Plan Sponsor Contributions to Roth 401(k)s Increase in T. Rowe Plans

T. Rowe Price’s Retirement Plan Services unit saw the biggest one-year increase in Roth contribution offerings in its clients’ 401(k) plans in 2016 — up 10 percentage points, to 61% of the plans for which it provides recordkeeping services.

Announcing the results as part of its annual “Reference Point” report, T. Rowe Price said the increased adoption of Roth contribution options in 2016 was driven in part by participants who now have a better understanding of the benefits of the Roth approach to saving.

“It’s encouraging to see that so many of our plan sponsors are continuing to take steps to prepare their plan participants for retirement,” said Aimee DeCamillo, head of T. Rowe Price Retirement Plan Services, Inc. “Roth contributions in 401(k)s offer important benefits to participants, including the ability to diversify the tax treatment of retirement income.”

While the industry as a whole is more familiar with the Roth option and is becoming more receptive to adding it to retirement plans, the report further notes that the holdout group appears to be the plan sponsors who would be required to amend their plan documents.

Interestingly, the study shows that the percentage of participants making Roth contributions dropped slightly, down from 6.7% in 2015 to 6.3% in 2016. This may have resulted from the increase in plans offering a Roth option, rather than participants stopping or decreasing their deferrals, the report surmises.

In what seems to be a common understanding, the report also notes that the adoption of auto-solutions has been steadily rising since the 2006 Pension Protection Act and continues to be a successful tool for plan sponsors to use within their plans. The report shows that the percentage of plans adopting auto-enrollment increased from 40% in 2011 to nearly 55% in 2016. In addition, auto-escalation grew from 63% in 2011 to nearly 72% in 2016.

Other key findings include:

  • Pretax deferral rates continued to increase in 2016, rising to 8%, the highest rate since before the financial crisis; likely drivers include raising the default deferral rate and improved market conditions.
  • More than half of participants invested their entire account balance in target-date products, indicating that participants either prefer a managed approach over choosing their own allocation or are staying with their plan’s default option.
  • The percentage of participants with loans at year-end 2016 was down to nearly 24%, the lowest since the peak of the financial crisis in early 2009.

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