Money Tip of the Day: Lean on Your Employer to Get Roth Option into Your 401(k)
Roth 401(k)s are Finally Getting Noticed, But Employers Are Playing Wait and See
Yahoo Finance provides a rundown of how they will work. Essentially, they will operate just as Roth IRAs currently do, but will have the much higher contribution limits found inside 401(k) plans. 401(k) contribution limits are usually at least 15% of earnings, but are sometimes as high as 50%, depending on the employer’s plan design. The Roth IRA contribution limit for 2005 is $4,000 ($4,500 for those 50 and older).
This is an idea whose time has come, especially for younger employees. The trouble is that very few employers plan on making the move in 2006 (graphic was obtained from Investment News–paid subscription required):
This is not a good thing. A few years of delayed implementation could cost younger employees thousands of dollars in long-term wealth. The Yahoo item notes:
This is where it gets tricky: While any employer can add a Roth 401(k) option to its plan starting Jan. 1, 2006, it isn’t required. Among the major concerns for employers are the costs associated with managing the plan, and educating their workforce about this new investment option. According to The Profit Sharing Council of America’s President David Wray, companies will be much more likely to start offering a Roth 401(k) if their employees indicate that they intend to participate. So if you want a Roth 401(k) option to be added to your plan, make sure to let your employer know.
Education should be an ongoing employer concern anyway. To try to get a handle on the costs involved, I called Fidelity Investments, and confirmed what I thought, which is that the conversion costs essentially would involve adding boilerplate language to the 401(k) plan documents permitting the Roth treatment (no tax “deduction” for contributions, distributions tax-free) vs. the traditional treatment (contributions are pre-tax, distributions are taxed), and changing the forms for enrollment and making changes.
This doesn’t seem like a big burden to me. I would chalk up employers’ current posture to inertia more than anything else. So BizzyBlog’s Money Tip of the Day is to let your employer know you want the Roth option in your 401(k)–starting next year.
