Small Business 401k Plans are doing it right. Plan participants are benefiting from better plan design features which have led to increased participation and optimized portfolios.
Specifically, participant behavior has improved, which is reflected by decreased trading activity and reduced plan withdrawals, according to new research from Vanguard.
“The expanded use of professionally managed allocations is one of the most notable effects of plan investment menus on participant choices,” the firm notes. “In 2018, two-thirds of [smaller Vanguard plan] participants were invested in a professionally managed allocation, with a total of 61% of participants invested in a single target-date fund. Among new plan entrants, three-quarters of participants were invested in a single target-date fund.”
Automatic enrollment
Automatic enrollment is increasing plan participation and plan deferral rates.
Employees enrolled in plans with an automatic enrollment feature have an overall participation rate of 82%, compared with a participation rate of only 54% for employees hired under plans with voluntary enrollment.
Additionally, for individuals earning less than $30,000 in plans with automatic enrollment, the participation rate is more than double that of plans with voluntary enrollment.
Plan participants
Plan participants have decreased their trading activity. Participant trading or exchange activity is a measure of a participant’s willingness to change their portfolio in response to short-term market volatility.
While daily trading is nearly universal for Vanguard defined contribution (DC) plans, with virtually all plans allowing it, only 7% of participants initiated one or more portfolio trades or exchanges in 2018.
Withdrawals
Among small Vanguard DC plans, 85% allowed plan withdrawals for those who have reached age 59 ½.
However, in 2018, less than 1% of participants in plans offering any type of withdrawal used the feature.
“Positive participant behaviors coupled with the increased use of professionally managed accounts is making a difference in the retirement readiness of small business 401k plan participants,” Jean Young, author of the report and senior research associate in the Vanguard Center for Investor Research, said in a statement. “The increased use of the features and tools available points to the continued commitment by plan sponsors to further drive these improved outcomes.”
According to the Small Business Administration, small businesses represent 99.7% of American employers.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
