Push to require Roth 401(k) savings over traditional plans may re-emerge

Rothification, which set off a furor in 2017 as Congress debated tax reform, could find its way into new bills next year, experts say.

Retirement plan advisers who thought Washington had ditched the idea of requiring Roth 401(k) savings instead of traditional 401(k)s should think again.

Those who closely follow retirement policy say senior legislators on Capitol Hill are again whispering about so-called Rothification. The idea could re-emerge, perhaps to make up for tax-revenue shortfalls related to other retirement legislation being floated, observers said.

“Rothification is not dead,” Robert Holcomb, vice president of legislative and regulatory affairs at Empower Retirement, said Monday at the Kohler Retirement Plan Advisor Conference in Kohler, Wis. “[It] is going to raise its head again.”

The idea to change the calculus between traditional and Roth savings for 401(k) investors set off a furor in the second half of 2017 as Congress debated its tax-reform legislative package.

Concern began to grow in the weeks leading up to early November (when a bill in the House was released) that Republicans would limit pre-tax 401(k) contributions to as little as $2,400 from the current $18,000 threshold. Savings beyond that limit would go into Roth accounts.

(More: Ted Benna, father of the 401(k), thinks tax reform that favors Roths is ‘pretty stupid’)

By having 401(k) investors pay tax upfront on Roth savings, as opposed to deferring tax until retirement with traditional accounts, Republicans could budget revenue sooner to pay for cuts to corporate and individual tax rates.

But some opponents argued that paying tax immediately would dissuade employees from saving money in 401(k) plans. In rare unity, AARP, financial services companies and trade groups, and others formed the Save Our Savings Coalition to lobby against Rothification and other retirement proposals.

The situation came to a head and President Donald J. Trump unleashed a characteristic tweet storm, proclaiming there would be “NO change to your 401(k).”

Rothification ultimately never came to pass. But that may not be the end of the story.

As Mr. Holcomb of Empower explained: “Once a pay-for has been identified, it never really goes away.”

Indeed, the industry was faced with similar Roth proposals just a few years ago. Former Rep. David Camp, R-Mich., who was chairman of the House Ways and Means Committee, tried advancing the concept in 2014 as part of his tax-reform proposal.

While Washington observers don’t expect retirement measures — let alone any significant legislation — to advance ahead of this year’s midterm congressional elections, chances look good for one or more notable bills to be taken up by Congress in 2019 (such as the Retirement Enhancement and Savings Act and the Automatic Retirement Plan Act).

That’s especially true if Democrats win the majority in the House and Rep. Richard Neal, D-Mass., ranking member on the Ways and Means Committee, becomes chairman. Retirement reform would likely be his highest priority, observers said.

The bottom line is, for those 401(k) advisers who didn’t like the idea of mandated Roth savings last year, the fight likely isn’t over.