What’s Happening with Roths in Retirement Plans?

Roth 401k, retirement, T. Rowe Price
Let’s hope the number on the calculator isn’t total retirement savings.

Roth 401k adoption is still relatively low, but that could (and will most likely) soon change. T. Rowe Price found that 61 percent of the employer-sponsored retirement plans for which it provides recordkeeping services offer Roth contributions in their 401k plans, up from 50 percent at the end of 2015.

It’s something the Baltimore-based behemoth says is the biggest one-year increase in Roth contribution adoption since the company began tracking the figure in 2007, and it’s one of the findings in the latest update to its Reference Point report, an annual benchmarking release of employer-sponsored retirement plans based on T. Rowe’s recordkeeping data.

“It’s encouraging to see that so many of our plan sponsors are continuing to take steps to prepare their plan participants for retirement,” Aimee DeCamillo, head of T. Rowe Price Retirement Plan Services, said in a statement. “An important demonstration of this is the 10-percentage point increase we saw in 2016 in the number of plan sponsors who offer Roth contributions in their 401ks.”

Other key findings include:

Auto-solution trends

Adoption of auto-solutions (enrollment, escalation, portability) has been on the rise since the Pension Protection Act of 2006, T. Rowe writes, and it continues to be a successful tool for plan sponsors to use within their plans, according to the company. Of the T. Rowe Price plan participant base:

  • The number of plans with a 6 percent default deferral rate or more has doubled since 2011, with 33 percent of plans offering this higher rate in 2016. The industry standard for the past 10 years has been 3 percent.
  • The percentage of plans adopting auto-increase of participant contributions and auto-enrollment has significantly grown in the last five years. The percentage of plans adopting auto-increase grew from 63.3 percent in 2011 to 71.5 percent in 2016. Similarly, auto-enrollment increased from 39.8 percent in 2011 to 54.5 percent in 2016.
  • Participation rates continue to be strongly tied to the adoption of auto-enrollment, with participation 42 percentage points higher in plans with auto-enrollment than those without it.

Contribution trends

Pretax deferral rates continued to increase in 2016 and now stand at 8 percent, the highest rate since before the financial crisis. Likely factors contributing to this increase include plan sponsors raising the default deferral rate for their plans and improved market conditions.

Investment trends

Plan adoption of target date portfolios continued to rise. In 2016, 93 percent of plans at T. Rowe Price offered target-date portfolios.

Additionally, 55 percent of participants invested their entire account balance only in target date products, an increase of nine percentage points since 2013. The increasing popularity of target date products could indicate that participants prefer a more managed approach versus choosing their own allocation or are sticking with their plan’s default option.

Loan and disbursement trends

Loans are a staple of the retirement plan feature but can derail a participant’s future savings if not utilized properly. The percentage of participants with loans at the end of 2016 is down marginally to 23.8 percent, which is the lowest since the height of the financial crisis in early 2009.

Rowe Price also found that as of year-end 2016:

  • The ratio of direct rollovers to cash-outs continued to strengthen, with rollovers increasing to 81 percent in 2016, compared with 71 percent in 2009, and cash-outs decreasing to 19 percent in 2016, compared with 29 percent in 2009.
  • Hardship withdrawals declined, with only 1.4 percent of participants in plans at T. Rowe Price taking such a withdrawal, compared with the 2 percent industry average.
John Sullivan
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.

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