Roth Plan Features Becoming More Popular

A paper, “Roth Usage in Defined Contribution Plans,” indicates companies and workers are increasingly receptive to these features as a retirement savings vehicle. In addition, more U.S. employers are adding Roth 401(k) features than ever before and participation is also on the rise.

More specifically, Aon Hewitt’s research finds half of all companies now offer a Roth account, nearly five times the percentage that did so in 2007 (11%). Aon Hewitt also found in 2013, 11% of workers saved to a Roth account when it was available in the plan, which is up from 8% in 2011.

“Continued changes to legislation around Roth, coupled with increased awareness and understanding of these plan features, are driving more employers to add Roth savings feature to their plan,” says Rob Austin, director of Retirement Research at Aon Hewitt, based in Lincolnshire, Illinois. “Because of the potential tax benefits, employees increasingly see Roth accounts as attractive savings options and we anticipate that the use of Roth will continue to rise.”

Roth 401(k) plan features can also improve retirement readiness, says Austin. According to the paper, while 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 with 7.7% for non-Roth savers (32% higher).

In addition, the survey found, when Roth 401(k) accounts are available, 15% of workers in their 20s contributed to a Roth, compared with fewer than 8% of workers in their 50s. When it comes to salary, workers earning between $60,000 and $79,000 were most likely to use Roth 401(k) accounts (12%), compared with 6.3% of workers earning between $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,” says 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.”

More information about the paper, including how to download it, can be found here.