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Why Can Employers Determine Retirement Contributions?

I’m very lucky to have a Roth 401k retirement plan through work. In addition to the Roth IRA maximum contribution of $5,000 in 2010, I’m also allowed to make a contribution of $16,500 to my Roth 401(k). Most people don’t have that opportunity and I think there’s a problem with the system.

Why should retirement plans be dictated by work? It doesn’t seem fair that I am able to contribute more post-tax (which is great if you’re young and not making that much money) than my friend who works for Starbucks. Our employers don’t dictate how much we can contribute to our Roth IRA plans, so why should they have such a say in our Roth 401(k) plans? Why not let everyone contribute to flexible savings accounts or a health savings accounts?

I understand that with certain jobs, there are perks. Some people get discounts, some get profit-sharing, and some get a nice healthy 401(k) match. That’s amazing and I’m jealous of them, but I understand that they are sponsored by the company. So why should companies get to dictate how much I contribute to certain types of accounts?

Is the Roth 401(k) really a perk? Some companies feel that the administrative burden outweighs the benefits, but for employees, many would prefer to contribute their post-tax dollars to their retirement account instead of being forced to contribute pre-tax money.

Why not enact a law that makes it mandatory to give employees the option to set up a Roth 401(k) if the company already allows employees to contribute to a traditional 401(k) plan? I can’t imagine the administrative fees for Roth 401(k) plans are higher than traditional 401(k) plans. Under my proposal, people would be able to do what’s best for their situation and companies wouldn’t be able to dictate how much employees can contribute pre-tax and post-tax.

There are always fees for employers, but I think this one is worthwhile. Why should they choose to only allow traditional retirement accounts and not allow for the Roth versions? Not all employees are in the same situation, and they shouldn’t be treated like they are. As new changes are made (allowing Roth 401(k)s in the first place), changes need to be made in workplace policies as well.

Readers, do you have the option to contribute to a Roth 401(k)? If you could, would you take advantage of another $16,500 in Roth contributions?



  1. Daniel –
    You already have either a huge defined benefit plan or large pre-tax retirement savings? I think the Roth Mania(tm) is overblown. I am now starting to see articles repeating what I said coming out of the chute, that Roth may benefit a select few, but not most people.
    To answer your question – expenses. My company dragged its feet for a couple years and now offers the Roth 401(k). The administrators of the plan charge for setting up the extra accounts, and the cost will be passed on to the fewer participants. If they wanted, they’d offer it at no incremental cost, but what would be their motive? Few enough people have any idea what you’re talking about. So the demand isn’t really there.
    I have no use for the Roth 401(k) – If anything, I’d be using the IRA conversion to top off my current bracket each year, and using that strategy, won’t ever be fully converted, as I’d want that pretax withdrawal to fill the lower brackets upon retiring.

    • @joetaxpayer, I love the Roth IRA for young people. Most people won’t be above the 25% tax bracket in retirement, so it makes sense.

      Why make laws that very few people can benefit from?

      • @Daniel, fair enough, a young person already at 25% is at risk of saving his way to a higher bracket and earning his way there as well. Soon as he is earning higher, I’d say to flip to the deductible.

        The laws are often written as ‘allowed’ not ‘must have.’ Your point is well taken, but I’d ask, what about those whose companies don’t even offer the 401(k). They are stuck with $5K limit. Who are you going to scare with that?

        • @joetaxpayer, So why not make the IRA limit $21,500? That gives everyone an even playing ground. Obviously the government wants people to have the option, right?

        • @Daniel, I don’t know. I do know that there’s nothing you or I can propose that will make everyone happy.
          Why can a couple making $250K sack away a total $43K, but a single earner (couple) only $21.5K+5K = $26.5K total?
          Allow too high and people squawk bout the rich getting a break, but too little, and it’s not enough for those getting a late start.

          IRA, Roth IRA, SEP IRA, 401(k), 403(b) and all the other variants each with slightly different rules. Scrap it all and offer two flavors, pre tax, post tax, with same limit whether in employer’s accounts or outside. If all my money were pretax in the 401(k), no IRAs, I’d have no converting option. Where’s the chance to convert within the 401(k) to go from pre-tax to Roth inside that account?

  2. I think a Roth is great if you can contribute to both a 401k and a Roth. Not to mention it is nice to know with your Roth money, what you have is what you have, you don’t then have to account for taxes and such.

    Its too bad that Roth IRAs have income limits in my opinion. That is something I just don’t get. Especially if you live somewhere like New York or something where it is easier to make 105,000 (single) than somewhere else, you are then limited in what you can contribute to a Roth, if anything at all.

  3. My company doesn’t offer a Roth 401k, but that’s fine by me. I contribute 6% to the regular 401k and get 6% matching. I then contribute $5000 a year to a separate Roth IRA.

    I don’t have an extra $16k laying around anyway, so this will work very well for us. We’ll be diversified in retirement – taking the minimum withdrawal from the 401k and use the Roth IRA and my husband’s pension to cover the rest of our living expenses…that’ll help keep us in the lowest tax bracket. :-)

    • @Budgeting in the Fun Stuff, If you had the option to contribue 6% to a Roth 401(k) and get that 6% match in a traditional 401(k), would you?

      • @Daniel, yes. My husband and I are 27 and in the 15% tax bracket…that’s probably the best we’ll ever be so I prefer Roth accounts. Most of the people I work with are either much older (50 plus) or don’t give a flip (barely contribute anything), so I know that’s why my company doesn’t offer a Roth option.

    • @Budgeting in the Fun Stuff
      I’d recommend looking at a few things to help you decide how to proceed after retiring.
      First, see how high the fees are in the 401(k). Some are super low, others are too high. If high, you can convert that money to an IRA and keep the fees very low.
      As far as withdrawals go, minimum doesn’t always make sense. You might want to look at where you fall in your tax bracket after retiring. Often, a retiree will be in the 15% bracket and convert some money to Roth to “top off’ that bracket.
      This is a strategy I use for an 80+ yr old. So each year her taxable money is exactly at the top of the 15% bracket and the Roth keeps growing. Her RMDs increase as a percent, but she’s staying ahead of the risk of being in the 25% bracket.

      • @JoeTaxpayer, good points. I wasn’t being thorough in my comment, but I do completely agree with looking at our options in 25 years. My 401(k)’s expense ratio is 0.2% and our Roth IRA’s ratio is 0.8%. That is below the 1% I usually see referred to, so I guess it’s low?

        What you are doing for the older lady is exactly what I meant (I said minimum, which was just wrong…I meant take the amount that would keep us in the lowest tax bracket…you are totally right). You are spot on. The different tax rules for a regular 401(k) and a Roth account make this an awesome way to manage your retirement accounts!

  4. Fun stuff, I am jealous of your company’s 6% matching, I only get 4% at 100% match and half of the fourth percentage. I contribute 12% right now, and also contribute an additional $2,000 to a Roth IRA.

    It’s not quite as good as some of you guys, but it’s better than MOST of the people I work with, some who are quite a bit older than me (makes me so sad!!!).

  5. My confusion is when a company only allows flexible spending accounts for certain positions. My university allows grad students to have a flexible account for child care but not medical expenses yet professors and staff can have access to both flex accounts. Does it really cost more to open both flex accounts to everyone?

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