According to a Hewitt research paper, the largest barriers among plan sponsors reluctant to add the feature this year are the potential lack of participant usage (54% of respondents) as well as the administration complexities and/or implementation cost (51%).
Hewitt researchers had sympathy for those reluctant to jump into the Roth 401(k) waters. “Adding a Roth feature is not as simple as clicking an on/off switch—it takes considerable planning, implementation, and communication,” Hewitt wrote. “Communication is especially important, and tools must be made available to help employees navigate this new and complex decision.”
Meanwhile, according to Hewitt, 7.4% of active workers elected to save through a Roth, where available. The average Roth deferral was 6.8% of pay, with a total contribution rate (including before-tax, after-tax, and Roth) of Roth users at 10.8%.
Usage of a Roth 401(k) feature ranged from 4% to 22% of participants with most companies seeing low Roth usage either recently having implemented the feature or automatically defaulting their new hires into a before-tax option (rather than Roth). Plans with relatively higher usage had been early adopters of Roth and/or are organizations with more financially savvy populations. Most early adopting employers are insurance, financial services, or professional services organizations.
Hewitt found that overall participant Roth 401(k) usage tends to grow through years one and two, and then stabilizes after three years. Seven percent of workers added the Roth after a year, a number that rose to 15% after 36 months. Usage among participants who joined the plan after the Roth feature was added was substantially higher, with nearly 13% of newly enrolled workers opting to use a Roth 401(k) feature.
Younger participants are most likely to use a Roth 401(k) feature. Where available, 16.6% of workers in their 20s elected to use a Roth 401(k) versus only 4.2% of those in their 50s. In terms of salary, those earning between $60,000 and $80,000 had the highest usage of a Roth 401(k) feature. However, considerable adoption was also seen in all income levels above $40,000.
Hewitt researchers contended that while adoption rates are still somewhat limited, that picture is likely to change. “Given its relatively short history, a Roth 401(k) option has proved beneficial to a meaningful segment of plan participants,” Hewitt wrote. “Data shows there is genuine participant interest in and significant use of the Roth design. Further, having one may actually increase participants’ retirement savings. The Roth feature is increasingly becoming a more prevalent 401(k) and 403(b) feature and is likely to become an inherent feature in all plans— especially with pending legislation expanding its use.”