Small Businesses Embracing Progressive Retirement Plan Design Features

A supplement to its broader How America Saves report, the Small Business edition focuses on trends relevant to Vanguard Retirement Plan Access (VRPA) clients, who include full-service plan fiduciaries for plans with less than $20 million in assets.

In the report, Vanguard notes a significant increase in its work with small business clients—from roughly 1,400 small business plans in 2013 to nearly 8,900 in 2017, with the number of participants increasing six-fold to more than 370,000 over the same time period.

In addition to increased coverage, Vanguard reports that small business plans are broadly adopting progressive design features that can lead to improved retirement readiness of their employees. The findings bolster many of those in the 2018 PLANADVISER Micro Plan Survey, which also highlights the increasing professionalization of this segment of the defined contribution (DC) plan marketplace.

Looking closer at Vanguard’s book of business in the sub-$20 million market, nearly two-thirds of all eligible employees participated in their small business 401(k) plan in 2017. Participation rates vary depending on income and age, as is the case with larger plans. However, Vanguard researchers highlight how employees subjected to automatic enrollment have far higher participation rates across all demographic variables. Plans with automatic enrollment had an 83% participation rate, compared to 58% for plans with voluntary enrollment.

Deferral rates have also steadily increased in small business plans, Vanguard finds. When considering both employee and employer contributions, the average participant contribution rate was “a healthy 9.7% in 2017,” up from 9.3% the year before. Also similar to the larger plan market, deferral rates increase with job tenure and age—from 5.2% for employees age 25 and younger to 10.6% for those age 65-plus.

Nearly all plans (96%) on the VRPA platform offer target-date funds (TDFs) as the qualified default investment alternative, Vanguard reports. More than two-thirds of participants use TDFs and 59% are invested in a single TDF. The data shows TDFs have helped reduce extreme equity allocations. According to Vanguard, “only 4% of participants had no allocation to equities while participants investing exclusively in equities was 7%.”

Small business plans have also clearly embraced the offering of Roth savings, with eight in 10 now offering such a feature. Another positive for participants, nearly 100% of plans offer eligible participants the ability to make catch-up contributions.

“Within the small business marketplace, we’re seeing more plan sponsors implementing positive plan design features to better help their employees save for a comfortable retirement,” observes Jean Young, author and senior research associate in the Vanguard Center for Investor Research. “In particular, we expect that the use of professionally managed allocations, predominantly TDFs, will continue to increase over the next few years, helping to increase diversification, lower investment costs, and ultimately improve outcomes.”

The full small business plan report is available for download here.