Employers prepare to add Roth features to 401(k) plans

An increasing number of U.S. employers are planning to add Roth options to their 401(k), 403(b) or other defined contribution plans in 2013, a January 2013 survey by consultancy Aon Hewitt reveals. This comes on the heels of legislation that makes it easier for defined contribution investors to convert balances within their savings plan into Roth accounts.

Unlike traditional 401(k) plans, where employees make pretax contributions and, after retirement, pay income taxes on all distributions, Roth 401(k) contributions are made with after-tax dollars. Funds in the plan grow tax-free, and on retirement no taxes are owed on any distributions.

Previously, converting funds from a pretax to a Roth 401(k) account was limited to money that was already “distributable” without penalty from the pretax plan -- typically when an employee reached age 59½ or terminated employment, unless the plan otherwise allowed in-service distributions.

The American Tax Payer Relief Act -- the “fiscal cliff” deal enacted in January 2013 -- includes a provision that “opens the door for employers to allow expanded in-plan conversions, but it’s not a requirement,” said Patti Balthazor Bjork, retirement research director at Aon Hewitt, in a media release. “However, it makes the Roth conversions more attractive for employees, so there will likely be increased interest and incentive for employers to offer them.”

The consultancy’s survey of large U.S. employers (those with more than 1,000 employees) revealed that:

• While almost half (49%) of respondents currently offer no Roth option, 29% of those that don’t offer a Roth said they were very or somewhat likely to add this feature in the next 12 months. Of those new adopters, more than three-quarters (76%) will add both Roth contribution and in-plan conversion features.

• Employers that already have a Roth option are likely to allow employees to make in-plan conversions to Roth accounts. Of those respondents that currently allow Roth contributions but do not offer in-plan conversions, more than half (53%) are very or somewhat likely to add this feature in the next 12 months.

• For companies that already allow Roth contributions and in-plan conversions for amounts not subject to early-withdrawal penalties, more than three-quarters (79%) are very or somewhat likely to expand the eligibility for in-plan conversions, allowing them for previously nondistributable amounts.

“While employers have steadily been adopting Roth features in recent years, the new law, along with a better understanding of Roth by both participants and companies, will encourage more plan sponsors to add these options in the near-term,” Bjork said.

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