Study: Small businesses are boosting benefits of their 401(k) plans

Written on Jun 29, 2017

The fourth annual How America Saves: Small business edition, analyzes small business 401(k) plans. The report, produced by Vanguard, 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.

The report shows 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 401(k) 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 401(k) plan and accompanying fiduciary responsibilities," said Crystal Hardie Langston, principal and head of Vanguard Retirement Plan Access (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."

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 target date fund (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.

The adoption of specific plan features also enable small business owners to leverage 401(k) plans as a more comprehensive benefit to employees. Most notably, employer contributions to 401(k) 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 401(k) 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 401(k) account can have a beneficial impact on retirement savings—raising contribution rates above what they would be otherwise.

Leave a comment

Upcoming Events