Tax law changes open door for increased Roth 401(k) adoptions, Aon Hewitt reports

A new survey by Aon Hewitt shows that an increasing number of U.S. employers are planning to add Roth features to their defined contribution (DC) plans in 2013. This comes on the heels of new legislation that makes it easier for participants to convert balances within their DC plans into Roth accounts.

Immediately following the passage of the American Taxpayer Relief Act of 2012 (P.L. 112-240), the legislation that averted the “fiscal cliff,” Aon Hewitt conducted a survey of more than 300 individuals representing large U.S. employers to determine the prevalence of Roth accounts and employers’ likely actions with respect to their plans over the next 12 months. According to Aon Hewitt’s findings, while almost half (49%) of respondents currently offer no Roth provisions, 29% of those that don’t offer Roths are very or somewhat likely to add this feature in the next 12 months. Of those new adopters, more than three-quarters (76%) will add both Roth contribution and in-plan conversion features.

“While employers have steadily been adopting Roth features in recent years, the new law, along with a better understanding of Roth by both participants and companies, will encourage more plan sponsors to add these options in the near-term,” said Patti Balthazor Bjork, director of Retirement Research at Aon Hewitt.

Aon Hewitt’s survey also found that employers that already have a Roth contribution option are likely to allow employees to make in-plan conversions to Roth accounts. Of those respondents that currently allow Roth contributions but do not offer in-plan conversions, more than half (53%) are very or somewhat likely to add this feature in the next 12 months. For companies that already allow Roth contributions and in-plan conversions, more than three-quarters (79%) are very or somewhat likely to expand the eligibility for in-plan conversions, allowing them for previously non-distributable amounts.

“The new rules open the door for employers to allow expanded in-plan conversions, but it’s not a requirement,” explained Bjork. “However, it makes the Roth conversions more attractive for employees, so there will likely be increased interest and incentive for employers to offer them,” she added.

Source: Aon Hewitt news release, February 6, 2013.

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For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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