Any effort to partially or fully transition workplace retirementplans to an after-tax, Roth-based model will come withcomplexities, say industry insiders.

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Perhaps the biggest one is that most 401(k) participants don’tknow what Roth means, or the potential advantages and drawbacks ofsaving on an after-tax basis.

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

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

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For most savers, the learning curve is steep.

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Of the 1,000 plan participants surveyed by Cerulli, onlyone-third could accurately identify the benefits of investing on anafter-tax basis, including the fact that withdrawals in retirementare tax-free.

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The learning curve improves for higher earners—among thosemaking more than $91,000, 44 percent correctly identified Rothplans’ characteristics.

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

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The Roth option has only been available to 401(k) plans since2006. Cerulli’s 2017 record-keeping survey shows only 13.5 percentof savers with the option save in a Roth plan.

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

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

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

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

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Those numbers present powerful evidence that Rothification mayresult in Americans saving less for retirement, the reportsays.

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

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

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.