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Employers dragging their feet on Roth 401(k)
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The New Year may have brought a touch of disappointment to many workers who had been hoping the Roth feature would be added to their company's 401(k) plan.

The Roth 401(k), available Jan. 1, 2006, allows participants to set aside a portion of their after-tax pay in a retirement account that grows tax-free. (A Roth 403(b) is available to 403(b) plan participants.)

But a survey by Profit Sharing/401(k) Council of America, or PSCA, an organization that assists companies with the design and administration of profit sharing and 401(k) plans, indicates that only 17 percent of companies are offering the new plan to their employees. Of those companies that did plan on adding the Roth feature, only 42 percent expected to make it available Jan. 1. The rest say they'll adopt it during the year.

"Just because someone passes a law in Washington, D.C., to provide an additional voluntary opportunity in a benefit program doesn't mean a company has to immediately implement it," says David Wray, PSCA president.

Why so much reluctance by employers to add the Roth? Answers range from "employees will be confused by another plan" to "the Internal Revenue Service hasn't issued final rulings regarding some areas of the Roth 401(k)." Research by mutual-fund giant Vanguard lists at least two areas -- taxation of nonqualified distributions and required minimum distributions after age 70½ -- that are awaiting final decisions by the IRS.

"I hear concerns about the additional administrative and compliance resources necessary to run the program right and the difficulty that many feel there will be in educating the rank and file participants," Wray says. "It's a challenging issue to educate employees about investment concepts, and now it's important to teach them about tax planning."

Another question that's up in the air is whether the Roth in any form will be around much longer. It exists because of a tax act that expires Dec. 31, 2010, and it's up to Congress to decide whether to extend the act.

Here's the breakdown of the portion of PSCA's survey that asked 425 401(k) plan sponsors about their intentions regarding the Roth 401(k). PSCA says the respondent companies "spanned a wide range of sizes, industries and geographic locations."

That's discouraging to some financial planners who view the Roth 401(k) as another arrow in the employee's financial quiver.

Geordie Crossan, a certified financial planner based in Westlake Village, Calif., says the Roth 401(k) provides benefits for employees across the board.

 

 
 
Next: Old and young can share the benefits of a Roth
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