With ‘Rothification’ of Retirement Savings, Vanguard Stresses Education

The “Rothification” of retirement savings will gain steam in 2024, as the SECURE 2.0 Act of 2022 mandated Roth catch-up contributions for those over the age of 50 who make more than $145,000 a year is scheduled to go into effect.

But implementation, while mandatory, will still need consultation and education for plan sponsors to understand—and communicate—the potential benefit of post-tax Roth saving to participants, according to David Stinnett, a principal in strategic retirement consulting at the Vanguard Group.

“There are advantages to using a Roth, but we need to continue to educate participants on those advantages, depending on their personal situation,” Stinnett says.

SECURE 2.0 has multiple provisions that boost Roth 401(k) and individual retirement account savings, which are funded with post-tax income. Those include the 2024 mandatory Roth catch-up for high-income earners; a Roth option for employer matching contributions if the contributions are fully vested; and, also beginning in 2024, participants with Roth accounts are no longer subject to pre-death required minimum distributions.

As of the end of 2022, 80% of plan sponsors were already offering Roth contributions, according to Vanguard commentary published in July. Meanwhile, 17% of participants contribute to Roth accounts, a significant jump from 2018, when just 11% were contributing to the savings vehicle, according to the researchers.

Retirement industry groups have been lobbying for more time for Roth regulations to take hold, noting the recordkeeping and administrative issues that arise from both making Roth contributions available and sorting out payroll processing with the $145,000 threshold in mind.

Stinnett says the plan sponsors his team works with are prepared to implement Roth options, but the bigger push is around education and communication.

“Our role now is to discuss the benefits for participants,” he says. “There are a number of tax benefits that can come from Roth savings, but it will depend on the individual.”

Vanguard’s report noted that having a sizable Roth balance can provide tax diversification and lower overall tax liability by reducing the need to draw down taxable accounts such as 401(k) and traditional IRA savings accounts.

The authors also noted, however, that Roth options are not the best solutions for every saver. Some plan participants may benefit from pre-tax accounts, including those whose income and tax rate are both likely to be reduced in retirement or who have only temporary high income.

Whatever a participant’s situation for participants, plan sponsors should be providing targeted communications about Roth options to their employees, Vanguard noted.

“Once the Roth option has been added to a plan, sponsors should consider how to educate participants about the benefits of Roth contributions,” the report’s authors wrote. “Given the tax intricacies of Roth accounts, some participants find them difficult to fully comprehend. Because of this, a targeted, long-term approach to communication often works best.”

Beyond Roth options, Stinnett sees further benefits for participants coming out of SECURE 2.0 to improve overall financial well-being.

Stinnett notes that emergency savings programs are already available to participants and can be a good vehicle to prevent savers from taking plan loans or outright withdrawals. Further integration will depend on plan sponsors and their advisers being more deliberate in adding emergency programs to plan design, he says.

Meanwhile, student loan matching has potential to further help participants and is a subject of discussion with plan sponsor clients, Stinnett says. But getting recordkeepers and plan sponsors to put in place the processes necessary to administer such a benefit will take time.

“SECURE 2.0 came with a lot of excitement and brought good ideas to the table,” he said. “Implementation, as with most legislation, will take time.”