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Portfolio > Portfolio Construction

Small-Business 401(k)s Follow Large-Plan Trends: Vanguard

By Danielle Andrus

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Vanguard released its small-business-focused How America Saves report on Thursday, which found small 401(k) plans are mirroring trends seen at larger companies.

Half of all private-sector employees work at a small business, according to the Small Business Administration.

One-quarter of small 401(k) plans administered by Vanguard’s small-business 401(k) service, Vanguard Retirement Plan Access (VRPA), allow employees to begin contributing to the plan immediately after hire, and 60% require tenure of less than a year.

VRPA serves more than 2,700 plans and 125,000 participants at small businesses.

More than half of workers are saving at least 5% of their income, and nearly one in five are saving 10% or more.

Almost three-quarters of employers are making contributions, too, the survey found.

“We started offering DC plan services to small businesses, recognizing that this segment of the market was underserved and overcharged,” Crystal Hardie Langston, Vanguard principal and head of VRPA, said in a statement. “We are pleased with the adoption of the service and the commitment by small business owners to offer robust, thoughtfully constructed plans to their employees.”

She added that research from Vanguard and other industry data have consistently shown “that plan design has the most substantial influence on participant outcomes.”

Similarly to larger plans, automation is becoming more prevalent. One in five sponsors in the survey were using automatic enrollment by the end of 2014, and 40% had adopted automatic escalation.

By comparison, about 36% of all plans that use Vanguard as their recordkeeper use auto-enrollment, and 70% of those also use automatic escalation.

Plans with automatic enrollment have a participation rate that’s 50% higher than plans with voluntary enrollment.

Almost all the plans VRPA administers have a designated default investment option, usually a target-date fund. The report found 94% of plans with a default use a TDF, and three-quarters of participants are invested in them.

“Target-date funds have considerably improved the portfolio construction of participants by providing a well-balanced, diversified portfolio in a single option,” Jean Young, lead author of the report, said in a statement. “As a result, nearly 80% of VRPA participants hold a balanced portfolio.”

— Check out Workers More Serious About Their 401(k)s Than Hitting the Gym: Schwab on ThinkAdvisor.

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