Client Service August 14, 2017

Larger Companies Offering Roth 401(k)s

More than half of employers recently surveyed by Transamerica offer a Roth 401(k).
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The Roth 401(k) that allows participants to make contributions on an after-tax basis while allowing for tax-free withdrawals is increasing in popularity, with large employers taking the lead, according to a new survey by Transamerica.

The study found that 59% of large companies and 60% of medium ones offer this option. Overall, 52% of plan sponsors offer a Roth 401(k). A separate Transamerica survey of workers found that among workers who are both aware of the Roth 401(k) option and offered it by their employers, approximately six in 10 contribute to it.

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Large companies also lead in offering traditional 401(k)s and matching contributions, the study finds. Matching contributions are more prevalent in large companies. Seventy-nine percent of plan sponsors offer a matching contribution as part of their 401(k) or similar plan, including 77% of small companies, 80% of medium-sized companies, and 84% of large companies. Transamerica says, “The employer’s matching contribution is one of the most important features of a 401(k) or similar plan because it incentivizes employees to join the plan and enables them to further build their retirement savings.”

In addition, 71% of employers say their employees view a 401(k) or similar retirement plan as an important benefit. However, it is a luxury enjoyed by only 60% of small companies as opposed to 90% among large companies.

In addition, automatic plan features are more prevalent in larger companies’ plans; 21% of plan sponsors have adopted automatic enrollment, including 31% of large companies, 20% of medium-sized companies and 19% of small companies. Plan sponsors with automatic enrollment report a median default contribution rate of 5% of an employee’s annual pay. Automatic escalation, a feature which automatically increases participants’ contribution rates annually with no action required by participants, has been adopted by 47% of plan sponsors. It is more prevalent at large (52%) and medium (50%) than small companies (44%).

Among plan sponsors not offering automatic enrollment, only 34% plan to do so in the future. Thirty-nine percent do not plan to offer it, and 27% are “not sure.” Among those not planning to offer it, the three most frequently cited reasons are participation rates are already high (39%), concerns about cost (32%) and administrative complexity (20%). According to TCRS’ 17th Annual Retirement Survey of Workers, 89% of workers find automatic enrollment to be appealing.

The survey also found many plan sponsors are not making plans to manage a workforce that is aging and working longer.

Transamerica’s report was drawn from responses to a 21-minute online survey conducted between November 20  and December 20, 2016, among a nationally representative sample of 1,802 employers. The full study “All About Retirement: An Employer Survey 2017″ can be found at Transamericacenter.org.

Data & Research August 14, 2017

Study Finds Preference for Pre-Tax Deferrals Even If a More Adverse Outcome

The study finds most people do not consider tax implications before deciding whether to defer into retirement plans' pre-tax or Roth accounts.
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Researchers for the Center for Retirement Research (CRR) at Boston College examined individual choices between Roth and pre-tax deferrals to retirement plans.

The results of their experiments suggest that individuals may not systematically rely on their beliefs regarding their relative tax rates when making plan choices, but that at least part of that failure is due to a lack of awareness and/or understanding. However, the researchers say, although education increased participants’ use of expected tax-rate changes in their plan choices, participants continued to display an economically “irrational” preference for pre-tax deferrals. 

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The researchers found this to be systematically related to participants’ more general non-economic attitudes and preferences and the relation of these attitudes and preferences to the features of the plans being evaluated. However, they did find that investment risk preference is negatively associated with a preference for pre-tax deferrals and may be influenced by tax-related contextual variables as well.

“Consistent with prior research, our results suggest that individuals, on average, do not respond rationally to the relative economic incentives associated with alternatively structured plans. Further, although errors can be reduced with increased awareness, our evidence illustrates that individuals systematically incorporate non-economic factors into their retirement plan choices, often leading to a preference for [pre-tax deferrals] even when such a choice is economically adverse,” the researchers say in their report.

Even when participants were educated about how their tax rates before and after retirement related to their retirement income, 49% who reported that they expected their tax rates to be lower in retirement nonetheless elected to make their contributions to on a pre-tax basis. Conversely, only 18% of those who reported that they expected their tax rates to be higher in retirement nonetheless selected to make their immediate contributions as a Roth deferral.

The research found that participants, on average, prefer to pre-pay for consumption and positively discount future payments. As the researchers expected, they link the tax costs and savings of Roth deferrals more than they do pre-tax deferrals and see the tax costs and savings of Roth deferrals as more uncertain than those of a pre-tax deferrals.

One other finding of the research is that a sense of urgency regarding saving for retirement is positively associated with savings rates. “While this is not surprising in itself, the current crisis in retirement preparedness suggests that current marketing and education campaigns are not sufficiently stoking investors’ sense of urgency,” the researchers said. “Further research into the factors that increase a sense of urgency for retirement saving could be fruitful for future campaigns aimed at increasing savings rates.”

The research report can be downloaded from here.

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