How to split Roth and traditional 401(k) automatic enrollment for tax diversification

401(k) automatic enrollment is one of the primary ways plan sponsors combat inertia to encourage people to save. The default is usually pretax deferrals—although many participants may be in a lower tax bracket now than at retirement. 401(k) plan sponsors that want to make it easier for their participants to use their contributions more strategically may want to consider combining Roth with their automatic plan features.

Roth 401(k) tax benefits provide built-in tax diversification

Unlike with a traditional 401(k) plan, employee Roth 401(k) contributions are taxed at the time they’re made and can be withdrawn tax free in retirement, along with any earnings, if certain conditions are met. Any employer matching contributions are pretax, which means taxes are due when the money is taken out of the plan. This combination of taxable and tax-free money can help participants create a tax-efficient distribution strategy in retirement.  

Tax diversification adds flexibility to a drawdown strategy

A common perception is that taxes go down in retirement because individuals have less income coming in. But this isn’t true for everyone—some participants may pay a higher tax rate in retirement or experience no change.

Given this uncertainty, many financial professionals encourage individuals to create tax-diversified retirement accounts—a mixture of taxable and tax-free money—similar to building diversified investment portfolios to help offset risk. This approach gives retirees more flexibility with their drawdown strategy to help them make the most of their retirement income. Each year of retirement, they can decide which money to take out (taxable, tax free, or a combination) to minimize their tax liabilities.

But it may not just be the uncertainty that’s keeping people from contributing to a Roth 401(k). As with many financial matters, it’s likely a combination of inertia and lack of education that has people defaulting into pretax 401(k) contributions. That’s where automatic enrollment comes in.

Auto-enrollment helps keep participants from missing out

In plans that offer a Roth 401(k), participants have the right to choose the type of contributions they want to make. But many people don’t make that choice and stick with pretax deferrals.

Percentage of eligible participants contributing to a Roth 401(k)

Chart shows that fewer than 15% of participants who earn less than $75,000 are contributing to a Roth 401(k)
Source: John Hancock Retirement mid- to large-market platform as of March 2021.

Lower-paid participants may not realize they could potentially save more in the long run by making Roth contributions while they’re in a low federal income-tax bracket. By automatically enrolling these participants in Roth contributions, you can help them avoid missing out on additional savings.  

Let’s look at an example of a 30-year-old participant earning $35,000 per year.

Background information

  • Salary growth rate: 3%
  • Auto-enrolled contribution: 4%
  • Auto increase per year: 1%, up to 15% 
  • Employer match: 100% of the first 2% and 50% of the next 3%
  • Annual rate of return: 6%
  • Retirement age: 65
  • Tax rate at retirement: 25%



After-tax value

Standard auto-enrollment

Pretax contributions





Tax-diversified auto-enrollment

Pretax contributions

Roth contributions










Additional after-tax value with tax-diversified auto-enrollment







This is a hypothetical mathematical illustration only. It assumes a 25% tax rate and a 3% annual salary increase. Figures are based on assumptions as set out, and individual circumstances may vary. There is no guarantee that any investment strategy will reach its objectives.
Smart tax diversification resulted in an additional 13% in retirement savings for our sample participant.

Plan data plays a key part in auto-enroll design  

To derive maximum value from a Roth 401(k) plan, a participant’s current federal income-tax bracket should be lower than the one expected at retirement. This means pretax deferrals may be the better option for some participants. But how do you know which ones? Look at your compensation data. Based on participant salaries, you can make reasonable judgments as to who’s likely paying low taxes and would benefit from a Roth 401(k). Your financial professional, plan recordkeeper, and third-party administrator can help you use this information to create a flexible auto-enroll plan design, where the default contribution varies by compensation.

For example, you might use the following tiered formula:


Default contribution

Up to $35,000

100% Roth


50% pretax and 50% Roth

Greater than $90,000

100% pretax

For illustrative purposes only. 

Tailoring the contribution type to each participant can help propel them forward on their unique path to retirement. For maximum impact, consider pairing it with a higher default contribution rate. Higher rates don’t scare participants. On average, less than 9% opt out when the default contribution rate is between 3% and 7%.1

Harness the power of Roth 401(k) automatic enrollment

Left on their own, many participants who could benefit from a Roth 401(k) are either not doing so or not contributing as much as they could. Getting creative with auto solutions can provide them with a nudge in the right direction, helping them optimize their post-tax retirement savings. 

1 State of the participant 2021, John Hancock Retirement, February 2021.

In this document, all tax disclosures regarding Roth 401(k) contributions are limited to the federal income-tax code and, in particular, all references to tax-free treatment of qualified distributions are intended to refer to the treatment of such distributions at the federal level only.

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.