Why The Roth 401(k) Is A "Dud" So Far

In its October 17 issue, Business Week reports the new Roth 401k might not be as well-received as some are predicting. Their report:

Unless your retirement plan is managed by Vanguard Group, don't expect to see the Roth 401(k) pop up as an option in your benefits package yet. "It has turned out to be a dud," says Michael Weddell, a retirement consultant at Watson Wyatt in Southfield, Mich. "Most employers are not offering them right now."

Roth 401(k)s are taxed differently than traditional plans. When you put money into a conventional 401(k), you reduce your taxable income, but you must pay regular income tax when you take distributions. Participants in a Roth 401(k) pay their taxes up front.

Many benefits consultants thought Roth 401(k)s would be rolled out in January, yet companies are waiting for the Internal Revenue Service to clear up some murky tax rules -- such as how early withdrawals will be taxed. "There has been no guidance, that's true," says IRS spokesman Bruce Friedland. "The IRS intends to issue guidelines this fall." Vanguard spokesman John Demming said the firm has been talking to corporate clients and studying the Roth 401(k) for more than a year. "We are prepared for the decisions the IRS makes and are ready to offer it on Jan. 1," he says.

This is what I expected, though not for the same reasons. While the Roth 401k is a great option, big companies (the ones that hold lots of 401k funds) tend to move rather slowly when it comes to innovations like this. They like to see what others are doing, then move in once any initial problems/issues are cleared. As such, it may be a year or two before we see any significant usage of the Roth 401k.

What about you? Is your employer planning on offering the Roth 401k on January 1? If so, please share your story.

Comments

[foo]

One of the unresolved issues with Roth 401(k) plans is how employer matches, if you have them, are handled. Since the contributions are taxable income, in effect, the employer contributions would also be succeptible to tax.

A good friend that is a benefits and pension attorney is currently recommending that his clients setup a dual 401(k) plan. Use the Roth feature for employee contributions, and stash the matching funds in a traditional 401(k) account so employees don't have to pay taxes on them.

[Neo]

As soon as I read about the possibility of the Roth 401(k) being introduced, I sent an email message to my HR department. I received what appeared to be a canned responses stating that they are reviewing the details and will announce their decision either later this year and early next year. I am sure this is the same response that most employees are receiving from their employer.

Neo

[Janina Jack]

ary4rVanguard is only offering Roth 401k to hugh companies with either certain number of participants or a certain amount of dollars. Most big firms, such as Fidelity, Schwab, are doing it the same way. A smaller company, 9 employees and a small retirement amount, 50k a year, won't be able to open it at any of the big firms. I know this sounds like a great idea, Roth 401k, but jumping into a untested plan could cause excess work. Let the big dogs test out these accounts on their employees, then jump in. I've heard so many people wanting to jump right in to these accounts but legislation hasn't been completely finalized. One more year of tax deferal contributions won't kill anyone.