Sunday, October 16, 2005

Simply, Stated

I don't get the Roth 401(k).

More accurately, I don't get the need for the Roth 401(k).

I understand that there is an emerging common wisdom that tax rates in the future will be higher than they are at present. I also understand that some may well believe that they are in a better position to pay taxes now than they may be in the future. Bottom line, I understand the appeal of the Roth IRA. I just don’t get why we need to clutter up the 401(k).

Let’s be honest here. The folks most likely to benefit from the Roth 401(k) (other than a myriad of personal finance columnists) are, quite simply, those who are better-off financially. Not that I am against benefits for this group (I am, and hope to remain, among this constituency). However, given how many arcane rules and strictures exist in qualified plans to prevent them from benefiting unduly at the expense of the plan, the Roth 401(k) strikes me as peculiarly targeted.

It’s not exactly a "giveaway" for the rich, who won’t be able to contribute more to the Roth 401(k) and their pre-tax account than they previously could to the pre-tax account alone. Indeed, proponents claim the Roth 401(k) gives highly-compensated executives who were beginning to look askance at their need for a tax-deferred savings vehicle a new reason to support the workplace program. There’s nothing that precludes the non-highly compensated individuals from taking advantage of the convenience of the account in their 401(k), after all, nor are employers even obligated to offer the option to participants. Those worried about that burgeoning federal deficit may even draw comfort from the fact that the Roth 401(k) is a projected money maker (the US government gets tax revenues now, rather than later).

Like self-directed brokerage accounts, it will no doubt find an enthusiastic constituency among some professional service firms and for a handful of executives across a broader spectrum of employers (unlike those self-directed brokerage accounts, however, the costs will likely be born by the entire plan, not just those who avail themselves of the option). And like those accounts, many of those who will benefit most, and who will be most intrigued, will have availed themselves of the services of a financial advisor. My best guess is that one will be hard-pressed to find a provider who will not offer the capability - and, having spent some amount of time and energy building the facility, we can count on a steady promotional drumbeat extolling the virtues of the additional flexibility.

Still, at its best, the Roth 401(k) seems a dalliance for those the federal government generally deems too wealthy for such deference, IMHO. Moreover, it will be expensive to develop, complicated to explain, and at least marginally problematic to administer.

At a time when our industry is clamoring for greater simplicity - when the current complexity of choices already stymies the participation of so many – additional cost and complexity is surely the last thing we need.

- Nevin Adams

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