The first Bush tax cut will create an imperative next year for companies that sell employer-sponsored retirement plans to begin offering Roth 401(k) and Roth 403(b) plans in order to remain competitive, people in the industry say.
The new products combine features of Roth IRAs with 401(k) or 403(b) plans, and the tax-law provision authorizing them takes effect Jan. 1.
A survey released in October by Invesmart, a Pittsburgh retirement plan provider, showed strong interest by employers in Roth 401(k) plans. Forty-four percent of respondents said they were interested in offering the product next year; 31% said they were not; and 25% said they did not know enough to take a position.
Banks and other financial institutions that sell employer-sponsored retirement plans but do not offer Roth 401(k) and Roth 403(b) plans stand to lose business, said Tom Foster, the national spokesman for corporate retirement plans at Connecticut's Hartford Financial Services Group Inc.
Mr. Foster plays an educator role for Hartford, discussing with employers and financial advisers the products and rules in the retirement marketplace.
"These plans will be a small portion of overall retirement plan business, but if I as a provider am not offering it and a competitor is, I'm going to lose out," he said. The new products will be particularly attractive to highly paid employees, who may press their employers to offer the plans, he added.
Financial advisers seem eager to sell the new plans, he said, citing the roughly 1,000 participants in Hartford's recent conference call on Roth 401(k)s.
Roth 401(k) and 403(b) plans let employees contribute after-tax dollars for retirement and take qualified distributions tax-free. Essentially, they are optional features that can be incorporated into an existing 401(k) or 403(b) plan. If an employer already offers a standard 401(k), adding the Roth 401(k) feature simply gives employees another option for how their contributions will be taxed.
If an employer offers both options, employees can divide their retirement contributions among standard 401(k) or 403(b) and Roth 401(k) or 403(b) plans.
Providers should offer extensive education on the new plans for employers and participants, said Kevin Morris, the retirement investor services marketing officer at Principal Financial Services Inc. in Des Moines. The plans are only appropriate for those who expect to be in a higher tax bracket upon their retirement, he said.
"That's the million-dollar question. Most people couldn't even tell you what tax bracket they're in now," he said.
Though providers must offer Roth 401(k) and 403(b) plans to keep pace with competitors, he said, demand for the new plans is likely to start slowly.
"We're expecting a marginal take-up rate based on industry data," he said. "Employers are going to be somewhat slow to get into this. It's another decision for employees to make … and employers have to worry about educating their participants."
Hartford and Principal are planning to roll out educational tools to help demystify the products.
Hartford expects to offer printed guides to the products for participants, employers, and financial advisers. The insurance company will also give client companies sample letters to help explain the products to employees, along with an interactive Web site offering calculators intended to help participants determine whether the products are appropriate for them.
Principal's education effort also includes guides for participants. The guides explain the products and list a series of questions that employees should answer for themselves to determine whether the products are appropriate.
