Roth 401(k) Usage on the Rise

November 21, 2012 ( – Overall Roth 401(k) usage is up 14% year-over-year, a recent Wells Fargo study found.

The study of 1.9 million participants in employer-sponsored 401(k) plans recordkept by the company revealed that the most frequent users of Roth contributions are Generation Y, whose year-over-year increase was slightly higher (16%) than the overall book-of-business. More than one-tenth (14.3%) of Generation Y now contribute Roth dollars when the feature is available, compared with 9.4% of Generation X and 5.8% of Baby Boomers.

When Wells Fargo first rolled out the Roth 401(k) option, plan sponsors were moving a lot of information about conversions, Laurie Nordquist, director of Wells Fargo Institutional Retirement and Trust, told PLANSPONSOR. That communication went to a smaller subset of employees, or participants already enrolled in a retirement plan rather than all employees.

Once plan sponsors added the Roth 401(k) as an ongoing feature in employer-sponsored plans, Wells Fargo started to see a number of the new employees begin to look at it as an attractive option. “When you’re new and coming into a plan, you’re more opt to look at the options you’re given and make a more conscious decision around that,” Nordquist said. The adoption rate is also higher among Gen Y workers, in part because they are often new employees.

“Most of Gen Y is at a relatively low tax rate today,” Nordquist added. “They see that they’re doing okay with paying taxes on the contributions now, thinking that they’ll be in a higher tax bracket later, toward retirement.”

As far Roth 401(k) adoption by salary, there is some difference, but not as dramatic as it is by age, Nordquist said. “Clearly, with those that are making $100,000-plus we see the highest adoption; but even with those that are making $20,000 to $40,000, we see a 5% adoption.”

It is also common to see participants splitting their contributions between a Roth 401(k) and a traditional 401(k). “We hear from plan sponsors that they see participants who are unsure about what bracket they’ll be in and doing a little bit of both,” Nordquist noted.

Regarding the impending regulations coming from Washington regarding the tax treatment of retirement plans (see "The Fight for Retirement Plan Tax Advantages"), Nordquist said many are watching for tax-deferred status in general. “What we hope is that policymakers would clearly recognize that the tax incentive structures on these plans do drive good savings behavior,” Nordquist said. “We’d hate to go backward on the savings; we need to improve the savings rate.”

While still in a wait-and-see mode for future trends for Roth 401(k) adoption, Nordquist said she is “pleased to see that it’s being presented in a fashion that participants understand and can take action against.” It’s not a matter of better or worse—both Roth and a traditional 401(k) are equally great as long as participants are putting dollars away, she added. “It’s a positive, the way plan sponsors are explaining [Roth] so younger participants are signing up. We are staying encouraged by it.”