Small 401k plans are living large.
A recent report from Pennsylvania-based fund giant Vanguard found small businesses are employing state-of-the-art 401(k) plan design features, including automatic enrollment and target-date funds, “prompting encouraging savings behaviors in their employees.”
“Automatic enrollment recasts the retirement savings decision and overcomes the initial hurdle of participation,” according to the report. “In [Vanguard plans] with automatic enrollment, researchers reported participation rates that were nearly 50 percent higher than voluntary enrollment plans. In addition, more than one-third of these plans have instituted automatic annual escalation that results in gradual savings increases and the potential for better retirement outcomes.”
The report, titled How America Saves: Small business edition, found that as of year-end 2015, participant savings remained “steady and encouraging,” with average deferral reported at 6.7 percent.
Most significantly, 12 percent of participants saved to the maximum dollar amount of $18,000 ($24,000 for participants aged 50-plus), a slight uptick from the prior year. In addition, nearly one in five participants saved 10 percent or more of their annual income.
“We recognize that small business owners juggle many varied responsibilities. Yet, on top of the obligation of providing thoughtfully designed, well-managed retirement plans, they are more than doing their part to drive savings rates,” Jean Young, author of the report and senior researcher in Vanguard Center for Retirement Research, said in a statement. “In 2015, three-quarters of VRPA sponsors offered an employer contribution. Notably, this is resulting in an average total contribution rate of 9%—a figure that is nearly on par with their larger-plan counterparts.”
Small plan sponsors are also increasingly utilizing default investments. Nearly all Vanguard plans have designated a default fund, and 96 percent had selected a target-date default in 2015. As of year-end, 75 percent of participants used a target-date fund when offered.