Benefits Business

New options for retirement accounts

Employers can offer IRA options

By Len Strazewski

When the equity market crashed and the 21st century recession began, employers stopped having much to say about their employee retirement benefits. Many companies reduced their defined contribution plan matches or tabled them completely until the economy recovered. The manifold investment options that were supposed to please employees tanked with the market, shocking employees who saw their plan balances plummet.

Since 2008, few employers have wanted to talk to their agents and brokers about providing more retirement benefits or more options, but as the economy begins to recover, so does interest in alternatives. The matches are back—though maybe not at the pre-recession levels—and employers are again looking for some inexpensive ways to deliver good news to employees about their retirement.

Pamela Hess, director of retirement research for Hewitt Associates in Lincolnshire, Illinois, says employers are ready to make some adjustments to their employee benefits programs, which provides some new opportunities for agents and brokers with financial expertise and retirement plan specialties.

"With steadily increasing health care costs, employers have had to deliver lower contributions and higher co-payments on the health benefits side," Hess explains. "Defined benefit pension plans are all but gone, and defined contribution plans have taken huge hits.

"It would be nice to deliver some good news to employees about plan changes that will provide some additional value," she says.

New Roth options

One plan option that is finding an employer audience is a Roth 401(k) or Roth 403(b) retirement plan feature. Enabled by the Pension Protection Act of 2006, but relatively ignored for years after a show of some initial interest, the Roth 401(k) or 403(b) provides the same tax benefits as the Roth individual retirement account (IRA), but it is available for employee and employer contributions.

Like Roth IRAs, the employer plan feature allows plan participants to make after-tax contributions to their retirement plan which will accrue earnings tax-free and allow for tax-free distribution at age 59½, or disability—if the plan is at least five years old.

Unlike the individual accounts that bar individuals with high income levels, the Roth 401(k) features are available to plan participants at all income levels.

Employee contribution limits are the same as traditional 401(k) pre-tax contribution—$16,500 for 2010, more than three times the $5,000 limit of IRAs. Employers also may provide matching contributions for Roth 401(k) plans, and employees may seek loans and hardship withdrawals.

Pending legislation would also allow conversions of before-tax and after-tax money into a Roth account within a 401(k) plan, making the option even more attractive. Some 401(k) plans already allow after-tax contributions, but those contributions do not accrue tax-free earnings.

"Saving for retirement is a tough hurdle for many employees and anything a plan sponsor can do to encourage savings is a good contribution to retirement benefits," Hess says. "People aren't accumulating what they will need after retirement."

The Roth IRA has been a popular option for individuals who believe that they will face a higher tax rate after retirement and want to convert their savings into tax-free payments, she explains. The Roth 401(k) can bring those individuals back to their retirement plans with the availability of higher limits and the convenience of payroll deduction savings.

According to a Hewitt study, about 29% of employers already offer Roth 401(k) contributions, and about 25% more are likely to add the option by the end of the year. However, the consultants say, the adoption rate is likely to escalate as the regulatory environment improves and employees demand new choices for their savings.

A Hewitt analysis of employers that now provide the Roth 401(k) reveals some interesting participation trends. Only about 7.4% of retirement plan participants make Roth 401(k) contributions, but about 13% of new plan enrollees choose the option and 17% of younger employees choose the option.

Contributions average about 10.8% of payroll, more than the contributions in a traditional 401(k) plan which average about 8.1%. About half of Roth 401(k) participants also make before-tax contributions to a traditional plan.

Hess says these rates track with Roth IRA use, appealing to younger retirement savers who appreciate the tax-free accrual. "It is vitally important to get people saving early and keep them in a savings pattern," she says. The Roth appeal to younger employees provides a good incentive for early and larger contributions.

Communication is vital

Introducing the new plan option won't be easy, however. Hess notes that educating employees about the Roth 401(k) will require some extensive communication and access to investment resources. Agents and brokers who already provide value-added services such as employee benefit communication and investment modeling software may have a leg up.

Specifically, she advises employers to communicate with employees at the time of introduction using multiple channels, including e-mail, postal mail, employee newsletters, internal/benefit Web sites, and workshops.

Plan sponsors also will need to educate employees about Roth 401(k) contributions and how they compare with contributions to traditional retirement plans. For example, she suggests providing a comparison of Roth 401(k) and before-tax 401(k) contributions and identifying examples of who might want to make Roth 401(k) contributions, explaining the benefit of tax diversification.

Hess also recommends investment modeling tools to help employees make their savings decision. Modeling tools can help employees understand the impact on their paycheck and future retirement savings.

Agents and brokers can also expect more opportunities as retirement plans continue to rebound. As more employees reach retirement age, plan sponsors will have to provide a broader array of income options. Annuities are among the next wave of retirement benefit products to be on the plan sponsor agenda, she says, as employees seek insured and protected ways to guarantee payments for the length of their retirement.

Choices for small employers

Also on the horizon are more options for small employers who have been reluctant to sponsor retirement plans. New legislation, introduced in August first by Sen. Jeff Bingaman (D-N.M.) who is on the Senate Finance Committee and later by Rep. Richard Neal (D-Mass.), could create another very marketable retirement plan product for agents and brokers.

The Automatic IRA Act of 2010 make automatic retirement savings available to more employers; notably firms with 10 or more employees who do not already sponsor retirement plans—and a little less expensive and frightening.

The bill would require employers without retirement plans to automatically enroll employees in IRAs into which they can make voluntary, pre-tax contributions. Employers would be given a tax credit to cover administrative costs and would be shielded from fiduciary liability if they chose from a government-approved list of vendors.

Coverage would be universal; employers who fail to conduct automatic enrollment would be subject to a per-employee excise tax penalty.

The concept of automatic IRAs was proposed in President Obama's budget and supported by the Middle Class Task Force chaired by Vice President Joe Biden.

The author

Len Strazewski has been covering employee benefits issues for more than 30 years and is employee benefits columnist at Human Resource Executive magazine. He has an M.S. in Industrial Relations from Loyola University in Chicago.