Roth 401(k) Usage on the Rise Among Younger Participants, According to Wells Fargo
Wells Fargo announced today that in the first quarter 2013, 10 percent
of all participants in Wells Fargo administered defined contribution
plans chose to contribute to a Roth 401(k), when available, up from 8.9
percent reported in the first quarter 2012. Notably, 16.9% of
participants under age 30 contributed to a Roth 401(k) (up from 15.2%
one year ago) as compared to 4% of participants in their 60s. In
addition, the number of people with access to a Roth 401(k) increased by
5.3%. These findings are based on an analysis of two million eligible
participants in a subset of retirement plans that Wells Fargo
administers.
“The continued upswing of Roth usage is interesting because the usage is
driven by younger investors. This suggests that they are aware that
their tax rates will likely go up as they age therefore it is a good
strategy to opt for the lower tax bracket now, versus waiting to be
taxed at their unknown rates in their 60s,” said Laurie Nordquist,
director of Wells Fargo Retirement. “The new rules for converting
existing traditional 401(k) assets to after-tax Roth 401(k) assets may
have heightened awareness of how Roth works, which could also play a
role in the trends we’re seeing.”
Managed products popular but could be misunderstood
Managed products, including target date funds, model portfolios and
managed accounts, continued to gain popularity. Nearly three-fourths of
all participants in a Wells Fargo-administered 401(k) plan had money in
a managed product, and 89% of newly hired participants used a managed
product. However, new hires using managed accounts are only putting 49%
of their assets in managed products.
“This shows that participants treat managed products as just another
fund instead of a one-stop investment,” said Joe Ready, director of
Wells Fargo Retirement. “If participants only put some of their assets
in a managed product, they may not get the full benefit of a pre-mixed
portfolio that these types of products can offer. As a result,
participants may actually be increasing their portfolio volatility and
risks without even realizing it.”
Health Savings Account holders and their 401(k)s
In an analysis of forty-eight 401(k) plans (325,000 eligible employees),
people who also have Health Savings Accounts (HSAs) saved at
significantly higher rates than those without an HSA. Nineteen percent
more eligible employees participated in their employer-sponsored 401(k),
account balances were 55% higher, and average deferral rates were 0.5%
higher than average deferral rates for those not in an HSA. In addition,
HSA account holders have 58% higher 401(k) balances.
“It seems that higher savings rates result when Health Savings Accounts
and 401(k) plans are offered together,” said Ready. “These plans are
similar in nature from a self-directed, pre-tax savings perspective, so
it does not surprise me that positive savings behaviors of participants
often reflect in both of these plan types.”
Low Deferral Rates Continued Decline
Despite the record highs of the S&P 500 in the first quarter,
participant activity overall did not change drastically. However, of the
participants who did make changes to their deferral rates, more
increased than decreased the amount they put into their defined
contribution plan. Among positive deferral rate trends, 24% of new hires
deferred at least 6%, and 42% of new hires deferred at least 4% of their
pay to their employer-sponsored retirement plan. Those deferring 3% or
less to their 401(k) plan in the first quarter decreased to 58%, as
compared to 62% in the first quarter 2012.
“We saw the most improvement among people who had been hired in the last
two years, which is traditionally a group that is hardest to get to
contribute at a rate above the common 3% default deferral rate,” said
Nordquist.
Increased Balances
For participants who have been in their plan for at least ten years,
balances rose for all age bands in the first quarter, according to Wells
Fargo data. Participants ages 40-59 had their balances rise more than
17% (average) from two years ago, while those in their 60s saw a balance
increase of 14.3% and participants in their 30s saw the same percentage
increase over the same time period.
About Wells Fargo
Wells Fargo & Company (NYSE: WFC) is a nationwide, diversified,
community-based financial services company with $1.4 trillion in assets.
Founded in 1852 and headquartered in San Francisco, Wells Fargo provides
banking, insurance, investments, mortgage, and consumer and commercial
finance through more than 9,000 stores, 12,000 ATMs, the Internet (wellsfargo.com),
and has offices in more than 35 countries to support the bank’s
customers who conduct business in the global economy. With more than
265,000 team members, Wells Fargo serves one in three households in the
United States. Wells Fargo & Company was ranked No. 26 on
Fortune’s 2012 rankings of America’s largest corporations. Wells
Fargo’s vision is to satisfy all our customers’ financial needs and help
them succeed financially.
About Wells Fargo Institutional Retirement and Trust
Wells Fargo Institutional Retirement and Trust is a national leader in
providing total retirement management, investments and trust and custody
solutions tailored to meet the needs of institutional clients. Wells
Fargo ranks eighth in the number of plan participants and assets in the
2012 PLANSPONSOR Magazine Recordkeeping survey, with 3.7 million
retirement plan participants, and $278.8 billion in retirement plan
assets.
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