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Most employers to wait on Roth conversions: Survey

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A majority of 401(k) and other defined contribution plan sponsors intend to add a feature to allow participants to roll over account balances into Roth accounts, but few plan to do so immediately, according to a survey released Wednesday.

Such rollovers are permitted under a provision in a small-business jobs bill that Congress approved in September.

The Mercer L.L.C. survey of nearly 300 defined contribution plan sponsors found that only 17% of respondents plan to add the Roth rollover feature by the end of this year, with 14% planning to add the feature by the end of next year. Twenty-four percent said they will amend their plans to allow the rollovers sometime in the future. Forty-five percent said they have no current plans to permit conversions.

Thirty-seven percent of employers said they are not changing their plan immediately to first see how much interest there is from plan participants. In addition, nearly one-third of respondents are waiting to see when plan administrators will be ready to handle conversions; just under one-quarter are waiting to see what other plan sponsors intend to do.

Mercer consultants said it isn’t surprising that employers are not immediately amending their defined contribution plans to add a Roth conversion feature.

“For in-plan Roth conversions to truly provide value, sponsors cannot just amend their plans and their processes. Participants must be educated about Roth and tax implications in general, which can be a particularly challenging task for employers,” Amy Reynolds, a partner in Mercer’s Richmond, Va., office, said in a statement.

In fact, a majority of employers said their employees have not yet asked about the Roth conversion feature, on which the Internal Revenue Service recently provided guidance.

But Ms. Reynolds said she expects employer interest in adding the feature to pick up. “In-plan Roth conversions provide sponsors an opportunity to enhance their plans to benefit participants at little or no cost. While employers are understandably hesitant to take the plunge with outstanding administrative questions, we expect interest to increase over time,” she said.

Adding a conversion feature would boost the appeal of 401(k) and other defined contribution plans by potentially reducing taxes that participants pay when they receive a distribution, retirement plan experts have said.

Under current law, employees make pretax contributions to 401(k) plans. Employee contributions, employer matching contributions and investment income are taxed when the participant receives a distribution, such as at retirement.

In a Roth 401(k), contributions are made after taxes have been taken out and distributions are not taxed.

Once rolled over into the Roth 401(k) plan, the money would earn tax-free investment income and participants would not be taxed when they receive a distribution.

Depending on participants’ current and future tax bracket, the measure could reduce their tax liability.

The Mercer survey, “Few Employers Offering In-plan Roth Conversions Before 2012,” is available at http://www.mercer.com/press-releases/1402100.