Retirement coverage for workers without access to a plan, most likely those employed by small businesses, is an ongoing and evergreen industry issue.
However, more states are stepping up to fill the gap, and thankfully Vanguard revealed a number of positive developments among small business defined contribution plans from this year’s How America Saves: Small business edition.
In the report, Vanguard noted 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.
In addition to increased coverage, Vanguard also reports that small business plans are 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 401k 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 percent participation rate, compared to 58 percent for plans with voluntary enrollment.
- Increased deferral rates. Considering both employee and employer contributions, the average participant contribution rate was a healthy 9.7 percent in 2017, up from 9.3 percent the year before. Deferral rates increase with job tenure and age—from 5.2 percent for employees age 25 and younger to 10.6 percent for those age 65-plus.
- Availability and usage of target-date funds. A total of 96 percent of plans offer target-date funds as the QDIA. More than two-thirds of participants use TDFs and 59 percent 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 reduce extreme equity allocations. Only 4 percent of participants had no allocation to equities while participants investing exclusively in equities was 7 percent.
- Availability of a Roth option. A total of eight in 10 plans offer a Roth feature, which provides additional tax flexibility to participants. 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 percent 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,” Jean Young, author and senior research associate in the Vanguard Center for Investor Research, said in a statement. “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.”
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.
