Roth 401k Accounts Failing to Gain Traction

MILWAUKEE, WI, August 5, 2010 - Since their introduction in January 2006, only about 31% of 401k plans have added the Roth 401k as a savings option. Further, only 7% of 401k investors with access to a Roth 401k use one. These statistics baffle Michael J. Francis, President of Francis Investment Counsel LLC.

"The financial planning community cheered when this powerful wealth accumulation tool was finally made available," said Francis. "Yet it has been largely ignored by the vast majority of employers and 401k savers. I attribute this apathy to lack of information.

While the analyses I've seen suggest the Roth option makes the most sense for many people, it still requires retirement savers to answer three questions. The answers are not easy because they require you to predict the future. But many investors will find their honest answers to the following three questions would lead them to a Roth: 1. The length of time you intend to leave savings in the account; 2. The estimated rate of return; and 3. The difference between your current tax bracket and your tax bracket when it comes time to take withdrawals."

The Roth option is not for everyone. To assist savers in determining whether the Roth 401k is an appropriate investment for them, Francis Investment Counsel has published a series of profiles:

 

Stick with a Traditional 401k Pre-tax contributions Earnings tax-deferred Savings taxed as ordinary income when withdrawn	Move to a ROTH 401k After-tax contributions Earnings tax free* Savings withdrawn with no taxes* *If withdrawn after account open for five years and age 59 ½
Temporarily High Income – Those with variable income such as commissioned sales people may benefit from the tax deduction in a high tax year.	Low Tax Bracket Today – Those workers in a low (less than 15%) tax bracket today are well-advised to contribute after tax dollars today in exchange for tax-free distributions at retirement.
Short-Term Retirement Saver – In the short-term, the upfront tax deduction is almost always more valuable than the tax-free treatment of earnings on your savings.	Young Aggressive Investor – Those with 30 or more years who intend to stay aggressively invested to maximize their long-term rate of return are likely to retire with more investment earnings than contributions.   Sheltering those earnings from taxation is a sound strategy.
Currently Qualify for Income Tax Credits – Shifting from pretax to after-tax savings could bump you into a higher tax bracket and put certain tax credits at risk.	Wealthy Investor – Someone with substantial existing savings in tax-deferred accounts may desire to shelter future savings past age 70 ½ or pass wealth on to beneficiaries income-tax free.
Unsuccessful Saver – If saving for retirement has not been a priority, the up-front tax break may be more meaningful than tax-free distributions on a limited amount of retirement savings.	Max Contributor – Those who contribute the maximum each year can build a larger benefit in a Roth 401k account for retirement using after-tax dollars.
Convinced Tax Code Will Change – If you believe the tax code will shift away from its emphasis on the taxation of current income, a known tax break today may be more valuable than the promise of a tax break of unknown value in the future.	Works for Company with Generous Company Contributions – Since company contributions are made with pre-tax dollars and are therefore subject to tax upon withdrawal, contribute to a Roth to diversify the tax risk of higher taxes in retirement.

 

Francis also suggests that employees approach their employers about adding the Roth 401k feature to their 401k or 403(b) plan. In most cases, adding this option is a simple recordkeeping change that does not increase plan costs.

About Francis Investment Counsel

Francis Investment Counsel LLC is a fee-only Registered Investment Advisor dedicated to providing independent investment consulting and employee education services to the qualified plan marketplace. The company delivers conflict-free investment advisory services to plan sponsors and also offers extensive education and individualized advice services to plan participants. Francis Investment Counsel has been named one of the "Most Successful Retirement Plan Advisors" by Plan Sponsor Magazine for four consecutive years.

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