In contrast to regular 401(k) plans, where an employee's wages are taxed as income when they retire, Roth 401(k)s allow employees to contribute after-tax dollars. This could be particularly attractive to workers who are just beginning their careers and who expect to pay more in taxes in the future as their income rises.
Also, unlike Roth IRAs, these vehicles are available to individuals with income over $110,000 per year and married couples with income of $160,000 or more.
Despite these advantages, however, only three out of 10 employers surveyed recently by Hewitt Associates say they are likely to offer Roth 401(k)s when they become available on January 1.
"I don’t think we need to add another level of complication until we have a much greater level of participation in our 401(k) plan," says Cindy Ellis, benefits manager at Cadmus Communications in Richmond, Virginia. Cadmus, with 3,000 employees, has a 65 percent participation rate in its 401(k) plan. Ellis says she would wait until the majority of Cadmus’ workers were already in the regular 401(k) before adding the Roth option--unless employees demanded it.
Randy Boldt, director of global rewards at Motorola, agrees that the communications challenge is one of the reasons the company is not launching a Roth 401(k) plan in January. Another issue that gives Boldt pause is that under current law, Roth 401(k)s are scheduled to sunset in 2010 and the Treasury Department hasn’t given instructions on how to handle the accounts if that happens.
"We want to get more guidance about some of the nuts and bolts regarding these plans," Boldt says. Since it doesn’t seem that many of its competitors are launching Roth 401(k) plans, he is not concerned that Motorola will be less competitive by waiting until the middle of next year to make a decision.
Bob Hunkeler, vice president of investments at International Paper Co. in Stamford, Connecticut, had similar concerns when he first started looking into Roth 401(k)s. But he now is starting to warm to the concept. "On further review, there are some nice features about it," he says.
For one, Hunkeler anticipates that offering a Roth 401(k) will cost the company little or no money. "If we do it, it will probably be sometime next year," he says.
Currently, International Paper has 60,000 plan participants and automatically enrolls employees into its regular 401(k) plan. Hunkeler is weighing whether that would continue if the company launched a Roth 401(k).
"This is a tough one because you could argue that automatically enrolling employees into a Roth 401(k) makes the most sense, since the employees you are automatically enrolling tend to be younger people," he says.
But given the uncertain fate of Roth 401(k)s, Hunkeler thinks his company will continue to automatically enroll employees into its regular 401(k) if it adds the Roth plan.
"There is just more certainty there," he says.—Jessica Marquez