Although the American Taxpayer Relief Act expands the opportunity for defined contribution plan participants to convert from a traditional pretax contribution option to a Roth after-tax contribution option, some industry professionals doubt there will be a surge of activity.
They say many participants still view a Roth conversion — or even starting a Roth — as a daunting matter requiring them to make complex assumptions about future earnings and taxes. They also point out that Roth options in DC plans have received lukewarm responses from participants even though more plans are offering a Roth opportunity.
“Roth accounts have not been widely accepted by participants,” said David Ray, vice president of national sales for TIAA-CREF in Dallas. The new law could provide “a great opportunity” for some people depending on individual finances, but ”we don't see significant demand unless providers promote this,” he added.
Providers and plan executives aren't sure how much the new law will affect participant interest in choosing a Roth option or converting to one.
Joshua Newmister, global retirement program manager for Symantec Corp., Mountain View, Calif., said he can't predict how the new law would affect participants in his company's $900 million 401(k) plan. Although 12% of participants have chosen a Roth option, no one has converted from a traditional 401(k) to a Roth 401(k).
“Obviously Roth is still new compared to pretax in 401(k) plans, and most automatic-enrollment designs have pretax as the default deferral, hence the relatively lower utilization,” he said. “It will take some time before employers and employees embrace the full benefit of the Roth feature and create comprehensive communication/education of how to utilize both pretax and Roth deferral sources in retirement planning.”
Mr. Newmister said younger employees “could likely benefit from Roth contributions early in their career where they could likely be earning less than they will be later in their careers.” Other employees, with higher incomes, “may desire to pay the tax now, knowing that they have the ability to, rather than paying the tax in retirement,” he said.”