The Total View - (Page 38) Roth 401(k) Elective Deferrals Starting on January 1, 2006, employers were authorized to begin offering Roth 401(k) elective deferrals as an additional feature to their plan participants with the option of electing to have part — or all — of their elective deferral contributions treated as after-tax contributions. That means that those contributions made in after-tax dollars have no immediate tax savings, but contributions and eligible earnings can be withdrawn tax-free in retirement if certain requirements are met. Distribution of Roth 401(k) elective deferrals can only be made after separation from service, death, disability, age 591/2, financial hardship, or termination of the plan. Companies were hesitant to begin offering the Roth 401(k) features because initially the feature was not going to allow new contributions after December 31, 2010; however, Congress made the plan feature permanent in the Internal Revenue Code with the passage of the Pension Protection Act of 2006. According to the Profit Sharing Council of America, 22.4 percent of employers added a Roth 401(k) feature to their 401(k) plans and 7.9 percent of eligible employees made Roth 401(k) contributions in 2006.3 At the end of 2006, less than 10 percent of plan sponsors with services provided by The Principal allowed Roth 401(k) contributions and 6.5 percent of participants with access to a Roth 401(k) had elected Roth 401(k) salary deferrals. Plans that allowed Roth 401(k) contributions had higher salary deferral rates, participation rates, and average account balances. Participation rates for plans allowing Roth 401(k) contributions were 10.5 percent higher than plans that did not allow Roth 401(k) contributions. Average account balances were 25 percent higher for plans allowing Roth 401(k) contributions. Catch-Up Not Allowed 7% Overview of 2006 Catch-Up Contributions for 401(k) Plans Catch-Up Allowed and Unused 61.8% Catch-Up Used 38.2% Catch-Up Allowed 93% More than 93% of retirement plans with The Principal allowed catch-up contributions. More than 38% of these plans had participants who used this provision. Average Salary Deferral Contributions by Catch-Up Provision 2004 Deferral 2005 Deferral 2006 Deferral $6,000.00 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– $5,000.00 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– $5,000.00 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– $4,146 $4,081 $3,764 $3,836 $4,000.00 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– $3,640 $3,880 $3,128 $3,040 $3,000.00 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– $2,288 $2,000.00 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– $1,000.00 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– $0 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Average Catch-Up Normal Deferral of Plans Normal Deferral of Plans Deferral With Catch-Up Without Catch-Up The average catch-up contribution was $3,764. Plan Design as a Percent of Total 401(k) Plans 100% –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 89% 90% –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 87% 84% 81% 80% –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 70% –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 60% –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 50% –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 40% –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 30% –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 20% –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 16% 19% 11% 13% 10% –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 2003 2004 2005 2006 1 Profit Sharing/501(k) Council of America Roth 401(k) Survey 2007 2 Profit Sharing Council of America 50th Annual Survey 3 Profit Sharing/401(k) Council of America Survey 0% –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Safe Harbor Non-Safe Harbor 38
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