Wells Fargo Sees Rise in Roth, Managed Accounts Use

This is up from 8.9% reported in the first quarter 2012. Among participants younger than 30, 16.9% contributed to a Roth 401(k) plan (up from 15.2% one year ago) as compared to 4% of participants in their 60s. In addition, the number of people with access to a Roth 401(k) increased by 5.3%.

“The new rules for converting existing traditional 401(k) assets to after-tax Roth 401(k) assets may have heightened awareness of how Roth works, which could also play a role in the trends we’re seeing.” said Laurie Nordquist, director of Wells Fargo Retirement (see “Fiscal Cliff Deal Extends Roth Conversions”).

Managed products, including target-date funds, model portfolios and managed accounts, continued to gain popularity. Nearly three-fourths of all participants in a Wells Fargo-administered 401(k) plan had money in a managed product, and 89% of newly hired participants used a managed product. However, new hires using managed accounts are only putting 49% of their assets in managed products.

"This shows that participants treat managed products as just another fund instead of a one-stop investment," said Joe Ready, director of Wells Fargo Retirement. "If participants only put some of their assets in a managed product, they may not get the full benefit of a pre-mixed portfolio that these types of products can offer. As a result, participants may actually be increasing their portfolio volatility and risks without even realizing it."

In an analysis of forty-eight 401(k) plans (325,000 eligible employees), people who also have health savings accounts (HSAs) saved at significantly higher rates than those without an HSA. Nineteen percent more eligible employees participated in their employer-sponsored 401(k), account balances were 55% higher, and average deferral rates were 0.5% higher than average deferral rates for those not in an HSA. In addition, HSA account holders have 58% higher 401(k) balances.

Despite the record highs of the S&P 500 in the first quarter, participant activity overall did not change drastically. However, of the participants who did make changes to their deferral rates, more increased than decreased the amount they put into their defined contribution plan. Among positive deferral rate trends, 24% of new hires deferred at least 6%, and 42% of new hires deferred at least 4% of their pay to their employer-sponsored retirement plan. Those deferring 3% or less to their 401(k) plan in the first quarter decreased to 58%, as compared to 62% in the first quarter 2012.

For participants who have been in their plan for at least 10 years, balances rose for all age bands in the first quarter, according to Wells Fargo data. Participants ages 40 to 59 saw their balances rise more than 17% (average) from two years ago, while those in their 60s saw a balance increase of 14.3% and participants in their 30s saw the same percentage increase over the same time period.

These findings are based on an analysis of two million eligible participants in a subset of retirement plans Wells Fargo administers.