Small DC Plan Sponsors Taking Lessons From Larger Ones

Small business defined contribution (DC) plan sponsors, like their large corporation counterparts, are increasingly implementing best-in-class design features to improve the retirement readiness of their employees, according to Vanguard’s fourth annual How America Saves: Small business edition, an extension of its How America Saves publication.

Vanguard researchers highlight several positive trends, including the growing adoption of automatic enrollment, target-date funds (TDFs), employer contributions, Roth options, and loan flexibility.

Further supplementing these positive trends is the increasing influence of financial advisers catering to the small business 401(k) market. Advisers are counseling on plan design, investment selection and participant education, as well as providing Employee Retirement Income Security Act (ERISA) expertise and fiduciary support.

In 2016, small business 401(k) plans supported by Vanguard Retirement Plan Access (VRPA) featuring automatic enrollment strategies prompted an overall plan participation rate of 82%. In comparison, plans with voluntary enrollment reported an average participation rate of only 57%.

Nearly all VRPA plans have designated an automatic default fund, and 95% had selected a TDF as their default investment option last year. “Our research shows that nearly six in 10 VRPA participants were invested in a single TDF in 2016—a more than 75% increase since 2012,” says Jean Young, lead author of How America Saves: Small business edition.

In 2016, three-quarters of small business plan sponsors provided some type of contribution—either an employer match, non-elective contribution, or both. Taking into account both employee and employer contributions, the average total savings rate was 9.3% in 2016, with employer contributions representing more than one-quarter.

Small business plans are also increasingly offering a Roth option. In 2016, eight in 10 VRPA plans offered a Roth feature.

A third valuable plan feature that the majority of small business plan sponsors have implemented is the ability to take a loan from their 401(k) plans. In 2016, 70% of VRPA plans permitted participants to borrow from their plan.