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Early users of the Roth plan tend to be younger, lower-tenured employees, according to a Hewitt preliminary assessment across three company plans with more than 60,000 active participants. The Roth 401(k) plan was temporarily put in place by Congress in 2001, and then made permanent in the recent Pension Protection Act of 2006 passed this summer. In a Roth 401(k) plan, contributions are made with after-tax dollars and withdrawals are tax-free at retirement, which is the reverse of a traditional 401(k) plan.

“Many companies have been hesitant to offer a Roth 401(k) because of concerns over whether employees would use them, and whether this feature might result in reduced contribution rates,” says Pam Hess, an investment consultant at Hewitt. “Our early research shows no noticeable difference in participation and contribution rates between the Roth 401(k) plan versus a traditional plan.”

After just three months of availability, nearly 8% of all employees in these companies elected to make Roth 401(k) contributions. The Roth utilization rate was nearly double—14%—for those employees in their 20s. And nearly 25% of newly enrolling 401(k) employees chose the Roth plan. As for the higher participation rate among younger employees, Hess explains that those newest to the workforce are most likely to benefit from the Roth because they’re at a lower wage level, and have many years until retirement when wages and taxes could rise, making it advantageous to pay taxes today versus tomorrow.

The Roth feature did not negatively impact contribution rates. The Hewitt study revealed that contribution rates among newly eligible employees remained at 3%, the same level as a traditional 401(k) plan. In addition, many employees elected to contribute to both the traditional before-tax and Roth 401(k) plans, which led to a higher overall contribution rate of 11.6%, or 3% more than workers saving in a traditional 401(k) plan only.

Hess adds that given these initial positive findings, along with the recent passage of the Pension Protection Act, adoption of Roth 401(k) plans is likely to markedly increase over the coming year.

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