PLANADVISER - November/December 2018 - 45

and would be indifferent [as to whether it was] a Roth or a
pretax 401(k), " observes Martha Tejera, head of plan consultants
Tejera & Associates in Seattle.
But real-life conditions are rarely so simple. " Many
younger workers just starting out expect their tax rates to be
higher in the future, which could make the Roth structure
more advantageous, " Tejera says. And it is not just about tax
rates. In terms of higher-income participants, she adds, " If
someone is up against the maximum deferral, putting those
dollars in a Roth saves about one-third, irrespective of the
tax rate. Those dollars have already been taxed, and that
$18,000 is the equivalent of $24,000 in pretax dollars. "
She also notes that taxes paid in retirement on Social
Security benefits are determined by the amount of other
taxable income. " For retirees drawing from conventional
401(k)s, 85% of their Social Security benefits may be subject
to tax, but if retirement income is taken from a Roth, it's not
taxable, and there's no impact. "
Roths offer greater flexibility in cash flow as well. " People
who have considerable income in retirement may be able
to avoid some of the required minimum distributions when
they reach age 70 1/2 by having a Roth in place, " says Mike
Shamburger, head of territory sales for T. Rowe Price Retirement
Plan Services, in Owings Mills, Maryland.
Roughly 72% of plans offer a Roth contribution option,
according to the 2018 PLANSPONSOR Defined Contribution
(DC) Survey, which covered 4,000 DC plans. Roth availability
was more prevalent at the largest plans-nearly 79% for those
over $1 billion in assets-but comparable across other plan
sizes. While 76.5% of plans match participant contributions
for their plan overall, just 69.4% both support and match
Roth contributions, although more often at larger plans.
The actual participant use of Roth plans is scant. T.
Rowe Price Group reports that, among the 600 plans and 1.6
million participants studied for its " 2017 Reference Point "
report, just 6.9% of participants made Roth contributions,
rising slightly from 5.8% in 2014.
Few sponsors have made Roth 401(k)s their default structure,
perhaps from a reluctance to make tax decisions for
participants. " That's a valid argument, " Shamburger says.
" With pretax plans, the benefits are pretty much the same
for everyone, while with Roth accounts they're more subjective
to the individual. "
Marina Edwards, senior director of retirement with
Willis Towers Watson in Chicago, points out, " Sponsors have
been making 'paternal' tax decisions for participants all
along, by automatically enrolling them in a pretax 401(k). If
Roth can provide a better outcome for some, why not select
that for them instead? "
Without defaults in place, the choice of Roth vs. pretax
has to be guided, and educating participants on the
complexities of Roth has been challenging. " When people
don't understand something, they're not likely to take action
on it, " Edwards observes.
" Age 50 is usually when the alarm goes off, and people
realize, 'I'm actually going to have to get ready for retirement,' "
Shamburger says. However, with Roth plans, T.
Rowe Price finds that the message is most resonant among
participants ages 20 to 40 and has reached about 9% of
those participants as of 2017.
" There's a contradiction
there, " he says. " Those are the folks you would think live
in the moment and are less related to something as far off
as retirement. "
" Part of the disconnect is inertia, " says Jim Sampson,
director of retirement advisory services for Hilb Group
Retirement Services in Warwick, Rhode Island. " For too
many people, their 401(k) is like a health club, where they
sign up but never go back. And that lack of attention goes
hand in hand with the industry using too much jargon. "
What he finds most effective in increasing Roth participation
is one-on-one or small group meetings, " focusing on the
basics and 'Fisher-Pricing' it for everyone. "
Many advisers also promote Roth accounts by borrowing
a familiar concept from investing. " Participants don't know
what's going to happen in the markets, so they diversify
their investments, " Edwards says. " Nor do they know what
future tax rates will be, and they can diversify by paying
current taxes through a Roth 401(k). " She adds that recent
reductions in federal income tax rates make this choice
more appealing through 2025 and provide a greater payoff
to converting from traditional to Roth accounts.
" I think people find 'diversification of taxes' too
confusing, " Sampson says. " Instead, I say, 'You never get
away completely from paying taxes, but if you adopt a Roth
for part of your savings and pay the taxes now, you'll have a
bucket of money that you won't be taxed on in retirement.' "
" If the education is too technical and talks about all
of the options and flexibility, it can be overwhelming to
participants to the point where they just go with the pretax
choice, " Shamburger
says. He advocates an approach
through " personas " -representative profiles of hypothetical
people at several career points and in several financial positions
that participants can relate to.
Consultants at Willis Towers Watson go a step further,
modeling simulations of retirement options for individual
participants.
" We've been able
to demonstrate, using
reasonable assumptions on growth in participants' salaries
and the likelihood that their tax rates will be higher, that
people may be able to retire from eight months to two years
earlier if they go with a Roth 401(k), " Edwards says.
Retire two years early? That's like getting the second
marshmallow. -John Keefe
KEY TAKEAWAYS
* Despite wide adoption of Roth deferrals in DC plans,
participant takeup has been slow.
* Saving the maximum-this year, $18,000-in a pretax
401(k) is the equivalent of $24,000 in a Roth 401(k)
because of the tax advantages; that is a 33% premium.
* Investing in a Roth 401(k) is another way participants can
diversify their portfolios.
planadviser.com November-December 2018 | 45
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