Small Business Employees Benefiting From Enhanced DC Plan Design

Small business plan participants are benefiting from enhanced retirement plan features, including professionally managed allocations, which have led to increased plan participation and optimized portfolio construction, according to Vanguard’s “How America Saves: Small Business Edition.”

Like participants in larger plans, participants in smaller plans have reduced their trading and withdrawal activities.

In 2018, two-thirds of plans recordkept by Vanguard were invested in a professionally managed allocation, with 61% of all participants invested in a single target-date fund (TDF). Among new plan entrants, 75% were invested in a single TDF.

In 2018, 19% of participants held broadly diversified portfolios, with only 3% had no allocation to equities. At the other end of the spectrum, 7% had all of their money invested in equities.

Vanguard also found that among the plans using automatic enrollment, the participation rate was 82%. Among plans without this feature, the figure is 54%. Additionally, among participants earning less than $30,000 a year, the participation rate was more than double in plans with automatic enrollment than in plans that rely on participants to enroll on their own.

Only 7% of participants initiated one or more portfolio trades in 2018. Among plans recordkept by Vanguard, 85% permit plan withdrawals among people 59-1/2 or older, but less than 1% of participants used the feature in 2018.

“Positive participant behaviors coupled with the increased use of professionally managed accounts is making a difference in the retirement readiness of small business 401(k) participants,” says Jean Young, author of the report and senior research associate at the Vanguard Center for Investor Research. “The increased use of the features and tools available points to the continued commitment by plan sponsors to further drive these improved outcomes.”