Flexibility, tax benefits and the overall attractiveness of Roth 401(k) plans are encouraging more employers to offer them. According to an Aon Hewitt study, Roth Usage in Defined Contribution Plans, 50% of all companies now offer a Roth account a nearly five times percentage growth from 2007.
[Roth plans] are after-tax contributions and grow completely tax free, says Rob Austin, director of retirement research at Aon Hewitt. And I think thats attractive to a lot of individuals because they know that whatever happens with tax rates in the future, theyll be able to access their money and what they see in their balance is what they can get from the Roth account, he explains.
Aon also found that employee contributions are steadily growing in these types of accounts. In 2013, 11% of workers saved to a Roth account when it was available in the plan, up from 8% in 2011.
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Despite the growth, Austin says both traditional 401(k) plans and Roth 401(k) plans will be offered side-by-side without one taking squeezing out the other. The reason, he adds, is that employer contributions are always pre-tax (unlike the Roth) and therefore 401(k)s would likely not move completely to a Roth structure, he explains.
Aon Hewitt's analysis shows that Roth 401(k) plan features can also improve retirement readiness. The average pay of Roth users was slightly higher than for non-Roth users (6% higher), Roth users contributed significantly more to their plan than non-users. In 2013, workers saving to a Roth account contributed an average of 10.2%, compared to just 7.7% for non-Roth savers.
Austin says looking at whether to choose a Roth 401(k) or pre-tax plan can get too complicated. What employees need to consider are tax rates and whether their tax rates will be higher or lower when they get to retirement versus what they are paying now.
The study also shows that 401(k) plans tend to be an attractive savings vehicle for a subset of workers. Where Roth 401(k) accounts are available, 15% of workers in their 20s contributed to a Roth, compared to fewer than 8% of workers in their 50s.
In addition, workers earning between $60,000 and $79,000 were most likely to use Roth 401(k) accounts (12%), compared with just 6.3% of workers earning $20,000 and $39,000 and 10% of workers earning more than $100,000 annually.
Young workers and mid-level earners are most likely to benefit from investing based on today's tax rate, stresses Austin. "These workers are more likely to anticipate future tax bracket increases, so they are taking actions now that are likely to benefit them down the line.
Joel Kranc is Director of KRANC COMMUNICATIONS in Toronto, focusing on business communications. He can be reached at joel@kranccomm.com
