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Research Shows That When Offered, Roth 401(k) Accounts Can Be Valuable Retirement Saving Vehicles LINCOLNSHIRE, Ill. -- While the majority of employers have been slow to adopt Roth 401(k) plans, a new report by Hewitt Associates, a global human resources services company, shows that the Roth 401(k) is used by a meaningful number of employees when offered--particularly workers who are younger and newly enrolling in a retirement plan. Hewitt's report, which analyzed more than 60,000 employees at companies that offered Roth 401(k) plans, found that the average participant adoption rate of the Roth 401(k) was 8 percent after just three months of availability. Approximately 14 percent of participants in their 20s elected the Roth 401(k) when it was available, and nearly a quarter (24.7 percent) of employees who were newly enrolling in the 401(k) plan chose the Roth 401(k) option. Hewitt's study also found that when a Roth 401(k) was offered, the average contribution rate for newly eligible employees was approximately the same amount as it was before the Roth
401(k) was available. "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. "However, our early research on the Roth 401(k) shows no notable difference in the participation and contribution rates of employees choosing to contribute to the Roth 401(k) versus a pretax 401(k). At a time when many retirement benefits are being reduced, some companies might find that a Roth 401(k) provision, coupled with a well-executed education strategy, can be a useful and appreciated savings vehicle that meets the needs of a meaningful segment of the employee population." Utilization of Roth 401(k)s by Employees Already Enrolled in 401(k) Plans In addition to studying the behavior of employees who were enrolling in a 401(k) plan for the first time, Hewitt's analysis examined the behavior of employees who were already participating in a 401(k) plan before the introduction of the Roth 401(k) and who elected to switch their contributions completely, or in part, to the Roth 401(k) when it was made available to them. According to Hewitt's report, about 7 percent of workers already enrolled in a 401(k) plan elected to participate in the Roth 401(k) plan as a result of a contribution election change. "Keep in mind that this is over just a three-month period of time, and given employees' typical inertia with respect to 401(k) plans, this adoption rate is pretty reasonable," said Lucas. Moreover, Hewitt's study found that participants who changed their election to the Roth 401(k) when it became available contributed, on average, nearly 3 percentage points more in the aggregate (11.6 percent) than employees not electing the Roth 401(k) plan (8.8 percent). "This is not conclusive evidence that Roth 401(k)s cause workers to contribute more to 401(k) plans, but there is clearly evidence that the Roth 401(k) doesn't result in lower contribution rates, even though employees contribute to them on an after-tax basis," said Lucas. "This is good news for companies who are considering adding the Roth 401(k) option." Other Findings - Only 4 percent of workers age 50 to 59 elected to participate in a Roth 401(k) plan.
- Almost twice as many male employees (9.4 percent) invested in a Roth 401(k) as compared with female employees (5.5 percent).
- 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.
About Hewitt Associates With more than 60 years of experience, Hewitt Associates (NYSE:HEW) is the world's foremost provider of human resources outsourcing and consulting services. The company consults with more than 2,400 organizations and administers human resources, health care, payroll and retirement programs on behalf of more than 350 companies to millions of employees and retirees worldwide. Located in 35 countries, Hewitt employs approximately 22,000 associates. For more information, please visit www.hewitt.com.
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