Employers Say Roth Mandate Would Hurt, But Most Would Keep Plans
While the vast majority of plan sponsor respondents to a new survey think that eliminating or reducing pre-tax contributions to retirement savings plans is a bad idea, 85% say they would either definitely or probably continue to offer those programs if current pre-tax limits were lowered.
However, more than three-quarters of the 443 employer respondents to the survey by
the Plan Sponsor Council of America (PSCA) said they strongly agreed with the statement that eliminating or reducing the pre-tax benefits of 401(k) or 403(b) retirement savings plans would discourage employee savings in workplace retirement plans.
Currently, the vast majority of employers that sponsor a DC plan allow employees to defer portions of their salary into that plan on a pre-tax basis. However, three-fourths of the employers that responded to the PSCA survey provide an additional feature in their plan that allows employees to contribute to the plan on an after-tax, or Roth, basis. Of those plans that have the Roth feature, the employee take-up rate of that feature varies, though a plurality in this particular survey seemed to fall in the 5-10% range, consistent with other surveys. Among the smallest plans, roughly 10% say that more than 50% of their workers take advantage of the option. Approximately 60% of the employers who do not currently have a Roth option say they have evaluated and rejected the option.
The survey’s findings have implications for retirement savings, with Congress said to be considering changing the current tax treatment of 401(k)s as part of a tax reform package. The PSCA survey found that if Congress were to require that contributions to 401k plans be made on an after-tax or Roth basis, just 6.1% of the employers surveyed would be unlikely to continue or definitely terminate their plans (6.8% were unsure). Those figures increase for small plans. Nearly one in five small employers say they would be unlikely to continue or definitely terminate their plans if Congress eliminated the pre-tax option for employee contributions altogether, allowing only after-tax or Roth contributions (2.9% were unsure).
Despite the large percentage of employers already offering a Roth feature, concerns about the cost and administrative complexities of adding a Roth feature, if mandated, loomed large among respondents to the PSCA survey. Nearly a third (30.2%) were very concerned on that front, and nearly as many (29.2%) were moderately concerned. Just 16% were unconcerned, with somewhat higher levels of concern expressed by the largest (more than 5,000 participants) and smallest (fewer than 50 participants).
Concerns about the reaction of workers was understandable in view of the prominence of the pre-tax advantages in plan enrollment and education. More than half (53%) of plan sponsor respondents said those features were promoted to a “high degree,” and another quarter (25.7%) did so to a “somewhat high degree.”
In 2014, a tax reform proposal by House Ways & Means Committee Chairman Dave Camp called not only for a cap on the amount of pre-tax contributions by workers, but also a freeze on cost of living adjustments on contribution limits. However, nearly all (94%) of the respondents to the PSCA survey said they either strongly agreed or somewhat agreed that those limits should continue to be indexed to inflation.
Ultimately, more than 90% of respondents strongly or somewhat agree that they believe policymakers should allow employers maximum discretion to design their plan to meet the needs of their employees.
Sponsors of employer provided retirement plans are sounding an alarm — that Congress should exercise caution when developing its tax reform plan and be cognizant of the potential implications, not only for retirement savings, but the continued support of these vital programs by employers.
Andrew Remo is the American Retirement Association’s Director of Legislative Affairs.