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Roth 401k Usage on the Rise Among Younger Participants

    

CHARLOTTE, NC, July 15, 2013 -- 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 401k, 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 401k (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 401k 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 401k assets to after-tax Roth 401k 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 401k 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 401ks

In an analysis of forty-eight 401k 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 401k, 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 401k balances.

"It seems that higher savings rates result when Health Savings Accounts and 401k 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 401k 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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