More corporations are offering employees a choice between a traditional 401(k) plan and a Roth 401(k) but plan participants are not as quick to embrace the Roth 401(k) as their employers are.
Third-quarter statistics from Fidelity Investments found that more than half of Fidelity 401(k) plans offer a Roth contribution option, up from 36% three years ago, and more than 70% of people who have their 401(k) account with Fidelity have access to a Roth 401(k) option.
Also see: “Why 401(k) plan sponsors shouldn’t use custom TDFs.”
In a traditional 401(k), contributions go in pre-tax. Account holders pay taxes on the contributions and any earnings when the money is withdrawn at retirement. In a Roth 401(k), the money contributed is taxed so all of a person’s contributions and earnings grow tax free until retirement.
Roth 401(k)s have risen in popularity since the passage of the Pension Protection Act in 2006. In 2007, less than 10% of plan sponsors who used Fidelity adopted that feature. By 2010, it was about 25%.
“It’s a little bit of a lower uptick when we talk about plan participant adoption,” says Katie Taylor, director of thought leadership at Fidelity Investments. “What we do see is plan participants who do utilize a Roth feature tend to be higher savers overall.”
Also see: “What’s the right 401(k) contribution rate?”
Since most employers who offer a Roth 401(k) offer both types of plans, it adds an additional layer of decision-making for employees when they are deciding where they should put their money. Taylor believes this is the main reason that participants have been slower to adopt the Roth 401(k).
People who choose to put some of their money away after-tax are generally those who are very engaged in their retirement planning process, Taylor says.
On average, employees contribute about 8% to their workplace-sponsored retirement plan. Those who use a Roth save just a tad less than 11%, with 6.5% coming from the Roth source.
“They are saving a bit more overall when you think about the overall population,” Taylor said.
Also see: “Workers missing out on Roth 401(k)s.”
Most employers who offer a matching contribution on their 401(k) won’t match contributions made to the Roth 401(k) so employees are encouraged to put enough away in their traditional 401(k) to receive the employer matching contribution and then put the rest of their savings in the Roth 401(k).
Fidelity encourages employers to educate their employees about the benefits of using a Roth 401(k).
“A lot of times, younger people, who make less money, would benefit from this, especially if they expect their income to grow over time. Now is a great time to sock money away,” says Taylor.
Paula Aven Gladych is a freelance writer based in Denver.
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