Any effort to partially or fully transition workplace retirement plans to an after-tax, Roth-based model will come with complexities, say industry insiders.

Perhaps the biggest one is that most 401(k) participants don’t know what Roth means, or the potential advantages and drawbacks of saving on an after-tax basis.

Under the Trump administration’s effort to reform and lower individual tax rates, lawmakers are reportedly considering raising revenue by limiting pre-tax savings deferrals to traditional 401(k) plans.

Cerulli Associates, a Boston-based consultancy that provides market research to the financial services industry, set out to understand what plan participants know about Roth 401(k)s.

For most savers, the learning curve is steep.

Of the 1,000 plan participants surveyed by Cerulli, only one-third could accurately identify the benefits of investing on an after-tax basis, including the fact that withdrawals in retirement are tax-free.

The learning curve improves for higher earners—among those making more than $91,000, 44 percent correctly identified Roth plans’ characteristics.

One quarter of all savers admitted to not knowing Roth features. Nearly 20 percent mistakenly said Roth contributions are made on a pre-tax basis, and the withdrawals are tax-free. Another 14 percent inaccurately said savings are taxed in retirement.

The Roth option has only been available to 401(k) plans since 2006. Cerulli’s 2017 record-keeping survey shows only 13.5 percent of savers with the option save in a Roth plan.

“These numbers are very low and underscore the major sea change that will occur should tax reform succeed in Rothifying the DC market,” write Cerulli’s analysts.

Cerulli says its research shows participants often struggle with the tax bill on Roth contributions, and that participants have a “healthy amount of skepticism” as to whether the government will ultimately change policy down the road and tax Roth withdrawals in retirement.

In traditional 401(k) plans, participants cite the tax benefits of deferring earnings as a top motivator for starting to save for retirement.

One in five said the tax advantages were the primary motivation to start saving, and nearly half said the tax break on deferrals was the reason why the increased their savings rates.

Those numbers present powerful evidence that Rothification may result in Americans saving less for retirement, the report says.

“Given the lack of understanding of Roth contributions, the behavioral challenges associated with making taxable contributions, and, importantly, the loss of the immediate benefit or incentive of a tax bill deduction, Rothification could cause some individuals to reduce their contributions or cease contributing to an employer-sponsored retirement savings plan,” the report says.

If some form of compulsory Rothification is implemented under tax reform, sponsors and record-keepers will need to implement “significant” marketing and education campaigns. That is likely to be expensive, the analysts say.

Instant Insights /

Challenge to tax reform 'Rothification': Savers don&rsquo;t know what a Roth is

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Challenge to tax reform 'Rothification': Savers don’t know what a Roth is