The Rise of Roth
However, if fees and fee disclosure have dominated industry headlines of late, perhaps the most surprising trend to emerge from this year’s survey was a huge increase in the offering of Roth 401(k)s, an option that plan sponsors have long been reluctant to push since their pay-it-now concept on taxes seems at odds with the traditional tax-deferral mantra, and their benefits often are seen as skewed toward more highly compensated workers. However, these days, it is hard to find someone willing to predict lower taxes in the future, even post-retirement—and today’s younger (and not-so-highly compensated) workers may very well be paying the lowest tax rates they will ever experience.
Those realities may well account for the fact that this year’s survey found that 38.2% of all plans now offer the option, compared with just 20.2% a year ago. The increase was broad-based, with more than half of the plans in the mega category now providing the option, as well as one in four of those in the small, mid, and large segments and a full third of the micro-plan respondents to this year’s survey. What remains to be seen, of course, is if participants will respond in kind.
Participation rates slipped from a year ago—at least on average—from 71.5% a year ago to 69.7% in this year’s survey. On the other hand, the median participation rate was unchanged at 75.0%. By market segment, there were slight slippages among plans in the micro and small range, flat readings for those in the mid and large market segments, and a slight increase in the mega-plan segment, where the participation rate rose from 82% to 84%.
As a trend, automatic enrollment barely budged; overall, just a third of responding employers have this in place, ranging from just one in five among smaller employers (identical to last year’s results) to roughly half of employers in the mid, large, and mega market segments. Movement is still positive for the trend, but modest.
When it comes to auto-enrolling, the vast majority of employers still choose to do so prospectively, with a mere 29.6% targeting existing employees with these initiatives. Other objectives included existing employees contributing below the auto-deferral rate, and a few choosing to pursue a “re-enroll” strategy by targeting existing employees in the plan, but not invested in the qualified default investment alternative (QDIA).
As for those default investments, money market funds remained the option of choice for micro plans and, at one in five, pretty much at the same level as in last year’s survey. Indexed target-date funds were the option of choice for mega plans (31.5%), while actively managed target-date funds topped the list for small, mid-size, and large plans (33,1%, 41.5%, and 38.1%, respectively). Risk-based funds showed up in about 7% of the respondent plans, and balanced funds (the second-most popular default for micro-size program respondents) made it to double digits with small and mid-size programs as well. While 26.2% of mega-plan respondents opted for actively managed target-date funds as a default, 16.1% had selected custom target-date funds.
Not surprisingly, in view of the safe harbor guidelines found in the Pension Protection Act of 2006, most plans were inclined to adopt 3% as a default deferral rate—but only a little more than half, even at the largest plans. A full 7.3% overall (and more than one in eight of the largest programs) used 6%, and just as many chose 5%. Roughly one in 10 picked 4%, while 12.8% chose 2% as the default contribution rate, and about one in 20 went with 1%.
The pace of contribution continued to accelerate, albeit at a varied pace. Nearly half of mega programs had embraced the design feature (up from 32.5% a year ago), as had a full third of large employers (up from 25%), and a quarter of mid-size programs. The adoption pace at micro plans was modest (8.0%), but still nearly twice the pace evidenced in last year’s survey.