design educational aspect. Since most providers don’t charge to track the various money types, for most plans it’s a ‘pre-selected’ item,” noted another. “Speaking and writing quite a bit on the subject,” said one reader. “Coincidentally have a blog entry ready to publish this Thursday on the topic.”
Are they being asked more about Roth?
27% - In some situations, not all.
25% - Yes.
23% - No.
12.5% - Definitely.
12.5% - No, it’s been a topic for a while now.
‘Rothed’ Readers?
On a personal level, we asked readers how much of their retirement – and their current contributions were “Rothed.” With regard to their retirement:
69% - some of it
17% - none of it
10% - most of it
4% - all of it – after a point in time
“I should be doing more, but need to work out finances. Main goal is to save as much as possible,” commented one. “I didn’t have access to Roth in my early career years, so the bulk of my retirement savings is pre-tax, sadly,” noted another.
Regarding their current contributions:
48% - some of it
27% - none of it
8% - all of it, including catch-up
6% - all of it
6% - most of it
The rest? None, because their plan doesn’t currently allow for Roth.
Other Comments
As you might expect, we got a number of comments on the topic. Here’s a sample:
“I like auto enroll into the Roth.”
“The new tax laws have changed a lot of realities for a number of 401(k) contributors.”
“I think most participant still get confused about a plan offering Roth and think it’s a Roth IRA option… subject to the Roth IRA limitations. Other think they need to open separate accounts for the Roth. It’s a HUGE education topic for my clients these days and when I do go into those meetings, you can see there is genuine interest in utilizing Roth... they just thought they couldn’t.”
“I absolutely think defaults should start switching to Roth. It’s the smart decision in most cases.”
“I think plan sponsors should be looking to default people into Roth contributions up to a certain income level or age.”
“Key point is most households do not qualify for individual Roth especially if there are two earners or they are HCEs.”
“Great feature, but education for the general population of plan participants needs to continue. Discussing tax implications with rank/file employees is often difficult for them to comprehend.”
“This is generally and under-utilized option. I have made it a point to emphasize the importance of tax diversification with respect to retirement savings. It’s all about ‘optionality’ in the decumulation phase. A firm understanding of the taxation of social security retirement benefits as well as the impact of taxable income and Medicare premiums is a must. Having a healthy dose of Roth source retirement money at retirement allows for more flexibility with tax planning.”
“If someone could get me a crystal ball with the tax rates in the future, I’ll definitively go one way or the other. Right now I still feel ‘eh’ about Roth.”
“We don’t tend to recommend a lot of stuff like auto-enroll or Roth. Mainly, we set these plans up to benefit the owner. Also, my old boss doesn’t trust the government and thinks they will tax Roths someday. He saw what they did with Social Security. He may be right, but I think he’s turning into a bit of a crank.”
“With tax rates now low, and likely to increase, if there is a good time to use Roth, it’s now. However, my reservation with Roth is that I do not trust the government not to tax my Roth account when I withdraw it even though it was contributed with post-tax money. I anticipate a time when accounts in excess of a certain amount, or individuals who have income exceeding a certain limit, will find at least a portion of their Roth accounts subject to tax.”
“I have thought about using Roth for those that make lower income because of current tax law. But have not pulled the trigger yet.”
“We see most uptake on Roth after meeting with an advisor 1v1 to discuss the benefits and their personal situation.”
“Just started talking about Roth as the default however plan sponsors aren’t comfortable with it... yet.”
“If we find a plan where Roth is not being offered or hasn’t been discussed then we know the current advisor has not done their job. We make sure it is available on all of our plans.”
“Roth conversions are more frequently discussed due to the TCJA and one-and-done rule.”
“I continue to find that people struggle to grasp the difference; despite dumbing down the comparison, participants still get confused by it. In the midst of confusion, people just pick box #1 rather than box #2.”
“Wish there was a simple, customized calculator the could truly tell you if a Roth is better than you – if you hear of one, let me know!”
Thanks to everyone who participated in our weekly NAPA-Net Reader Poll!
