For boomers who have been looking to combine the tax treatment of a Roth IRA with the corporate matching dollars they get when contributing to a 401(k), the wait may soon be over. Spurred by the Pension Protection Act of 2006, a growing number of companies are offering a Roth option to their 401(k) plans — and employees are buying them up.
“Since the passage of the Pension Protection Act, we’ve seen a doubling in the number of 401(k) plans that offer a Roth option,” says Steve Wilt, an advisor and team leader of the Star Group unit of Merrill Lynch, Akron, Ohio. “It’s really starting to take off.”
Since the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001, plan sponsors have been allowed to incorporate after-tax Roth contributions into both 401(k) and (for non-profit employees) for 403(3)(b) plans. The Roth-enabling provision of EGTRRA was, however, set to expire in 2010; the Pension Protection made the provision permanent.
A March 2008 survey from Hewitt Associates, Lincolnshire, Ill., shows that approximately one-fifth (19%) of employers currently offer a Roth 401(k) to their employees, up from 12% in 2007. Among those companies that do not offer a Roth 401(k), 11% said they are very likely to add one in 2008.
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Also noting an upswing in Roth 401(k) plan adoption by its client-base is Merrill Lynch. A survey by the New York-based company’s Retirement Group reports a 21% increase during the first quarter of 2008 in plans incorporating a Roth 401(k) feature. Assets in Roth 401(k) accounts total $70 million, with $28 million contributed during the first 3 months of this year. The average Roth contribution in Merrill Lynch’s plan-base is approximately $5,400.
Kevin Crain, a managing director Merrill Lynch’s Business Retirement and Corporate Market Integrated Benefits business, says that professional services firms have experienced the greatest penetration. Medical practices, law and accounting firms, and consulting agencies accounted for fully one quarter of the increase in plan adoption enjoyed during the first quarter.
“What’s happening now, particularly at professional services firms, is that people are learning about the Roth 401(k) and encouraging senior executives within their companies to make it available to employees,” says Crain.
In contrast to a standard 401(k), Roth 401(k) contributions are invested using after-tax (rather than pre-tax) dollars, but distributions are tax-free; standard 401(k) contributions are taxed at distribution. The different tax treatment, sources say, has no effect on a plan participant’s balance, assuming the same rate of return and tax rate for both plan types.