401(k) Specialist Issue 3 - 2020 - 29

401(k) PRODUCTS
tax-free while with a traditional 401(k) the
contribution and the growth are taxable.
" We all know the value of compounding
interest, yet we ignore its value when
having this conversation, " Fisher says. " Take
a 35-year-old. They can save $10,000 for 30
years, and by the time they are 65 they will
have saved $300,000. But with reasonable
market growth that account is more
like $1 million! I would much rather pay
tax on $300,000 than $1 million. It's why
we advocate so strongly for the Roth for
younger clients who have a lot of time for
the account to grow. "
Her rule of thumb is that anyone with
more than 20 years to retirement should
heavily consider the Roth, as should lower-income
earners.
" If they are in a very low effective
federal tax rate, or even a negative tax rate,
the Roth is very beneficial. Finally, it can
be used as a flexible bucket in retirement
for high-income, high-net-worth clients, "
Fisher says.
" We consider all things like: How is
the rest of the nest egg saved? Is it all tax
deferred? Are they expecting a pension? Do
they need all of their retirement savings or
do they intend to pass it to the next generation?
Will they need all of their projected
RMDs? I'm not exaggerating when I say-
especially particular to the 401(k)-that
eight out of 10 times I will recommend a
Roth contribution. "
Education an Obstacle to Greater
Adoption
Fisher notes that educating participants
about the advantages of a Roth 401(k) is
one of the biggest challenges to higher
Roth adoption rates. Since she experiences
a lot of success in getting participants to go
the Roth route, how does she go about it?
For one, by providing her previously
mentioned talking points with scenarios.
" We illustrate the total growth of the
portfolio and what the cumulative account
balance could be in retirement, " she says.
" We also educate to how it affects their
paycheck. Electing the Roth in the 401(k)
isn't going to result in a big tax bill when
you file your taxes. Instead, the tax withholdings
are adjusted on your paycheck, and
in most cases, you are seeing only a minor
adjustment each pay period. "
But after advocating for the Roth for a decade
now, Fisher says there are some arguments
Birth of the Roth 401(k)
W
hile traditional 401(k) plans were born back in 1981
when Ted Benna turned a little-noticed subsection
of the Internal Revenue Code into a tool that has
since revolutionized retirement planning, the Roth 401(k) is
relatively new.
It was authorized by Congress under the Internal Revenue
Code, section 402A, and represents a unique combination of
features of the Roth IRA and a traditional 401(k) plan. Designated
Roth contributions grow with tax-free earnings and are
distributed at retirement without triggering any future income
tax liability.
Since Jan. 1, 2006, U.S. employers have been allowed to
amend their 401(k)-plan document to allow employees to
elect Roth IRA-type tax treatment for a portion or all of their
retirement plan contributions. The Roth retirement plan provision
was enacted as a provision of the Economic Growth and
Tax Relief Reconciliation Act of 2001 (EGTRRA 2001).
The Roth 401(k) was originally set up to sunset after 2010
along with the rest of EGTRRA 2001, but the Pension Protection
Act of 2006 extended it indefinitely.
According to the 19th Annual Transamerica Retirement Survey
released in December 2019, 43% of plan participants opt
for a Roth 401(k) over a traditional 401(k) when their company
offers the choice. The same study found Millennials are more
likely to contribute to a Roth 401(k) than Gen Xers or Boomers.
One major obstacle to greater Roth 401(k) adoption is that
plan sponsors rarely set them as the default account type for
automatically enrolled participants, a result of IRS guidance
that includes an example of traditional 401(k)s being used as
the default.
ISSUE 3 2020 | 401kSpecialist.com
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401(k) Specialist Issue 3 - 2020

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