More than half of Thrift Savings Plan participants want a Roth 401(k) fund option, which would offer them a hedge against future tax increases, a new survey shows.

And that has some officials predicting that a Roth 401(k) option could be added to the TSP program as early as this year.

"It seems to be a real possibility," Jim Sauber, the chairman of the Employee Thrift Advisory Council, a group of union and management association representatives that advises the board governing TSP. "There is growing interest for a variety of reasons."

Under a Roth option, participants would pay taxes when they make contributions to their TSP retirement investment accounts. When they retire and withdraw those funds, they would not be taxed. That differs from the current tax-deferred TSP plan, where contributions are taxed at the time of withdrawal.

The Federal Retirement Thrift Investment Board, which oversees the TSP program, said military service members are most likely to benefit from a Roth option, since their current tax rates are likely to be lower than future tax rates. Civilian employees will usually pay lower taxes in the future, which the board says makes a Roth option less beneficial for them.

Service members were most enthusiastic about the Roth option. While 56 percent of all respondents said they would like the Roth option, 63 percent of service members felt TSP needed the option and 49 percent of military participants would contribute some or all of their savings to a Roth.

The last survey, conducted in 2006, found that 60 percent of respondents wanted a Roth option.

Jessica Klement, the government affairs director for the Federal Managers Association, said that support for a Roth is still strong, even though it was lower than in the previous survey.

"If more than 50 percent of people want a Roth, that's telling, and worth looking into," Klement said. FMA supports creating a Roth option.

The percentage of participants who already have a Roth account outside of TSP has increased, from 32 percent in 2006 to 36 percent in the latest survey.

The House passed a bill last year that would create a Roth option, but the Senate failed to pass a similar bill and the proposal died.

The Roth's legislative future under a new Congress is uncertain. A champion of the idea in the House is Rep. Henry Waxman, D-Calif., the author of the measure that the House passed last year. But he is now chairman of the House Energy and Commerce Committee and no longer sits on the committee that handles federal workforce issues. His staff was unsure whether he would reintroduce the bill.

But Sauber, who is also chief of staff of the National Association of Letter Carriers, said the continued support, combined with the Roth's previous success in the House, could bode well for its chances.

After Waxman's move to another committee, "it's not clear whether it has the champion it did last year," Sauber said. "But the fact that it passed the House shows that it's gathering momentum."

The Federal Retirement Thrift Investment Board could add a Roth option on its own. But so far, it hasn't.

Last year, the board decided not to add the Roth option because it wasn't sure enough employees would use it to justify the $13 million cost. A Roth option would require a separate accounting system to handle pre-tax and post-tax accounts, a computer system overhaul, and a reorganization of the TSP's call centers.

TSP also might need to offer participants professional tax advice to help them determine whether a Roth option would be beneficial.

Gregory Long, executive director of the board, remained hesitant to throw his support behind the Roth.

"I don't want to sugarcoat this — it will be an administratively challenging change," Long said.

Tom Trabucco, the board's legislative director, said the board also does not want to sacrifice TSP's simplicity in adding another option. The employee council will now review the survey results and recommend to the board whether it is time to add a Roth, Trabucco said.

Creating a Roth option is expected to raise about $160 million in taxes annually. Sauber said that agencies could use those funds to start immediately making automatic and matching contributions to employees' TSP. Agencies now wait anywhere from seven months to a year after an employee is hired to start making TSP contributions.

Another TSP change Congress considered last year — to make the L Funds the default option for participants who do not choose a fund for their contributions — is losing support among the employee council members. The five L Funds, which are mixes of TSP's five stock, bond and government securities funds that vary based on when employees expect to begin making withdrawals, lost between 5 percent and 31 percent in 2008.

Jackie Simon, director of public policy for the American Federation of Government Employees, said returns show the government securities-backed G Fund should remain the default fund. The G Fund earned 3.75 percent in 2008.

Long acknowledged that the L Funds had a bad year, but restated his belief that investors are better off investing in L Funds in the long term.

Also, a proposal that the board strongly opposed three years ago — to create a fund tied to income-producing real estate such as hotels and apartment buildings — has reappeared. The National Association of Real Estate Investment Trusts (NAREIT) made another pitch in October for creating a REIT fund.

But after last year, when the collapse of the real estate industry helped send the nation's economy into a dire recession, the board and the employee council were once again not interested. A review of NAREIT's proposal conducted by the investment consulting firm Ennis Knupp and Associates found that REITs are extraordinarily volatile and have a standard deviation of 41 percent. Tracey Ray, the board's chief investment officer, said that means an expected return of 10 percent could, in reality, yield anything from a 31 percent loss to a 51 percent gain.

"It's a damn good thing we didn't [create a REIT trust] with all the overvaluing" in the real estate market, said Rick Brown, president of the National Federation of Federal Employees and vice chairman of the employee council. "People would have taken a bath."

NAREIT spokesman Ron Kuykendall said the group is not lobbying Congress to create a REIT fund, and said its submission was part of information packets it regularly sends to many retirement programs in the public and private sectors.

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