Small-business defined contribution plans are on a roll, according to a report Vanguard released Thursday.
The number of plans increased from 1,418 in 2013 to 8,873 last year, and the number of participants increased six-fold to 370,414 over that period.
The new report assessed plan design trends and participant savings behaviors in small-business 401(k) plans supported by Vanguard Retirement Plan Access, a service launched in 2011 to provide small-business owners with a 401(k) solution for their employees.
“The dramatic increase in Vanguard small-business plans over the past several years means more Americans are now able to participate in an employer-sponsored retirement savings option and save for a secure future,” Steve Holman, head of service, said in a statement.
Besides increased coverage, Vanguard reported that more small-business plans were adopting plan features that could lead to improved retirement readiness for their employees.
According to the report, nearly two-thirds of all eligible employees participated in their small-business 401(k) plan in 2017, with participation rates varying depending on income and age.
For employees subjected to automatic enrollment, participation rates were higher across all demographic variables: 83%, compared with 58% for plans with voluntary enrollment.
The report said that with both employee and employer contributions taken into account, the average participant contribution rate was 9.7% in 2017, up from 9.3% the year before.
Deferral rates increased with job tenure and age — from 5.2% for employees 25 and younger to 10.6% for those 65 and older.
Ninety-six percent of plans offered target-date funds as the qualified default investment alternative, according to the report. More than two-thirds of participants used TDFs and 59% were invested in a single TDF.
Vanguard noted that TDFs base portfolio allocations on an expected retirement date and allocations grow more conservative as the participant approaches the fund’s target year.
They help address concerns about participants’ lack of investment knowledge, placing them in a professionally managed, diversified option. They also reduce extreme equity allocations.
Only 4% of participants had no allocation to equities, while 7% invested exclusively in equities.
Eight in 10 plans offered a Roth feature, whereby contributions are post-tax, enabling savings to grow tax-free, according to the report — a potential boon for participants currently in a lower tax bracket, such as younger employees whose tax liabilities are likely to increase with age and higher earnings.
The report said nearly 100% of plans offered 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, the report’s author and senior research associate in the Vanguard Center for Investor Research, said in the 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.”
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