Roth 401(k)s gaining in popularity

By BenefitsPro

By Paula Aven Gladych

More defined contribution plan account holders are putting their money into a Roth 401(k), particularly younger participants.

An analysis by Wells Fargo of the DC plans it administers found that 10 percent of all participants contributed to a Roth 401(k) when available, up from 8.9 percent in the first quarter of 2012. Nearly 17 percent of participants under age 30 contributed up from 15.2 percent a year ago. Participants over the age of 60 were not huge adopters of the Roth 401(k), with only 4 percent of participants contributing.

The number of plan participants who had access to a Roth 401(k) increased by 5.3 percent.

“The continued upswing of Roth usage is interesting because the usage is driven by younger investors. This suggests that they are aware that their tax rates will likely go up as they age, therefore it is a good strategy to opt for the lower tax bracket now, vs. waiting to be taxed at their unknown rates in their 60s,” said Laurie Nordquist, director of Wells Fargo Retirement. “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.”

Managed account options, like target-date funds and model portfolios, 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 used a managed product, although most of them were only putting 49 percent of their assets in these 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.”

Wells Fargo also found that participants who contribute to both a Roth 401(k) and a health spending account saved more overall than those who didn’t contribute to an HSA.

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