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Reforming Roth provisions may be key to improving savings rates for Millennials. My proposal.

Greg Carpenter

December 29, 2022


The Roth 401(k) concept is outstanding – it provides an excellent way to build long-term wealth and may provide outstanding tax benefits for those positioned to make the most of its advantages. The problem is that very few plan participants use it, let alone understand it.

We also have a savings deficit for Millennial employees. As a group, Millennials are not saving enough for retirement, yet they are the group (young, lower wage, lower current tax bracket) best situated to take advantage of Roth accounts.

Appropriately utilized, Roth can create the strongest incentives – save a generous employer match – to incent employees to save and build wealth. I believe we have reached a political consensus in the country that all employees are at least partially responsible for saving for retirement. Short of forced enrollment or higher taxes, we can only incent workers to save. The Roth concept – slightly tweaked – can be reimagined as a powerful tool to radically increase contributions and wealth. In addition, these changes can be targeted to assist and incent Millennials to start saving early and participate for the long term.

Two issues are holding back greater use of Roth accounts within small business retirement plans:

Nearly half of all small business 401(k) participants do not have access to Roth 401(k) accounts. In 2006, the Roth 401(k) was seen as a potentially expensive addition to a small plan. Sponsors feared the additional costs and administrative burden. Plus, the Roth concept was confusing and difficult to explain. As a result, many sponsors who considered adding a Roth provision have never gotten around to pulling the trigger. The reality in 2014 is that Roth accounts have been seamlessly integrated into all recordkeeping platforms at zero additional cost. There is no practical reason – save inertia – keeping sponsors from adding the provision.

The decision to choose Roth is a behavioral economics nightmare. The “Roth or not-to-Roth” decision can be difficult for even experienced accountants to estimate. The Roth decision requires making a dizzying number of assumptions regarding future tax rates and projected earnings. As a result, timid participants use the Bart Simpson selection method in choosing between pretax and Roth 401(k) contributions. Like Bart always choosing “Good Ol’ Rock” in Rock-Paper-Scissors, participants make the go-to move to make pretax contributions and save some on current taxes. Saving money now has to be good, right?

Making Roth work for Millennials

I propose the following two changes to the Roth provision, effective for all 401(k) plans:

Roth accounts should be required for all sponsors offering a 401(k) plan. This requirement may have been a burden in 2006, but today it is a no-brainer.

Roth contributions should be tax deductible up to a $10,000 per year limit, and a lifetime limit of $100,000. This change in tax treatment would incent every employer in America to open a 401k plan in order to take advantage of the “double-dip” tax reduction. In addition, every American worker would have a powerful incentive to get to the $100K limit as quickly as possible to maximize tax benefits. The $100K tax-deductible Roth would be THE savings vehicle for workers saving for retirement. No more weighing the pros and cons of Roth versus pretax contributions.

Younger workers would benefit the most, as they would have the longest investment horizon. With these changes, the new objective in retirement saving would be maxing out the $100K as soon as possible in an employee’s working life. A worker maxing out the benefit and staying invested for 25 years may expect a $400K plus tax-free nest egg at retirement!

I would also be amenable to restricting access to those below a certain income threshold. High income workers do not need the additional incentive to save, and their contributions would only be a tax revenue drain.

I’m not going to argue that my proposed reforms are perfect, but we need to start thinking differently if we want to seriously address the retirement savings shortfalls facing most Americans.

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