US - A third of plan sponsors say they are likely to offer Roth 401(k) accounts to employees when the legislation comes into effect on January 1 next year, according to Hewitt Associates.
Hewitt said 35% of plan sponsors are “likely or somewhat likely” to offer the accounts, created under EGTRRA (Economic Growth and Tax Relief Reconciliation Act of 2001).
However Lori Lucas, director of participant research at Hewitt predicts this number will increase.
“We think as Roth 401(k) comes closer and closer, more plan sponsors are going to give it consideration and we might even see more than that express interest,” she said.
“The Roth 401(k) provides an interesting opportunity for employees to have more flexibility in their 401(k) plan so from a tax perspective, some individuals might like the idea of being able to not only defer taxes on earnings but have a tax free earnings on their investments, so much so that they might be willing to pay taxes on the contributions going into that account, especially if they’re envisioning that their tax rate might be higher in retirement or that taxes in general might be higher when they retire.
“From a plan sponsor perspective, this flexibility is good because it allows plan sponsors to offer a vehicle that might be more attractive to more people so there’s a chance it could increase participation… or lead to people contributing more.”
Lucas warned it is essential that plan sponsors provide communication and education to help people make the right choice.
“You’re adding complexity to the 401(k) plan and we know from past experience that adding complexity… can have the opposite effect, it can actually prevent people from choosing to participate in the plan,” she said. “I think the key thing for plan sponsors to understand about the Roth 401(k) is that it will definitely require considerable communication, education and tools to help people make the right choices.”
Separately, Hewitt has revised its earnings outlook for 2005 by US$7m on the back of a range of factors including “modestly lower consulting revenues versus expectations”.
The firm was expecting fiscal 2005 core earnings of US$152m to US$156m but has revised the expectation to US$145m to US$150m for the year.
“The company continues to expect revenues and margins to fall within the previously stated ranges, although at the lower end of the ranges for both segments,” said Dale Gifford, chairman and CEO.
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