Worried about losing some of the $3 trillion in assets they oversee, defined-contribution-plan administrators have forged a coalition with plan sponsors and retirees to lobby Congress to allow Roth conversions for 401(k) plan participants.
The heavy marketing of this year's tax law change, which re-moves income caps for converting conventional individual retirement accounts to Roth IRAs, has prompted fears among plan administrators that many 401(k) holders with high balances will move their money to Roth IRAs. In their congressional lobbying, administrators argue that a flight to Roth IRAs could make 401(k)s more expensive to run, resulting in higher fees for remaining participants.
“It will encourage leakage from these arrangements,” said Judy Miller, chief of actuarial issues and director of retirement policy at the American Society of Pension Professionals and Actuaries, which represents administrators and attorneys who work with 401(k) plans.
Groups involved in the lobbying effort are the the ASPPA, the Profit Sharing/401k Council of America, The ERISA Industry Committee, the Society for Human Resource Management, the U.S. Chamber of Commerce, Hewitt Associates LLC and the Women's Institute for a Secure Retirement.
Small-business owners are already leaving the 401(k) world, said Adam Pozek, vice president of consulting services at Sentinel Benefits and Financial Group, which administers 401(k) plans with a total of about $2.5 billion.
One small-business client of the company terminated both its defined-benefit pension plan and its 401(k) plan in December so that the owner could convert his own assets to a Roth IRA, Mr. Pozek said. The plans served 17 employees.
“Now they don't have any retirement benefits,” he said, noting that plan administrator fees are based on average participant account balances. “When you take the larger balances out of a plan, the average account balance decreases, and the fees increase.”
Proponents argue that permitting conversions would help combat the federal budget deficit because tax revenue on money leaving conventional 401(k) plans would be realized sooner rather than later. They also contend that 401(k) plans offer professional management at a lower cost to participants than IRAs.
“It's a shift from a low-cost to a high-cost fee environment,” said Frank McArdle, a principal of Hewitt Associates, a benefits consulting firm that works with large em-ployers and is pushing for the change.
In addition, 401(k) plans provide greater fiduciary oversight and spousal benefit protections than are generally available in IRAs, he said.
Republican members of the Senate Finance Committee support the proposal, said one Senate staff member, who spoke on condition of anonymity. “It makes sense from a consistency perspective,” the staff aide said. “If you have Roth rule conversions for IRAs, why not have them for qualified plans [such as 401(k)s]?”
It is not clear whether Senate Finance Committee Democrats will support the proposal. However, a Finance Committee aide, who asked not to be identified, wrote in an e-mail: “The Finance Committee is exploring legislation that would encourage employers to keep their retirement savings plans and employees to keep their savings in those plans.”
Lobbyists working on the issue say it could be difficult to get support from House Ways and Means Committee Chairman Charles Rangel, D-N.Y.
“This is not popular with Chairman Rangel,” said one lobbyist involved in the effort, who declined to speak for attribution. Mr. Rangel and some other Democrats have been critical of the Roth concept for retirement savings plans because the government loses tax revenue that would have been due on the earnings from the plans.
By converting to Roth IRAs, account holders pay taxes earlier than they would have otherwise, but tax revenue is lost when money is withdrawn from the accounts at retirement.
Ways and Means spokeswoman Lauren Bloomberg declined to comment about Mr. Rangel's position. “The issue is not currently pending before the committee,” she wrote in an e-mail.
While more financial advisers work with IRAs than with 401(k)s, at least one adviser agrees that plan participants should have greater flexibility.
“Why not allow people to convert their 401(k)?” asked Doug Flynn, a partner and co-founder of Flynn Zito Capital Management LLC, which manages about $250 million.
“There are going to be some people excluded from the conversion that might have done it,” he said. “Those people are at a disadvantage.”
E-mail Sara Hansard at shansard@investmentnews.com.
