Employer-sponsored retirement savings plans that have automatic enrollment features commonly do not steer such investments into Roth-style balances even though that form of investing may be more beneficial to those employees, says a study that in essence finds the TSP program mirrors 401(k) plans in that way.
In the TSP, new employees are automatically enrolled with a default investment of 3 percent of salary, money that goes into a “traditional” balance—paid in pre-tax but on withdrawal taxable along with its associated earnings. Employees can change the amount, the fund in which it is invested, or switch to a Roth balance, in which money is paid in after-tax but comes out tax-free, as do the earnings if certain conditions are met.
A study by the TowerWatson benefits consulting firm said that in the private sector, among plans that offer Roth investing only about 10 percent of money invested is in that form of balance (in the TSP, the difference is even greater).
That might be a missed opportunity, since new hires tend to be younger, and “it’s common wisdom that younger employees may benefit from the Roth option, as they are more likely to receive promotional and merit increases that will cause their pay to grow faster than inflation, which may cause them to move into higher tax brackets.”
Deciding on the best form of investment is complex and may require assistance of an expert; however the Roth option at least bears examining, it says.
Said the report, “sidestepping the opportunity to save in a Roth account, with its unique features, can lead to regret. Here’s why: Roth contributions can offer tax diversification for many retirees as they begin to take pensions, employer-match contributions and other taxable income, including Social Security with its complicated tax status. Participants may be able to reduce taxes paid by effective distribution strategies.”
Also, unlike traditional balances, Roth balances are not subject to minimum distribution requirements after age 70 ½, if they are rolled over to a Roth IRA, it said.