Hewitt Says Roth 401(k) Gaining Traction

June 26, 2006 (PLANSPONSOR.com) - Even if some companies have been skeptical about adopting Roth 401(k) plans, a new report by Hewitt Associates suggests that the retirement savings option is picking up steam, especially among younger workers.

The report looks at more than 60,000 employees at companies that offer Roth 401(k) plans and found that the average participant adoption rate was 8% after three months of availability.

The Roth 401(k) allows retirement plan participants to allocate certain 401(k) contributions as “after tax,” enabling them to withdraw these same contributions and earnings tax-free at retirement. This differs from the regular 401(k), where the contributions are taxed at retirement.

“Many companies have been hesitant to offer Roth 401(k)s for a number of reasons, including concerns over whether employees would use them and whether Roth 401(k)s might actually result in reduced overall contribution rates,” said Lori Lucas, director of retirement research at Hewitt Associates, in a release. Lucas added that Hewitt’s early research shows very little difference in the participation and contribution rates of employees choosing to contribute to the Roth 401(k) versus a pretax 401(k).

The Hewitt report also found that the instruments were more popular among younger workers, with 14% of participants in their 20s choosing the Roth 401(k), and nearly a quarter (24.7%) of employees who were newly enrolling in the 401(k) plan chosing the Roth 401(k) option.

The research firm also looked at the how employees reacted to a new investment option and whether the offering of a Roth 401(k) prompted a switch from traditional 401(k) plans.

According to Hewitt’s report, about 7% of workers that were already enrolled in a 401(k) plan opted to participate in the Roth 401(k) plan because of a contribution election change. The report also showed that participants who switched to the Roth 401(k) when it became available contributed, on average, nearly 3% more altogether (11.6%) than employees not electing the Roth 401(k) plan (8.8%).

Other findings of the Hewitt report include:

  • Only 4% of workers age 50 to 59 elected to participate in a Roth 401(k) plan.
  • Almost twice as many male employees (9.4%) invested in a Roth 401(k) as female employees (5.5%).
  • A higher percentage of non-highly compensated employees elected a Roth 401(k) versus highly compensated employees.
  • Hewitt’s study showed no notable change in participation rates after the Roth 401(k) plan was introduced, possibly addressing companies’ concerns that the addition of the Roth 401(k) might reduce participation due to overwhelming choice.