Cecily O'Connor
RedwoodAge.com

Many employers are expanding their 401(k) offerings, now that workers are taking on more responsibility for retirement savings.

The changes include beefing up "regular" 401(k) plans, as well as offering Roth 401(k)s - a retirement savings option that combines features of the 401(k) and Roth IRA. These alternatives come at a time when traditional pension plans, which many boomers count on to finance their retirements, are being closed because they are difficult for companies to support. 

For example, 3M, a blue-chip company with a long-standing pension, just reported it will no longer offer that plan to new hires, giving them an expanded 401(k) savings plan instead. The manufacturer, which also changed its retiree medical coverage, cited "3M's aging workforce and the increasing ratio of retirees as a percent of active employees" as reasons behind the makeover.

Meanwhile, all types of employers are adding Roth 401(k)s to their benefit offerings, providing workers a retirement savings plan that combines features of the 401(k) and Roth IRA, according to investment manager Charles Schwab. About 35 percent the retirement plans Schwab administers were offering the Roth 401(k) in 2007, up from 26 percent from a year earlier.

Expanded 401(k)
As part of the new 401(k) savings plan, 3M will contribute 3 percent of pay to a retirement account and provide a dollar-for-dollar match on employee contributions of up to 6 percent of pay. The savings plan takes effect next year, and addresses several key factors driving the need for change, including the emergence of tax-efficient savings vehicles, the company said.

“Our new retirement benefits program also will help us attract and retain talent and address the needs of today’s changing workforce, which desires more portability and greater involvement in decisions affecting their financial futures," said Jan Angell, 3M's vice president for compensation.

Tax efficiency also can be a draw of the Roth 401(k). The plan is similar to a regular 401(k) in that employees choose to have a certain amount withheld from their paycheck and contributed to the plan. The difference is when taxes are paid. In a Roth 401(k), payroll deductions are made on an after-tax basis, which means the employee pays taxes on the contribution before the money is put in the plan. When the money is eventually withdrawn, the Roth 401(k) contributions and the investment earnings are tax-free, provided withdrawal qualifications are met.

While Schwab has seen a steady increase in interest across most types of employers, it is noticing the "highest buy-in" among professional services firms and their employees, said Dean Kohmann, Schwab's vice president of 401(k) plan services.

"This is because employees at these types of firms are generally more likely to work with personal financial advisors who advise them to use Roth 401(k), they typically have higher salaries that disqualify them from contributing to a Roth IRA as part of their tax strategy, and their salaries give them greater leeway to save for retirement on an after-tax basis," Kohmann said.

Tax Advantages
Overall, about 12 percent of US employers offered a Roth 401(k) in 2007, according to a survey by Hewitt Associates, a consulting firm.

In general, a Roth 401(k) makes the most sense for people who expect to be in a higher tax bracket in the future or higher-paid employees who might be precluded from making Roth IRA contributions due to income limitations, Kohmann said. A Roth 401(k) can also be rolled into a Roth IRA, which requires no minimum distribution at retirement, presenting certain estate-planning opportunities.

"I think we are seeing more employers and employees ask about the Roth 401(k) because everyone is looking for tax advantages, and the Roth 401(k) can be beneficial for many people," said Kevin Timmerman, principal at Steele Capital Management, a company that works with Schwab.

Schwab has a Roth 401(k) calculator on its website to help individuals weigh pros and cons of contributing to such a plan. As always, it's a good idea to speak with a financial planner when considering a change or addition to your retirement savings plan.