According to Vanguard, adoption and usage of Roth 401(k) plans has been tepid at best. At the beginning of 2013, to avoid a fiscal “cliff,” the federal government came up with a way to raise an estimated $12 billion by making it easier to convert pre-tax retirement assets in DC plans to Roth plans. The initial results were very slow, according to Charles Schwab, and — at least based on data from Vanguard’s plans and participants — the momentum has not picked up.
At the end of 2013, 52% of Vanguard’s plans offered a Roth alternative but just 8% offered in-plan conversions. Worse, over the 4-year period from 2010 to 2013, only 0.3% of participants with access to in-plan conversions actually converted assets.
Why would employers offer these conversions if participants are not using them? Experts at Vanguard stated:
"From a participant level, you have the baseline inertia around Roth conversion. In addition, a Roth in-plan conversion is a taxable event for participants — and under ATRA, because the feature is not tied to a distributable event in the plan, they need to have that money outside the plan to pay that tax. And market fluctuations also come into play. In-plan conversions can't be undone. Participants don't want to pay taxes on a $20,000 Roth conversion that might only be worth $15,000 at tax time because the market has gone down."
