Opponents try to thwart Roth 401(k) before it starts

SAN DIEGO — While defined contribution plan providers gear up to offer the Roth 401(k) next year, some companies are quietly trying to kill the option before it becomes available.

Brian Graff, executive director and chief executive of the American Society of Pension Professionals and Actuaries in Arlington, Va., said a few "larger institutions" are urging Congress to repeal the Roth 401(k) before it goes into effect Jan. 1.

"There is (one) mutual fund complex that is a little bit behind the eight ball, and they have actually gone to Congress and said, ‘Why don't you repeal this thing because it is too complicated?' I am not going to let that happen," he said at a session at the society's 401(k) Summit in San Diego last month.

"They realize that all of sudden, they might be at a competitive disadvantage, because some of the larger vendors have got this system almost up and running," Mr. Graff said.

In an interview, he declined to identify the financial services company behind the lobbying effort, saying that it is being done behind the scenes. However, in Mr. Graff's panel remarks, he noted he wasn't referring to Fidelity Investments of Boston.

"I am relatively confident that these efforts by (a) very few larger institutions that do not want to bother with this won't succeed," he told the audience. Mr. Graff's advice: "Proceed in full course knowing that the Roth 401(k) is going to go into effect next year."

Early indications suggest that plan sponsors are indeed interested in adding a Roth 401(k) option to their traditional 401(k) plan.

"From a selling standpoint, this is what is new and fresh coming up next year," Mr. Graff said. "Ultimately, the decision makers and plan sponsors are going to really want this, so you've got to be prepared to sell it."

Unlike a traditional 401(k), which is funded with pretax dollars, the Roth 401(k) will be funded with after-tax dollars from the employee only. Like a Roth individual retirement account, the gains are tax free, whereas the gains in a traditional 401(k) are taxed as ordinary income.

As evidence of the anticipated demand, Marcy Supovitz, principal with Boulay Donnelly & Supovitz Consulting Group Inc. of Worcester, Mass., cited during the presentation a survey of large employers last year by Hewitt Associates LLC of Lincolnshire, Ill. More than one in three employers, or 35%, said they might add a Roth 401(k) account to their defined contribution plan next year, the survey found.

Ms. Supovitz said she was surprised the percentage was so high, considering that at the end of last year, many employers probably hadn't fully explored the option.

Because the Internal Revenue Service last month released the proposed rules governing the Roth 401(k), Ms. Supovitz — who joined Mr. Graff on the panel — said she thinks "we are going to see that percentage increase quite a bit."

The Roth 401(k), she noted in her talk, benefits especially higher-income earners who might exceed the income limits to invest in a Roth IRA. In particular, Ms. Supovitz thinks the Roth 401(k) will be popular for sole proprietors with an individual 401(k) plan, otherwise known as the solo 401(k).

``My best guess would be that by the time we get to the effective date of Jan. 1 of next year, at least 50% of employers should be ready" to add it, she said in an interview. "If we look at the individual (k) market or the very-small-plan marketplace, I think we will see the percentage is a lot higher."

An aspect of the proposed IRS rules governing Roth 401(k)s that surprises Ms. Supovitz is that unlike the Roth IRA, the Roth 401(k) is subject to required minimum distribution at age 70 1/2. "One of the great attractions of the Roth IRA is the fact that you never have to take it out during your lifetime; that is not the case with the Roth(k)," she said during her remarks.

But there may be a way around that, Ms. Supovitz added.

"At the point you terminate employment, there is nothing to keep you from rolling that Roth(k) money into a Roth IRA, and now you've totally gotten rid of all those age 70 1/2 requirements," she said.

Another difference between the Roth 401(k) and Roth IRA is that plan participants aren't allowed to convert traditional 401(k) money into the Roth version by paying taxes on the funds. However, Mr. Graff said, the conversion issue is a "pet project" for the ASPPA, which is lobbying Congress for change.

"I think there is some possibility in the future that Congress will allow for some limited amount of conversion," he said.