In the first quarter of 2013, 10 percent of all participants in Wells Fargo-administered 401(k) defined contribution plans chose to contribute to a Roth 401(k), an increase from the 8.9 percent who did so in the first quarter of 2012, the investment firm reported.
Notably, 16.9 percent of participants under age 30 contributed to a Roth 401(k)—up from 15.2 percent a year earlier—as compared with just 4 percent of participants in their 60s.
Also, the number of people with access to a Roth 401(k) increased by 5.3 percent. The findings are based on an analysis of 2 million eligible participants.
“The continued upswing of Roth usage is interesting because the usage is driven by younger investors,” said Laurie Nordquist, director of Wells Fargo Retirement. “This suggests that they are aware that their tax rates will likely go up as they age and, therefore, it is a good strategy to opt for the lower tax bracket now versus waiting to be taxed at their unknown rates in their 60s.”
Managed Products Popular but Misunderstood
Managed products—including target-date funds, model portfolios and managed accounts—continued to gain in popularity. Nearly three-fourths of all participants in a Wells Fargo-administered 401(k) plan had money in a managed product, and 89 percent of newly hired participants opted for such an investment vehicle. However, new employees who are selecting managed products are putting only 49 percent of their assets in them.
“This shows that participants treat managed products as just another fund, instead of a one-stop investment,” observed 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.”
Deferral Rates Edge Up
As for positive deferral rate trends, among new hires, 24 percent deferred at least 6 percent of their paychecks to their employer-sponsored retirement plan, and 42 percent deferred at least 4 percent. There was a decrease to 58 percent in those contributing just 3 percent or less to their 401(k) plan in the first quarter, as compared with 62 percent who did so in the first quarter of 2012.
“We saw the most improvement among people who had been hired in the last two years, which is traditionally a group that is hardest to get to contribute at a rate above the common 3 percent default deferral rate,” said Nordquist.
For participants who have been in their plan for at least 10 years, balances rose for all age bands in the first quarter of 2013, according to Wells Fargo data. Participants ages 40-59 increased their balances by more than 17 percent (on average) from two years earlier, those in their 60s saw a 14.3 percent balance increase, and enrollees in their 30s had the same percentage increase.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Related SHRM Articles:
Employers Prepare to Add Roth Features, SHRM Online Benefits, February 2013
Legislation Provides Roth Conversion Opportunity, SHRM Online Benefits, January 2013
The Roth 401(k): A ‘Value Add’ for Your Employees, SHRM Online Benefits, January 2012
Target-Date Funds Still Misunderstood by Many, SHRM Online Benefits, May 2012
Encourage Employees to Defer Adequate Pay to Their 401(k), SHRM Online Benefits, May 2012
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