Data and Research August 27, 2015

43% of Small Plans Offer a Match

However, only 23% of small plans permit participants to contribute immediately to their 401(k).
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In 2014, 43% of the small retirement plans with up to $20 million in assets that Vanguard served offered a match, Vanguard indicated in its “How America Saves—Small Business Edition.” Launched in 2011, Vanguard Retirement Plan Access (VRPA) is a comprehensive service for plans of this size.

Sixty percent of VRPA plans with a match had adopted a safe harbor design, with 42% of plans matching 4% of employees’ salary.

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Vanguard also found that only 23% of VRPA plans permitted their participants to contribute to the plan immediately. Another 40% require a year of service.

Twenty percent of VRPA plans had adopted automatic enrollment at the end of 2014, with 60% of these plans automatically enrolling participants at a 3% contribution rate. Of the 20% of plans that automatically enroll participants, 40% automatically increase contribution rates, and 95% of the plans with automatic enrollment use target-date funds as the default fund.

In 2014, VRPA’s plan-weighted participation rate was 73%. Among plans with automatic enrollment, the participation rate was 84%. Participation varies widely depending on demographics, Vanguard found. For participants with less than $30,000 in income, participation averaged 49%. For those making between $30,000 and $49,999, it rises to 66%; for those earning between $50,000 and $74,999, it rises to 77%; for those making between $75,000 and $99,999, it increases to 82%; and for those earning $100,000 or more, it averages 86%.

Likewise, participation increases with age. Among those younger than 25, 48% participate in their 401(k) plan; for those between 25 and 34, 63% participate; for those 35 to 44, 66% participate; for those 45 to 54, 69% participate; and for those 55 to 64, 70% participate.

NEXT: Impact of tenure

Tenure also has a significant impact on plan participation. In 2014, only 58% of those with less than two years on the job participated in their employer’s plan, whereas for those who have been with their company for 10 years or more, 78% participate.

Across all plans, VRPA participants save an average of 6.7% of their income. As with deferral rates, demographics have a strong influence on deferral rates. People making less than $30,000 save an average of 6.3%, whereas those making between $75,000 and $99,999 save an average of 7.7%. Age, as well, is a factor. Participants younger than 25 save an average of 4.8%. Those in the 55 to 64 age bracket are saving an average of 8.5% of their salaries.

During 2014, only 11% of participants saved the statutory maximum dollar amount of $17,500 ($23,000 for those age 50 or older). Participants who contributed the maximum dollar amount tended to have higher incomes, were older, had longer tenures and had substantially higher account balances. Vanguard also said it is noteworthy that 18% of participants deferred more than 10% of their salaries.

The average account balance for VRPA plans was $54,959 in 2014. The percentage of assets invested in equities averaged 73%.

Vanguard notes that 99.7% of employers in the United States are small businesses and employ half of all private-sector workers.

“We started offering DC plan services to small businesses, recognizing that this segment of the market was underserved and overcharged,” says Crystal Hardie Langston, principal and head of VRPA. “We are pleased with the adoption of the service and the commitment by small business owners to offer robust, thoughtfully constructed plans to their employees.”

The full “How America Saves—Small Business Edition” report, a complement to Vanguard's "How America Saves," can be downloaded here.  

Data and Research August 27, 2015

Small 401(k) Plans and Big Opportunity

A big market with needs to match, the small 401(k) plan market is fragmented and lucrative.
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Providers and advisers looking to service small 401(k) plans with fewer than 500 employees could find what Celent calls a greenfield space with plenty of opportunity.

Small companies employ a third of the American workforce today, Celent observes, but their 401(k) plans, where they exist at all, are expensive, cumbersome to operate and skewed toward expensive funds.

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Firms like ForUsAll, Honest Dollar, DreamForward Financial, Capital One Investing ShareBuildger 401k, Employee Fiduciary, and Ubiquity Retirement + Savings (formerly The Online 401k) have responded to the dearth of adequate infrastructure in the small-plan space by rolling out automated platforms that streamline processes and eliminate back-office paperwork. Most crucially, these firms are driving down costs to the benefit of the participant and the small-business sponsor, who can now afford to access the flexibility (in terms of plan design and contribution levels) and tax benefits intrinsic to the 401(k).

Celent points to the factors—regulatory reform that is weighing on traditional compensation and fee structures, the increase of working-age Millennials and rising interest in investments that address retirement income—that are changing how 401(k) plans are delivered to these smaller firms. “Nimble and digitally focused firms are staking claims to this lucrative and fragmented market,” the consulting firm says in “Big Rewards Come in Tiny Packages: Why Small Retirement Plans Offer a Huge Opportunity for Plan Providers, Sponsors, and Advisors.”

NEXT: Plan services and administration move downstream.

The report explores how a new generation of plan providers is making 401(k) administration less painful and more cost-effective for smaller companies, providing them access to services previously reserved for much larger firms.

Small providers will get a tailwind from the imposition by the Department of Labor (DOL) of a uniform fiduciary standard, with the fee transparency that entails. The entrance into the workforce of Millennials, whose self-directed but advice-friendly mindset aligns closely with the tech-driven model propagated by the new generation of providers, represents another potential inflection point.

“Once participants realize the extent to which they are being dunned of their retirement savings, some may change jobs; others will spur their employers to explore new provider options. The voices of these participants will echo loudest at the small end of the market,” says William Trout, senior analyst and author of the report.

The report, third in a retirement investment series, examines why small plans can be so expensive; the advantages of the 401(k) plan over other types of defined contribution plans and the offerings of new plan providers. A detailed comparison of six new providers of small plans—Ubiquity, ForUsAll, Honest Dollar, Dream Forward Financial, Employee Fiduciary, Capital One InvestingSharebuilder401k—outlines their key features, investment offerings and fees. A previous report looked at how advisers can better serve plan participants.

More information about “Big Rewards Come in Tiny Packages: Why Small Retirement Plans Offer a Huge Opportunity for Plan Providers, Sponsors, and Advisors” is on Celent’s website.

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