That was a key conclusion of a new research paper from the Vanguard Center for Retirement Research, which examined Roth 401(k) adoption trends at The Vanguard Group’s defined contribution recordkeeping client companies in 2006.
The research paper, written by William E. Nessmith and Stephen P. Utkus, found that 14% of Vanguard retirement savings plans adopted the Roth 401(k) in 2006, with smaller plans doing so at a faster rate than larger plans (16% versus 8%). The researchers said Vanguard estimates Roth adoption at the plan level will increase from 14% to around one-third of plans by year-end 2007.
Early Roth adopters are also more likely to be actively engaged in the 401(k) savings process – more of them are registered for 401(k) Web access, for example, according to the survey. They are also high savers with a plan contribution rate of about 14% of income, versus 9% for nonadopters. Roth 401(k) adopters had, on average, balances that are more than $40,000 higher than nonadopters, had higher household income and higher non-retirement-plan wealth.
Such participants were also more likely to be active in other 401(k) activities, such as trading in their accounts or contacting Vanguard regularly for information and updates on their accounts, the researchers asserted.
Vanguard data showed that business and professional services firms had the highest adoption rate (21%), while firms in the wholesale and retail trades had the lowest (5%). Plans that were early adopters had higher-income participants and larger plan balances.
The main barrier to adopting a Roth 401(k)? The Vanguard researchers said plan sponsors have reported that payroll system changes, particularly among large companies, have proven to be a drawback, but that as more plans and payroll vendors implement the Roth 401(k), that obstacle is expected to diminish.
Nessmith and Utkus said that for participants who have not adopted the Roth 401(k), regular communications will help improve adoption rates. As knowledge of the Roth 401(k) becomes more widespread, and participants come to recognize that the feature is not simply for the highly paid or financially sophisticated, demand for the feature seems likely to increase.
“After only one year’s experience with the Roth 401(k), it is difficult to foresee the future in ten years,” Nessmith and Utkus asserted in the report. “But given the potential advantages offered by the (Roth) feature, as well as the overall change in tax policy, it is possible to imagine a world in which Roth 401(k) savings emerge as the norm for future generations of plan participants.”
The report is here .