Roth 401(k) — Sponsors Need to Help Participants Understand the Benefits. Retirement plan sponsors are catching on to the benefits of offering a Roth 401(k) feature. According to the latest Willis Towers Watson survey, cited in, 70% of plans offered a Roth 401(k) in 2017, vs. 52% in 2014. What’s more, another 15% of sponsors say they are planning to add the Roth feature or are considering it.
So, great. Are participants as “jazzed” about the Roth 401(k) feature as sponsors? According to a recent Wells Fargo survey, also cited by EBN, with 15% utilization, Millennials are by far the biggest adopters of the Roth feature. Just over 10% of Gen Xers are Roth savers, while only around 8% of Baby Boomers have taken the Roth plunge. That said, adoption would probably higher across the board if employees understood how to use the Roth 401(k) feature to diversify their retirement tax planning or to up their savings game. That’s where plan sponsors can make an impact — by offering clear, engaging communications about how the Roth feature works, how it can provide a boost to retirement savings and planning strategies, and how to maximize Roth contributions, according to EBN.
Of course, the biggest benefit of a Roth 401(k) is the after-tax advantages — contributions go in after tax and can be withdrawn tax-free in retirement. In addition, Roth assets aren’t subject to a tax hit as long as the account is at least 5 years old and the retiree is at least 59 1/2, or is disabled or deceased.
According to EBN, the factors that determine whether or not Roth contributions are appropriate for an employee are age, current income level and projected retirement income. For older workers trying to determine their retirement income needs, the tax-free benefits can be quite compelling. Younger employees are also good candidate for Roth utilization, as time is on their side, and they have the opportunity for their long-term investment returns to make up for the taxes they’ve paid on their contributions up front.
In addition, employers have myriad options when it comes to offering a Roth feature. You can make a Roth available for new contributions, or split contributions from automatic enrollments between a traditional 401(k) and a Roth. You can even offer a Roth conversion in your plan, which gives participants the opportunity to switch their traditional 401(k) accounts to a Roth 401(k). According to EBN, 37% of sponsors currently offer in-plan conversions, and of those, 55% allow participants to convert their entire traditional 401(k) savings to a Roth.
If you already offer a Roth 401(k) feature in your retirement plan, or you’re thinking about doing so, the most important step in boosting Roth uptake among your employees is making sure they understand its unique benefits and how they can make it work for them. As a plan sponsor, you can, and should, help facilitate that process with engaging communication, modeling tools and calculators, and planning advice support. In short, offering a Roth 401(k) feature can provide your employees additional flexibility when it comes to diversifying their retirement savings; it’s just a matter of helping them figure out the best way to use it.