Steady Growth in Roth Adoption Rates Anticipated

Steady growth in the adoption of Roth plans is anticipated by plan sponsors, given the feature’s tax diversification benefits, according to Vanguard’s How America Saves 2017 report.

The percentage of Vanguard plans offering a Roth feature increased to 65% at year-end 2016, compared to 49% that offered the feature in 2012 – reflecting a steady increase over the five-year period.

While the take-up rate was less impressive, Vanguard’s numbers do show a gradual rise from 10% of participants in 2012 who used the Roth feature if they were offered it, to 13% of participants using a Roth in 2016.

The authors observe that those who use Roth plans tend to be younger and shorter-tenured participants. The data reveal that 30% of Roth participants in Vanguard plans were in the age cohort of 34 or younger, while 12% were age 55 or older. Regarding job tenure, the numbers are similar: Nearly 30% of Vanguard participants who have had their jobs for three years or less have a Roth plan.

Other data in the study shows that 13% of Vanguard’s plans offered Roth in-plan conversions, and 1% of participants with access to the option converted assets between 2010 and 2016.

Catch-up Contributions

Turning to other plan design features, catch-up contributions were offered in nearly all Vanguard plans in 2016, and a sizable 12% of eligible participants took advantage of this feature in 2016. The study notes that participants earning less than $100,000 would need deferral rates higher than 20% of income in order to make catch-up contributions, suggesting that “adoption of catch-up contributions by participants is actually quite strong.”

Noting that participants making catch-up contributions tend to have higher incomes and had accumulated substantially higher account balances, the report shows that 4 in 10 Vanguard participants with incomes of more than $100,000 made catch-up contributions. Similarly, 4 in 10 participants with account balances of more than $250,000 made catch-up contributions in 2016.

After-tax Contributions

A lesser-known plan feature, after-tax employee-elective deferrals are available to participants in about one-fifth of Vanguard’s plans. Pointing out that this feature is more likely to be offered by large plans, the study shows that one-third of participants had access in 2016, but only 8% of employees who were offered the after-tax deferral feature took advantage of it.

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