Despite serious barriers, small businesses are making solid strides in 401k adoption and enrollment.
One particularly interesting trend to note is the increase in Roth options offered by employers in the space, as well as growing adoption of automatic enrollment, target-date funds, employer contributions, and loan flexibility.
The $4.4 trillion mega-giant Vanguard tracked the trends in How America Saves: Small business edition, and said it’s encouraged small business plans, like their large corporation counterparts, are increasingly implementing best-in-class design features to improve the retirement readiness of their employees.
It also noted that further supplementing these positive trends is the increasing influence of financial advisors that cater to the small business 401k market. Advisors are counseling with 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,” Crystal Hardie Langston, principal and head of Vanguard Retirement Plan Access, said in a statement. “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 percent in 2016. In comparison, plans with voluntary enrollment reported an average participation rate of only 57 percent.
Nearly all VRPA plans have designated an automatic default fund, and 95 percent 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 is 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 percent increase since 2012.”
401k plans offer employees broader financial benefits
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 percent in 2016, with employer contributions representing more than a quarter.
As mentioned, 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. In 2016, eight 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 percent 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 percent 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.
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.
