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By Christine Benz | 07-15-2011 12:28 PM

The 401(k) Today

David Wray of the Profit Sharing/401(k) Counsel of America on the rise of Roth 401(k)s, trends in employer auto-enrollment and contribution escalation, and evolving thoughts on annuitization at retirement.

Christine Benz: Hi, I'm Christine Benz for Morningstar.

I recently attended the Dimensional Fund Advisors Defined Contribution Conference, and I had the opportunity to sit down with David Wray. David is the president of the Profit Sharing/401(k) Counsel of America, and he discussed some of the trends he sees in the 401(k) market.

David you are in a unique position to observe trends that are going on in the 401(k) marketplace. One thing I would like to talk about with you is the uptake of the Roth option in plan. So, first of all, are you seeing more plans install the Roth option, and second our participants taking advantage of it?

David Wray: Well, there is no question that this is a change in the system. In our most recent survey data, 40% of plans now offer a Roth option. It's a fairly substantial change over a 10-year period when they've been available, or talked about.

So, employers want to give employees the maximum opportunity to customize their programs, and one way to do that is to let them customize their tax diversification, if you will. So, companies are putting Roth in, and interestingly enough the usage is also coming as well. So, it's certainly not 40% of employees who have Roth, but clearly an increasing percentage of participants who can use Roth are using them.

Benz: Can you tell does, it tend to be participants with higher balances, higher incomes taking advantage of that?

Wray: It's the more sophisticated participants, which typically are older participants with higher balances, as you would expect. Younger people, they just want to go with whatever the flow is, and that's typically the deferred arrangement.

Benz: Right. So, let's talk about how 401(k) participants behaved during the bear market. I think there was a lot of hand-wringing about whether we would see mass exodus out of 401(k) plans--people doing wholesale withdrawals. What did you see when you observed participant behavior?

Wray: What I saw was a remarkable stability. Participants--we lost very few people actually leaving the system. To the extent you actually had actively employed participants stepping back, it was where their companies dropped their match. The match is really critical to participation in the system.

But where the matching contributions continued, and that was still at most companies, participants stayed the course. They didn't change their asset allocations all that much. They didn't stop saving in the plans. They didn't take a lot of hardship withdrawals. The loan--everything ticked up a little bit, but it's sort of at the top of the normal range. I mean, if you go back over many years, you would see some volatility in the percentage of employees doing these various things. So, it's ticked up, but it's still not massively different than it's been historically.

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