Data & Research September 8, 2010

Roth 401(k) Feature in 29% of Plans

A new Hewitt Associates study of the Roth 401(k) feature found that 29% of mid- to large-sized employers offer it and 25% are very or somewhat likely to add it in 2010.

 

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According to a Hewitt research paper, the largest barriers among plan sponsors reluctant to add the feature this year are the potential lack of participant usage (54% of respondents) as well as the administration complexities and/or implementation cost (51%).

Hewitt researchers had sympathy for those reluctant to jump into the Roth 401(k) waters. “Adding a Roth feature is not as simple as clicking an on/off switch—it takes considerable planning, implementation, and communication,” Hewitt wrote. “Communication is especially important, and tools must be made available to help employees navigate this new and complex decision.”

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Meanwhile, according to Hewitt, 7.4% of active workers elected to save through a  Roth, where available. The average Roth deferral was 6.8% of pay, with a total contribution rate (including before-tax, after-tax, and Roth) of Roth users at 10.8%.

Usage of a Roth 401(k) feature ranged from 4% to 22% of participants with most companies seeing low Roth usage either recently having implemented the feature or automatically defaulting their new hires into a before-tax option (rather than Roth). Plans with relatively higher usage had been early adopters of Roth and/or are organizations with more financially savvy populations. Most early adopting employers are insurance, financial services, or professional services organizations.

Hewitt found that overall participant Roth 401(k) usage tends to grow through years one and two, and then stabilizes after three years. Seven percent of workers added the Roth after a year, a number that rose to 15% after 36 months. Usage among participants who joined the plan after the Roth feature was added was substantially higher, with nearly 13% of newly enrolled workers opting to use a Roth 401(k) feature.

Younger participants are most likely to use a Roth 401(k) feature. Where available, 16.6% of workers in their 20s elected to use a Roth 401(k) versus only 4.2% of those in their 50s. In terms of salary, those earning between $60,000 and $80,000 had the highest usage of a Roth 401(k) feature. However, considerable adoption was also seen in all income levels above $40,000.

Hewitt researchers contended that while adoption rates are still somewhat limited, that picture is likely to change. “Given its relatively short history, a Roth 401(k) option has proved beneficial to a meaningful segment of plan participants,” Hewitt wrote. “Data shows there is genuine participant interest in and significant use of the Roth design. Further, having one may actually increase participants’ retirement savings. The Roth feature is increasingly becoming a more prevalent 401(k) and 403(b) feature and is likely to become an inherent feature in all plans— especially with pending legislation expanding its use.” 

 

Compliance September 8, 2010

Court Throws Out Cash Balance Conversion Suit

A federal appellate court has cleared Solvay Chemicals Inc. of wrongdoing in its cash balance plan conversion, but sent a narrowly drawn notice issue back to a lower court for further hearings.  
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The 10th U.S. Circuit Court of Appeals ruled the lower court judge was right to throw out nearly all plaintiffs’ Employee Retirement Income Security Act (ERISA) claims, according to the decision written by Circuit Judge Harris L. Hartz for the court.

In disposing of one key appellate issue, Hartz contended that Solvay’s use of tables to show how the conversion would impact pension benefits generally met ERISA’s requirements that participants be informed of how such a program change affect them.

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Hartz said ERISA Section 204(h)‘s participant notice regulations did not require Solvay to describe to its employees that the 2005 plan conversion would result in a reduction in their future accrual rates in either percentage or dollar terms. Using tables built on hypothetical benefit numbers met the notice requirements because employees could estimate their benefit reductions based on the data presented.

“In our view, Tables A and B in Solvay’s § 204(h) notice satisfy these (notice) requirements,” wrote Hartz for the three-judge appellate panel. “They provide illustrative examples comparing the expected monthly benefit under the new plan with the expected monthly benefit that would have been earned if the old plan had continued; the examples concern employees of different ages, compensation, service years, and time of retirement. By finding the example most like himself, an employee can estimate his benefit reduction in dollar terms. Nothing in these tables hides the fact that the new plan significantly reduces employees’ monthly benefits. On the contrary, these comparisons show that employees are almost always worse off after the conversion.”

The court also found that Solvay’s cash balance plan did not violate the Age Discrimination in Employment Act (ADEA) and met a number of other ERISA requirements.

The only issue to survive on appeal was a narrow question of whether participants could properly understand from the information available how the company figured an early retirement “subsidy” and what impact the dropping of that subsidy after the conversion would have on their benefit levels. Hartz dismissed Solvay arguments that a line in its participant conversion notice that “The current plan formula includes an early retirement subsidy” was sufficient for ERISA purposes.

“We fail to see how an employee could calculate early-retirement benefits with just this information. The notice does not comply with the regulation,” Hartz wrote. “We therefore conclude that Solvay’s notice failed to comply with the requirements for disclosure of early-retirement calculations.”

In sending the case back for additional hearings on that issue, Hartz cautioned that the key question will be whether the company’s actions constituted an “egregious failure.”

The case is Jensen v. Solvay Chemicals Inc., 10th Cir., No. 09-8082.

 

 

 

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