The Role of Roth 401(k) in Retirement Savings

The Roth 401(k) feature allows participants to make after-tax contributions to their 401(k) plan, which accrue earnings tax-free and allow for tax-free distributions in retirement. Most financial experts agree that it can provide a significant benefit to a variety of savers — from high-income to lower-income workers.

After sitting on the back burner for the past few years, the Roth feature is gaining momentum in defined contribution plans and emerging as one of the strongest trends for 2010 and 2011. Since the Pension Protection Act of 2006 established it as a viable, long-term savings option, participant use has been significant, especially among newly enrolled employees. Because of this demand, more plan sponsors are adopting the Roth feature.

Employer Adoption

Recent data shows that employer adoption of Roth is regaining energy. Employer adoption of Roth had increased markedly from 2006 to 2007. However, implementations plateaued during the financial crisis in 2008 and 2009. Now that the economy is on the upswing, plan sponsors have begun turning their attention back to Roth 401(k). Our data shows that 29 percent of employers currently offer a Roth 401(k) and another 25 percent are likely to add it in 2010.

Employee Usage

Overall, 7.4 percent of participants make Roth 401(k) contributions when the feature is available. However, Roth investing is nearly twice as high (13 percent) among newly enrolled workers. In addition, younger workers are most likely to use a Roth option, with almost 17 percent of those in their 20s electing to use the feature. Further, workers earning between $60,000 and $80,000 were among the highest users of a Roth 401(k) feature, although most income levels above $40,000 also showed significant utilization.

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Point of View: The Role of Roth 401(k) in Retirement Savings