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July 05, 2006
Study Looks at Participation, Contribution Rates in New Roth 401(k)

At companies that offer a Roth 401(k), the average participant adoption rate is 8 percent, but the rate is higher among younger workers and those who are newly enrolling in the company's 401(k) plan, according to a report by Hewitt Associates, a human resources services company.

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Hewitt analyzed more than 60,000 employees at companies that offered Roth 401(k) plans, finding that approximately 14 percent of participants in their 20s elected the Roth 401(k) when it was available, and nearly a quarter (24.7 percent) of employees who were newly enrolling in the 401(k) plan chose the Roth 401(k) option.  Only 4 percent of workers age 50 to 59 elected to participate in a Roth 401(k) plan.

Hewitt's study also found that when a Roth 401(k) was offered, the average contribution rate for newly eligible employees was approximately the same amount as it was before the Roth 401(k) was available.

"Many companies have been hesitant to offer Roth 401(k)s for a number of reasons, including concerns over whether employees would use them and whether Roth 401(k)s might actually result in reduced overall contribution rates," said Lori Lucas, director of retirement research at Hewitt Associates.  "However, our early research on the Roth 401(k) shows no notable difference in the participation and contribution rates of employees choosing to contribute to the Roth 401(k) versus a pretax 401(k) .

The Roth 401(k) became available on January 1, 2006 as a result of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). Designated Roth contributions allow for employees to designate all or a portion of their 401(k) employee deferrals as Roth contributions, which would receive treatment much like a Roth IRA contribution (that is, they would be contributed on an after tax basis, but qualified distributions of those contributions, plus earnings, would be tax-free).

"At a time when many retirement benefits are being reduced, some companies might find that a Roth 401(k) provision, coupled with a well-executed education strategy, can be a useful and appreciated savings vehicle that meets the needs of a meaningful segment of the employee population," says Lucas.

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