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Roth 401 (k) rollovers--mystery and opportunity.

ACCORDING TO THE Investment Company Institute, 59 percent of existing traditional IRAs are comprised in whole or part of assets rolled over from a corporate retirement plan. Significantly, 82 percent of the households with rollovers said they rolled over their entire account in their last rollover. It's odd, then, to discover that only 1.9 percent of Roth IRAs created in 2015 came from rollovers.

We've had two generations now for the rolling over of 401(k) retirement assets into personal IRA accounts to become accepted custom. Roth IRAs, which started 20 years ago, didn't have a 401(k) equivalent until a decade ago. The concept of rolling over retirement assets into a Roth IRA is therefore relatively new. Still, one would think it would follow on the coattails of the traditional IRA rollover. It hasn't.

Why not? It's not like this is a traditional versus Roth IRA decision. That decision was already made when the corporate retirement plan Roth account was initially chosen. No, the decision should be similar to any other IRA rollover decision. In terms of raw numbers, there were 1.6 million traditional IRA rollovers in 2013, compare to only 133,000 Roth IRA rollovers.

Age demographics does not wholly explain this disparity. It's true younger age groups favor Roth-type retirement savings accounts over traditional tax-deferred retirement savings accounts. It's also true older age groups prefer tradition tax-deferred saving to Roth-type saving. Those numbers, though, tend to even out for middle-aged groups (ages 50-54, per EBRI)--the prime rollover target group. Yet, using that same EBRI data sample shows that middle-aged group implemented 182,000 traditional IRA rollovers in 2013, but only 14,000 Roth IRA rollovers in the same year.

This begins to make sense when you look at the percentage of employees investing in Roth 401(k) accounts. The 2016 59th Annual Survey from the Plan Sponsor Council of America indicates 60 percent of all 401(k) plans now offer a 401(k) option. That survey also said 20 percent of employees contribute to a Roth 401(k) when the option is available. While it does make sense that we'd see fewer Roth rollovers, the actual numbers are still smaller than what we'd expect. Roth 401(k) accounts represent about 12 percent of all 401(k) accounts, yet only 8 percent of all 401(k) rollovers. It's possible employees who save in Roth 401(k) accounts are less likely to leave their company. That would be a convenient coincidence.

It may just be that those who save in Roth 401(k) accounts are more likely to choose to leave their retirement assets with their former employer. Given the fact those saving in Roth 401(k) plans tend to defer a greater percentage of their salary, it's easy to conclude they may be more "take charge" when it comes to planning for their retirement. It's hard to believe, then, that these same people would rely on their former employer to continue to oversee the bulk of their retirement account.

So, we're left with a bit of a mystery. And that might mean opportunity for someone.

29.4 - percentage of U.S. Households with Traditional IRAs (as of 2013) (*)

15.6 - percentage of U.S. Households with Roth IRAs (as of 2013) (*)

1.9 - percentage of Roth IRA investors aged 18 or older with rollovers (as of 2015) (**)

(*) Source: Investment Company Institute Research Perspective, Vol. 19. No. 11, November 2013

(**) Source: Ten Important Facts About Roth IRAs, Investment Company Institute, July 2017

By Christopher Carosa

Christopher Carosa, CTFA, is chief contributing editor for Fiduciary and author of the widely acclaimed book, "401(k) Fiduciary Solutions."
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Author:Carosa, Christopher
Publication:Benefits PRO
Date:Sep 1, 2017
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