Employees can convert their traditional 401(k) or 403(b) accounts to a Roth account in the same plan beginning this year. But, so far, few companies have amended their plans to offer the conversion option.
A Roth account allows retirement savers to pay income tax on deposits up front. Pre-paying the taxes can be beneficial to investors who think they will be taxed at a higher rate in retirement than they are now. In contrast, traditional 401(k)s permit you to defer paying tax on your contributions until you withdraw your money.
Only 17 percent of companies plan to allow employees to transfer their traditional 401(k) balances to a Roth 401(k) by the end of 2010, according to a recently released Mercer survey of 287 401(k) plan sponsors. Some of the employers surveyed plan to allow Roth conversions beginning in 2011 (14 percent) or at an unspecified date in the future (24 percent). And 45 percent of firms have no plans to add an in-plan Roth conversion feature.
Many companies say they are waiting before they will allow Roth conversions to see whether participants express interest (37 percent), determine when record keepers will be ready to administer the feature (34 percent), and see what other plan sponsors will do (23 percent). More than half (54 percent) of the plan sponsors surveyed say that employees have not inquired about in-plan Roth conversions. Highly compensated employees, executives, and older employees with large accounts were generally the most likely to tell their employer that they are coveting a 401(k) conversion option, the survey found.
The Small Business Jobs Act of 2010, which created the in-plan conversion option, went into effect on Sept. 27, 2010. The bill also allows government 457(b) plans to add Roth accounts beginning in 2011. Income tax will generally be due on the amount converted.