More than two years after its creation, the Roth 401(k) is finally gaining traction in company plans, such as those managed by The Hartford (Conn.) Financial Services Group Inc.,
The Vanguard Group Inc. and Merrill Lynch Retirement Group.
Few companies signed on to the Roth 401(k) when the plans became effective on Jan. 1 2006, largely because employers thought its Roth individual retirement account-like features would be too difficult for employees to understand.
But industry observers say that employees nervous about the possibility of tax increases under a new presidential administration next year have pushed companies to adopt the Roth 401(k).
"Now that we're getting closer to elections and we're hearing that tax rates will probably go up, people are concerned about it," said Tom Foster, a national spokesman for corporate retirement plans at The Hartford. "This is a great way to help with tax liability in the future."
Unlike the Roth IRA, the Roth 401(k) doesn't have income limitations, and all employees are eligible. The money is taxed when it is contributed, allowing employees to withdraw money tax free.
While overall Roth 401(k) numbers aren't available, data from individual companies show that employers have begun to embrace the Roth 401(k) and have started offering it to their employees.
Thirty-one percent of The Hartford's plans have adopted the Roth 401(k), up from just 7% in March 2007. The participation rate is 13% among employees who have the opportunity to use the Roth, Mr. Foster said.
As of last month, 28% of Malvern, Pa.-based Vanguard's plans had adopted the Roth 401(k), compared with 19% a year earlier. The average participation by employees was 9%, up from 4% in May 2007.
At Merrill Lynch Retirement Group, 12% of its defined contribution clients had adopted a Roth 401(k) option as of March 31. The Pennington, N.J.-based unit of Merrill Lynch & Co. Inc. of New York said in a statement that the number of companies that adopted the Roth 401(k) jumped 21% in the first quarter.
Nearly 13% of Baltimore-based T. Rowe Price Group Inc.'s plans are offering the Roth 401(k), which is an increase of about 50% from a year ago, said John Doyle, vice president of marketing and communications.
And at The
Charles Schwab Corp. of San Francisco, 42% of its plans used the Roth 401(k) as of last Tuesday, up from 37% at the end of 2006. By the end of the year, it projects that half of its plans will offer the Roth 401(k), said Dean Kohmann, Schwab's Richfield, Ohio-based vice president of 401(k) plan services.
"We're seeing a steady increase in 401(k) plans offering the Roth, and more individuals are using it, too," he said.
Mr. Kohmann said that the biggest interest in the Roth comes from professional services firms.
Meanwhile, Boston-based
Fidelity Investments doesn't have recent figures available. However, data from the end of 2006 showed that it had more than 20,000 participants in the Roth 401(k), compared with none a year earlier.
The total participant assets had reached $50 million by December 2006, and the Roth 401(k) was available in 500 of Fidelity's plans.
Fidelity intends to release a new report in the coming weeks and also expects that the report will confirm an upward trend of growth in Roth 401(k) participation, said Fidelity spokesman Mike Shamrell.
No firm tracks overall Roth 401(k) assets because the asset base is still relatively small, according to Luis Fleites, director of retirement markets for Financial Research Corp. in Boston.
As the Roth 401(k)'s popularity grows, it means more work for financial advisers.
Advisers will need to work more closely with clients and offer them advice on whether the Roth 401(k) is the right option, said Edward Ferrigno, vice president of Washington affairs for the Profit Sharing/401(k) Council of America in Chicago.
A lot of that depends on an individual's earning potential, he said.
Fund companies said that they have noticed that participants who are younger and lower paid and those who are much higher paid tend to use the Roth 401(k).
The highest Roth 401(k) participation rate is among workers under 25, said Kathy Himsworth, a principal at Vanguard.
Determining whether clients should take the Roth 401(k) is a gamble if the clients are in a higher tax bracket now, Mr. Ferrigno said. "If you're in a no-tax or low-tax bracket, this is a no-brainer and you want to do this," he said.
Employees in a higher tax bracket have to hedge whether they think taxes will go up, and getting help from advisers is the best way to make that decision, Mr. Ferrigno said.
One problem with the Roth 401(k) is that some clients need to use a traditional 401(k), which allows them to lower their taxable income now, said Rebecca Preston, a certified financial planner with Preston Financial Planning in Providence, R.I. She declined to provide her firm's assets under management.
E-mail Lisa Shidler at [email protected].
