Wisconsin funds move to after-tax plan for changing workforce
There's been a lot of talk about "Rothification" in Washington, but at least some of the action is taking place in Wisconsin.
Defined contribution plans of U.S. Venture Inc., Appleton, and Brady Corp., Milwaukee, are rare examples of auto-enrolling participants into Roth accounts. Officials at both companies took this approach based on the belief that the Roth feature can offer better tax benefits, most notably for younger and/or lower-salaried workers.
The $130 million 401(k) plan at U.S. Venture began offering Roth auto enrollment in January 2015. Now, 44% of employees are enrolled in a Roth option compared to 13% prior to the change.
At Brady Corp.'s $250 million 401(k) plan, the Roth usage is now at 55%, up from 25% in 2013, the year before Roth auto enrollment began for new employees, said Helena Nelligan, senior vice president for human resources.
Both companies use consultant Francis Investment Counsel, which has reviewed the demographics of its clients over the years to assess what percentage of employees are in their 20s and early 30s and in lower tax brackets. Because these workers could be logical candidates for auto-enrolling into a Roth strategy, "we thought our clients ought to have that discussion," said Clifford Dunteman Jr., vice president for the firm, based in Brookfield, Wis.
Commissioned a study
U.S. Venture commissioned a study of its plan in 2014 to assess why it had lower-than-hoped-for participation even though it had offered traditional auto enrollment since 2009, said Amy Vissers, director of total rewards. The study showed many non-participants were younger and lower-paid employees at the company, which distributes energy products, lubricants, tires and auto parts.
The information prompted a "healthy" discussion among members of the plan's investment committee, Ms. Vissers said, "but the decision seemed pretty obvious to everyone" that the Roth approach could be attractive to younger and lower-paid employees.
"We did a full in-plan conversion," she said. "We explained that Roth was a great way to get into the 401(k) plan." She emphasized that U.S. Venture only offers education about how Roth works and how participants are taxed.
The plan allows employees to opt out, choosing a traditional 401(k) approach or declining participation. Each March, it auto enrolls everyone contributing less than 6% of pay to their retirement accounts.
At Brady, the company initiated a traditional auto enrollment in 2005 and has offered a voluntary Roth feature since 2007. Company officials began discussing Roth auto enrollment after a Francis Investment Counsel analysis found the average age of new employees at the manufacturer was 28 and suggested company officials consider the strategy, Ms. Nelligan said. A target-date fund series is the qualified default investment alternative.
The plan's investment committee studied the matter for about six months, concluding the Roth approach made sense for younger, newer employees, she said. "There wasn't any pushback from employees," said Ms. Nelligan, a sentiment echoed by Ms. Vissers at U.S. Venture.
Even though more DC plans are offering Roth options, investment growth has been slower for many reasons, including the complexity of Roth rules. Participants are more comfortable taking immediate tax deferral rather than calculating their tax strategy decades into the future, consultants said.
Sponsors might offer the Roth option, but some provide little education or communication, the consultants said. Record keepers might not incorporate the Roth approach into their platforms for auto enrollment; and most plans that offer auto enrollment do so with the traditional 401(k).
"Operationally, Roth can be an issue," Francis Investment Counsel's Mr. Dunteman said."The more complicated it gets, the more likely the sponsor might stand pat."
However, the combination of younger workers and lower salaries can make a compelling case for some companies, he said. Nine of his firm's 47 clients now auto enroll participants into a Roth strategy but all them to opt out. Three others are setting up a Roth auto-enrollment feature. Most clients offer Roth auto enrollment only to new employees. The overall Roth participation in these plans can be as high as 60%, Mr. Dunteman said.
Other changes, too
In addition to offering the Roth auto-enrollment feature, executives at Brady and U.S. Venture made other plan design changes to encourage greater participation and contributions.
When it changed to a Roth auto-enrollment policy on Jan. 1, 2014, the Brady plan also raised the default rate to 5% of annual pay from 3%. The plan has had an annual 1-percentage-point auto-escalation policy since 2010. In June, it raised the total auto features cap to 10% from 8%, which had been in force since 2014.
The various design changes have helped the Brady plan produce an overall 93% participation rate today vs. 60% in 2005, Ms. Nelligan said. The average annual participant deferral is now 7.5% vs. 5% before the Roth auto enrollment took effect.
In March 2015, U.S. Venture raised its plan's auto-enrollment default rate to 6% of pay from 3%. The auto-escalation rate is one percentage point of pay per year, leading to a 15% cap on total auto features.
The plan offers a company match — dollar for dollar for the first 2% of annual pay and 50 cents on the dollar for the next 4% of annual pay.
U.S. Venture also contributes 3% of annual pay to each employee regardless of their participation. "This is in addition to the company match," Ms. Vissers said. "The company feels so strongly about retirement, so we will put you in the plan."