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More Employers Move to Offer Roth 401(k)s

With the fate of the plans settled via Congress’ pension reform measure, adoption is expected to further accelerate in 2007.

August 28, 2006
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Related Topics: Retirement/Pensions, Benefit Design and Communication, Compensation
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With the passage of pension reform, the uncertain fate of Roth 401(k)s has disappeared, paving the way for employers to add the accounts.

    For companies like International Paper of Memphis, Tennessee, and Wade Trim, a Detroit-based engineering company, the rewards of offering the option to employees are obvious, officials at both companies say.

    "This is a feature that we can give our employees that they can’t get anywhere else," says Bob Hunkeler, vice president of investments at International Paper. "Employees can’t just go to a broker and get this product."

    Roth 401(k)s just became available in January. Unlike regular 401(k)s, where an employee’s wages are taxed as income when they retire, Roth 401(k)s allow employees to contribute after-tax dollars now and not be taxed when they tap the funds after retirement. Employers are launching the product particularly to appeal to younger workers just starting their careers 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 of more than $110,000 per year and couples with income of $160,000 or more.

    But until earlier this month the question of whether Roth 401(k)s were here to stay had given some employers pause. Before the pension bill was signed into law on August 17, Roth 401(k)s were scheduled to disappear—or "sunset"—in 2010, as outlined in the Economic Growth and Tax Relief Reconciliation Act, the legislation that created the Roth 401(k).

    "While I’m not surprised that they made it permanent, because it made sense, I was glad to see it happen," Hunkeler says. "I think you are going to see an explosion of these products around the first of the year, now that the last piece of risk was removed."

    The change is "a watershed event" for the Roth 401(k), says Lori Lucas, senior vice president and defined-contribution practice leader at Callan Associates.

    Many organizations were concerned that if Roth 401k)s had expired, they would have been left to administer these accounts, Lucas says.

    Some employers remain skeptical and are worried that in a few years the sunset could be reversed and Congress will start taxing the earnings of these accounts, says David Wolfe, a partner at law firm Gardner Carton & Douglas. "They think that at some point Congress will be looking for new revenue sources and find that pot of money too tempting not to tax," he says. "We tease them that they are being a little bit paranoid."

    Wolfe and other experts don’t believe that will happen. "I advise clients that they shouldn’t sit on the sidelines just because of that," he says.

    But the reason companies like International Paper and Wade Trim waited this long to launch the product was because they were waiting for their vendors to be able to accommodate it, officials say.

    "We needed to make sure that our payroll provider, ADP, could do it first," says Timothy McKindles, people services group manager at Wade Trim. "Otherwise we would have shot for January 1."

    McKindles has received at least 10 e-mails from employees asking for the offering, and hopes to make it available by March 2007.

    Wade Trim is waiting a few more months to launch the product because it wants to make sure it has the opportunity to fully communicate how it works. "We don’t want to do it at year-end because it’s such a crazy time with open enrollment," McKindles says.

    He is planning to visit the company’s different offices and do face-to-face meetings to make sure that its 450 employees understand how the Roth 401(k) works.

    International Paper, which made the product available August 1, began communications about the offering earlier this year in its newsletter to 401(k) participants. The company followed that up in July with more detailed information in the newsletter about how the offering works, Hunkeler says.

    "Communications is a challenge be­cause a lot of employees won’t know whether it’s right for them," he says. Hunkeler says he is interested in online tools that could help employees see whether a Roth 401(k) is a good fit. Hewitt Associates and other companies have launched such online tools, says Lucas, who until July 31 was director of research at the Lincolnshire, Illinois-based company.

    Lucas advises that employers shouldn’t be overwhelmed by the communications challenges associated with launching a Roth 401(k). A recent Hewitt study shows that 48 percent of plan sponsors were hesitating about launching the offering because they were concerned about the complexity of communicating it.

    "I think it might be an overly exaggerated concern," Lucas says.

Workforce Management, August 28, 2006, p. 31 --Subscribe Now!

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