Let Them Roth 401(k)

When I was at law school at American University, we moved to a new building a few blocks down and it was a drastic improvement from our original digs. One of my favorite stories is how the former Dean at the time were incredulous that students demanded a type of computer at the computer sync sites because he insisted the students never used it and it was like owning a Betamax. That computer was a Mac.

In 2006, Roth 401(k)s were finally allowed. The misnomer of Roth 401(k)s is that it was separate and apart from the traditional pre-tax 401(k), but all it is, is a 401(k) plan that allows a Roth feature. The Roth feature allows for after tax deferrals that will result in tax-free distributions at normal retirement. The Roth feature is treated the same away as the traditional pre-tax deferral for compliance purposes and the only real issue is letting the payroll provider know which deferrals are pre—tax or which are post-tax.

So in my mind, there is no reason why a plan sponsor wouldn’t offer a Roth feature to their 401(k) plan. It should not increase cost and cause any administrative issues; it allows participants to chose to defer some or all of their deferrals on a post tax basis. Freedom of choice for 401(k) participants is a good thing, a very good thing. Yet only 40% of all 401(k) plans offer it.

People who will doubt the sell of Roth 401(k) will point out that only about 10-15% of participants who have the option of the Roth 401(k) will use it. Heck, looking at the state of our economy and our tax load, how many folks could afford deferring on an after tax basis? In addition, to Roth or not to Roth bring up a host of other issues, namely theories of future tax policy, as well as trying to predict the return of the markets, as well as trying to figure out whether foregoing a tax deduction now is worth paying no taxes at retirement. Of course, age and future income, are considerations as well. So the low percentage of those using it is because of cost, as well as mathematical and theoretical considerations that make my head spin.

So while most plan participants will never Roth, there are those that will. Maybe like a Mac, the rate of those deferring on a post tax basis will increase and it will be more than just a niche product.

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