RUNNING THE FUND
With President Donald Trump touting potential corporate and individual tax rate cuts, retirement plan sponsors are worried this could
lead to legislation that mandates some or
all contributions to workplace retirement
plans be made on an after-tax basis, as
the means to offset the cuts, says Michael
Zovistoski, managing director of UHY
Advisors NY Inc. in Albany, New York.
Sponsors are also concerned about the
damper these proposed changes could put
on participation and deferral rates.
Although various plans have been
floated, the idea behind them all is that
401(k) deferrals would lose some, or
possibly all, of their tax-deferred status
and instead be eligible to grow, tax free.
A survey by the Plan Sponsor Council of
American (PSCA) found that 90% of plan
sponsors believe reducing or eliminating
the tax incentives from 401(k) plans would
lower retirement savings rates.
Similarly, a recent member survey
by the Committee on Investment of
Employee Benefit Assets (CIEBA) about
the potential for an all-Roth 401(k) system
found 78% saying participation rates
would decline in such an environment.
Not a single member, in fact, said the
move would be positive. CIEBA members’
biggest concern was participant commu-
nications, with 39% saying it would very
or extremely difficult to speak about the
value of workplace retirement savings in a
Eighty-two percent said they thought
participants would view changing to a
Roth-only system very or somewhat negatively. Sixty-one percent said they would
not be comfortable converting their
participants who make pre-tax deferrals
into participants who made Roth deferrals
without affirmative consent elections.
It should be noted that, today, many
plans do offer a Roth 401(k) option.
Nearly two-thirds, 65.2%, of plans do so,
according to the 2016 PLANSPONSOR
Defined Contribution (DC) Survey, and
the option is prevalent among plans of all
sizes, although usage rates among participants is still low.
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 bear 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. Likewise, a 2016 Vanguard study of its recordkeeping platform
indicated that, while enrollment in Roth
401(k) plans has been steadily increasing
in the last few years, the rate is still only
13%. This suggests most DC dollars are
flowing into plans on a pre-tax basis.
“This would be uncharted territory,”
Simmons says. “You would have to reach
Art by Mark Wang
Rothification of DC Plans
Sponsors say this step would deter participation and lower savings rates