One of the benefits-related changes tucked away in the “fiscal-cliff” deal seems to already be impacting employers’ retirement plans.
Thanks to the American Taxpayer Relief Act, employers that offer a Roth 401(k) option can now allow employees to convert their traditional defined-contribution plan to a Roth version at any time. And, according to an research by Aon Hewitt, an increasing number of firms are set to add Roth options to their retirement plans.
Prior to the fiscal-cliff law, workers generally were only able to convert to a Roth 401(k) if they retired, changed jobs (or were terminated) or were at least age 59 and 1/2. Unlike traditional retirement plans, Roth 401(k) contributions are taxed up front. However, the balance grows tax-free and participants aren’t taxed on their distributions when they hit retirement.
Of the employers that don’t currently offer a Roth option – 49% of the participants in the Aon Hewitt study – more than a quarter (29%) said they were “very” or “somewhat likely” to add a Roth option within the next 12 months. And 76% of firms will add both a Roth option and in-plan conversion features.
As for employers that do already offer a Roth 401(k) plan but don’t currently offer in-plan conversions, 53% said they’re “very” or “somewhat likely” to do so within the next year.
Another reason to offer a Roth option: Employees tend to contribute at a higher rate than they do with traditional plans. According to Fidelity Investments, Roth contributors have an average deferral rate of 11%, which is the highest among DC participants.
For more on the Aon study of employer-sponsored Roth 401(k)s, go here.