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CCH® PENSION AND BENEFITS — 7/17/06

Where offered, Roth 401(k) accounts can be valuable retirement savings vehicles

Although most employers have been slow to adopt Roth 401(k) plans, a report by Hewitt Associates shows that the Roth 401(k) is used by a meaningful number of employees when offered—particularly workers who are younger and newly enrolled 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 employee participation rate in the Roth 401(k) was 8 percent after just three months of availability. About 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 enrolled 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 under a traditional pre-tax 401(k) plan.

"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 pre-tax 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

Among the other findings of Hewitt's study are the following:

Finally, Hewitt's study showed no notable change in participation rates in pre-tax 401(k) plans 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.

For more information on this and related topics, consult the CCH Pension Plan Guide.

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