Small Businesses Are Boosting Benefits of Their 401k Plans
VALLEY FORGE, PA, June 27, 2017 -- Vanguard today issued its fourth annual How America Saves: Small business edition (https://pressroom.vanguard.com/nonindexed/How-America-Saves-SBE-2017.pdf), an extension of its flagship defined contribution (DC) publication. The report analyzes small business 401k plans supported by Vanguard Retirement Plan Access™ (VRPA), a service launched in 2011 to provide small business owners with a cost-effective, flexible 401k solution for their employees. The report now incorporates five years of robust benchmarking data for the small business plan market, and demonstrates the significant influence of plan design on participant behavior and outcomes.
Vanguard is encouraged that small business plans, like their large corporation counterparts, are increasingly implementing best-in-class design features to improve the retirement readiness of their employees. 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 advisors catering to the small business 401k market. Advisors are counseling on plan design, investment selection and participant education, as well as providing ERISA expertise and fiduciary support.
"Many small business owners are partnering with advisors to help navigate and manage the complexities of their 401k plan and accompanying fiduciary responsibilities," said Crystal Hardie Langston, principal and head of VRPA. "In large part due to the invaluable support of advisors, we're seeing meaningful developments in small business plan design, which is really moving the savings dial for more working Americans."
Auto Features Increasing Participation and Diversification
In parallel to the larger end of the market, automatic enrollment features are also boosting employee participation in small business plans. In 2016, plans featuring automatic enrollment strategies prompted an overall plan participation rate of 82% in 2016. 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. TDFs reduce extreme allocations by providing a diversified portfolio of stocks and bonds that automatically grows more conservative over time as participants age. Rising adoption of professionally managed allocations like these are having a positive impact on participant portfolio construction.
"Many individuals don't have the skill or knowledge needed to construct their own portfolios. These diversified, professionally managed allocations, including target-date funds, are reshaping equity allocations by age and reducing extreme allocations," said Jean Young, lead author of How America Saves: Small business edition. "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."
401k Plans Offer Employees Broader Financial Benefits
The adoption of specific plan features also enable small business owners to leverage 401k plans as a more comprehensive benefit to employees. Most notably, employer contributions to 401k plans bolster savings rates and reassure employees that their long-term financial well-being is a top priority for the company. In 2016, three-quarters of small business plan sponsors provided some type of contribution, either an employer match, nonelective 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 a quarter.
Small business plans are also increasingly offering a Roth option, providing 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. In 2016, 8 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 401k plans. In 2016, 70% of VRPA plans permitted participants to borrow from their plan. Research shows that giving participants the option of borrowing from their 401k account can have a beneficial impact on retirement savings, raising contribution rates above what they would be otherwise. While only about 1% of total VRPA assets had been borrowed by participants as of year-end, Vanguard believes the availability of a loan option can provide participants with peace of mind and an additional financial resource in challenging times.
Vanguard is one of the world's largest investment management companies. As of May 31, 2017, Vanguard managed $4.4 trillion in global assets. The firm, headquartered in Valley Forge, Pennsylvania, offers 368 funds to its more than 20 million investors worldwide. For more information, visit vanguard.com.
Note: Stated participant rates refer to the participant-weighted average.
All figures as of May 31, 2017, unless otherwise noted.
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