With President Trump touting potential corporate and individual tax rate cuts, retirement plan sponsors and advisers are worried that could lead to the government switching 401(k) plans to all-Roth in order to raise revenue to offset the cuts, says Michael Zovistoski, managing director of UHY Advisors NY, Inc. in Albany, New York.
“Generally, the people who voluntarily opt for the Roth option are 50 and younger—people who expect their income will rise and bring them into higher tax brackets later in life,” Zovistoski says. “If the government passed legislation to move to an all-Roth 401(k), we would risk losing the older participants, and plans would absolutely become smaller without the tax-deferred savings option. Small plans would do a cost/benefit analysis and possibly not even offer a 401(k) at all.”
Even with younger people more inclined to remain invested in a Roth 401(k), they do not contribute as much as older participants, and that also could dissuade sponsors from offering a 401(k) at all, he adds. Stripped of the tax-deferred benefit in a 401(k), participants might look to other tax-deferred savings options, such as health savings accounts (HSAs) or 529 college savings plans, he says.
“My concern as an adviser is that as it is, Americans already are not saving enough,” Zovistoski says. An all-Roth 401(k) would only exacerbate the problem, he says.
While the concept of an all-Roth 401(k) has been floated for about five years, James Sullivan, vice president and a financial adviser with Essex Financial in Essex, Connecticut doesn’t think there is any chance in the current environment that the government would propose such a move in a standalone bill. However, with the push to lower corporate and individual income tax rates, Sullivan is concerned that it could be included in such a measure. And he agrees with Zovistoski that without the benefit of contributions to a traditional 401(k) lowering participants’ current income and, therefore, bringing down their current tax rates, participants would be far less inclined to invest in a 401(k) plan.
Certainly, a recent survey by the Committee on Investment of Employee Benefit Assets (CIEBA) found that sponsors share these concerns. Seventy-eight percent of CIEBA members said participation rates would decline in an all-Roth 401(k) system, and Dennis Simmons, executive director of CIEBA, says that participants who see more value in contributing on a pre-tax basis might reduce their deferral rates or stop saving altogether.
Certainly, CIEBA data bears this out, as the organization found that even when a Roth option is available, 90% of the dollars deferred in plans managed by CIEBA members are made through traditional pre-tax deferrals.
“We need the tax incentives to encourage 401(k) saving,” Sullivan says. “This is not a partisan issue. It really is good not just for the participants but for businesses when their employees are prepared for retirement.”