There has been a lot of buzz surrounding the new Roth option on 401k's.
Obviously, there are a lot of sound reasons why it is a good idea to add a Roth option to a 401k - otherwise our law makers wouldn't have passed this piece of legislation.
However, there is a one, very compelling reason to not add a Roth option to your 401k.
The simple, singular reason for not doing it is that it further confuses participants which leads to lower participation.
Countless studies have shown conclusive evidence that a confused consumer is less likely to buy.
Hewitt Associates, Harvard University and the University of Pennsylvania completed a joint study to determine why people don't participate in their 401k plans.
Here are the top five reasons:
Obviously, there are a lot of sound reasons why it is a good idea to add a Roth option to a 401k - otherwise our law makers wouldn't have passed this piece of legislation.
However, there is a one, very compelling reason to not add a Roth option to your 401k.
The simple, singular reason for not doing it is that it further confuses participants which leads to lower participation.
Countless studies have shown conclusive evidence that a confused consumer is less likely to buy.
Hewitt Associates, Harvard University and the University of Pennsylvania completed a joint study to determine why people don't participate in their 401k plans.
Here are the top five reasons:
- They are paying down their debt first.
- They do not plan on staying with the company very long.
- They are simply procrastinating.
- They are confused by the process.
- They don't trust the market due to government corruption and corporate scandals.
- Several people in your company are maxing out their 401(k) contribution.
Since the total dollar amount that can be contributed by a participant is the same for a Roth or Traditional 401k, a Roth option effectively allows for a larger contribution since it is after-tax money rather than pre-tax.
If a significant portion of your people would contribute the maximum allowed into their Roth 401(k) accounts, it would be worthwhile to add this option to your plan. - Several people in your organization have very large balances in traditional 401k or IRA account.
The biggest advantage of Roth IRA's and 401(k)'s is that they allow you to better manage your taxes in retirement.
If you have employees that have a lot of money in pre-tax qualified plans, it may be a nice benefit to save some money in an after-tax qualified plan.
(It's important to note that all company contributions for the benefit of the employee will still be classified as pre-tax traditional 401k contributions.
) - You have a young work staff who fit the following two criteria:1.
They are actually contributing to their 401k plans.
2.
Their future earnings potential is significantly higher than their current earnings.
As was stated above, savings in a Roth IRA or 401k allows you to manage your taxes in retirement.
If your income is less now that you think it might be in retirement, then assuming that tax rates stay consistent (not likely!), you'd be better off contributing to a Roth versus a Traditional 401k.
Adding a Roth option to your 401k plan is more likely to confuse participants leading to lower participation than.
Here are a few compelling reasons for doing so:
Our nation's lawmakers typically don't pass new legislation without some sort of justifiable reason.
(Although it could be argued that the entie Roth concept was designed solely to increase current tax revenue.
) However, the truth about 401k participation is that many people don't participate because they simply are confused.
Adding additional choices such as an excess number of funds or Roth options only serves to confuse participants more.
The bottom line is that a Roth option should not be added to a 401k plan "just for the sake of it".
Carefully consider if there is a compelling reason such as one of the aforementioned justifications for adding it to your plan.