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Investors liked the Roth IRA. Will they also take to the Roth 401(k)? Posttax contributions and free withdrawals make it ideal for high-bracket retirees.

After an eventful 30-year Senate career that ended in 2000, Delaware Republican William Roth may be best remembered for his namesake IRA. Now comes an addendum to his legacy: Beginning next January the senator’s name will begin appearing on a defined contribution plan -- the Roth 401(k).

The new kind of account represents a challenge, and an opportunity, for retirement services advisers. “It’s too early to tell whether Roth 401(k)s will prompt any significant increase in 401(k) assets,” says Christopher Bowman, vice president for retirement and investor services at Principal Financial Group. “But it will be a competitive differentiator among retirement services providers.”

The accounts have their allure. Like the Delaware senator’s IRAs, Roth 401(k)s will be funded with posttax contributions, while the withdrawals will be tax-free. The opposite is true of a traditional 401(k). Participants in a Roth 401(k) may contribute up to $15,000 aftertax dollars per year -- though doing so precludes them from contributing that sum to a regular 401(k). Investors may also split their contributions between the two accounts. Roth IRA contributors may not exceed $4,000 annually.

Unlike those chipping in to Roth IRAs, contributors to Roth 401(k)s face no income restrictions. Earnings for Roth IRA investors may not exceed $95,000 if they wish to make the maximum contribution allowed an individual. But Roth 401(k) participants must begin to take distributions by age 70 1/2, whereas Roth IRA holders may stay invested indefinitely.

Why contribute posttax to a Roth 401(k) instead of pretax to a traditional 401(k)? “The Roth 401(k) will benefit people whose tax status now is lower than it will be at retirement,” explains Deborah Novotny, head of the compliance group at T. Rowe Price Associates. Roth 401(k) investors are betting that they will be in a higher tax bracket after retiring and would therefore be better off taking the tax hit now, while working.

A number of people see themselves in this situation. “We’ve had a good early indication of demand for Roth 401(k)s,” reports Lori Lucas, director of participant research for Hewitt Associates. In Hewitt’s November survey of 200 plan sponsors with a median 9,000 employees, 35 percent of employers expressed interest.

Administering Roth 401(k)s could complicate plan providers’ lives. They will have to keep Roth 401(k)s and traditional 401(k)s separate. Rollback rules could add to the management chore. Internal Revenue Service proposals would allow employers to include both traditional 401(k)s and Roth 401(k)s when seeking to establish that they have sufficient numbers of rank-and-file workers participating in a defined contribution plan. The 1974 statute governing plans states that if a defined contribution plan receives disproportionate contributions from highly paid executives, the plan must roll back some of those contributions to the executives. Participants who have both a traditional 401(k) and a Roth 401(k) would be allowed to choose whether their rolled-back assets come out of pretax or posttax savings. The IRS proposed rule will be finalized in the next few months.

“This would add an extra layer of options and take more time to manage,” notes Mark Niziak, chief counsel at NYLife’s retirement unit.

Moreover, plan sponsors will need to spend time and money explaining the new retirement option to their employees. Says Bowman, “Probably the most significant cost associated with the Roth 401(k) will be communication.”

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