Vanguard Finds Increased Coverage, Plan Design Improvements For Participants Of Small Business 401(k) Plans

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Jul 12, 2018, 09:36 ET

VALLEY FORGE, Pa., July 12, 2018 /PRNewswire/ -- Vanguard today revealed a number of positive developments among small business defined contribution plans in its fifth annual How America Saves: Small business edition. The new report is a comprehensive assessment of plan design trends and participant savings behaviors in small business 401(k) plans supported by Vanguard Retirement Plan Access™ (VRPA), a service launched in 2011 to provide small business owners with a cost-effective, flexible 401(k) solution for their employees.

In the report, Vanguard notes a significant increase in coverage—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.

"The dramatic increase in Vanguard small business plans over the past several years means more Americans are now able to participate in an employer-sponsored retirement savings option and save for a secure future," said Steve Holman, head of Vanguard Retirement Plan Access. "VRPA offers employers a comprehensive, transparent solution with high-quality, low-cost funds for their participants."

In addition to increased coverage, Vanguard reports that small business plans are increasingly adopting plan features that can lead to improved retirement readiness of their employees. Among the positive trends highlighted by Vanguard researchers:

Increased participation. 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. However, employees subjected to automatic enrollment have higher participation rates across all demographic variables. Plans with automatic enrollment had an 83% participation rate, compared to 58% for plans with voluntary enrollment.
Increased deferral rates. Taking into account both employee and employer contributions, the average participant contribution rate was a healthy 9.7% in 2017, up from 9.3% the year before. 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.
Availability and usage of target-date funds. A total of 96% of plans offer target-date funds (TDFs) as the QDIA. More than two-thirds of participants use TDFs and 59% are invested in a single TDF. TDFs base portfolio allocations on an expected retirement date and allocations grow more conservative as the participant approaches the fund's target year.

TDFs help address concerns about the lack of investment knowledge among participants, placing them in a professionally managed, diversified option. They also reduce extreme equity allocations. Only 4% of participants had no allocation to equities while participants investing exclusively in equities was 7%.
Availability of a Roth option. A total of 8 in 10 plans offer a Roth feature, which offers additional tax flexibility to participants. Roth contributions are post-tax, enabling savings to grow tax-free. Participants currently in a lower tax bracket, such as younger workers, might benefit greatly from this feature as their tax liabilities are likely to increase as they age and earn a higher income.
Availability of catch-up contributions. 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," said 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."

Vanguard: A strategic partner for small business plan sponsors
Vanguard has long been recognized as an industry leader in effective DC plan design, providing sponsors with low-cost investment options, online tools and education, services, and research to help prepare participants for retirement. Vanguard Retirement Plan Access™ is a comprehensive service for retirement plans with up to $20 million in assets. With small businesses representing 99.7% of American employers, VRPA continues to serve as a valuable service to small business plan sponsors and the advisors supporting them.

About Vanguard
Vanguard is one of the world's largest investment management companies. As of May 31, 2018, Vanguard managed more than $5.0 trillion in global assets. The firm, headquartered in Valley Forge, Pennsylvania, offers 397 funds to its more than 20 million investors worldwide. For more information, visit vanguard.com.

All investing is subject to risk, including the possible loss of the money you invest.

Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target date funds is not guaranteed at any time, including on or after the target date.

Withdrawals from a Roth 401(k) are tax free if you are over age 59½ and have held the account for at least five years. If you take a withdrawal from your Roth 401(k) account before age 59½ and less than five years, a portion of the withdrawal may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the contribution is made.)

SOURCE Vanguard