Small-business defined contribution plans are on a roll, according to a recent Vanguard report. 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.
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.
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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.
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.
Deferral rate reaches all time high In the same vein, T. Rowe Price found the average employee pretax deferral rate reached 8.3% in 2017 — the highest in the 10 years the firm has been reporting participant data. T. Rowe Price’s 10th annual benchmarking report on 401(k) participant data, Reference Point, is based on the firm’s full-service recordkeeping client data for 2017. Data are based on the universe of T. Rowe Price Retirement Plan Services retirement plans — 401(k) and 457 plans — which consists of 636 plans and more than 1.6 million participants.
Plan design continued to be one of the strongest drivers of outcomes, led by features such as auto-enrollment and auto-increases with opt-out as well as adoption of higher default deferral rates, Roth contributions, and target date products.
Adoption of auto-solutions has been steadily growing since 2006, and the proven successes of auto-enrollment and auto-increase features continue to strengthen their popularity among plans at T. Rowe Price.
According to the report, the average participation rate in auto-enrollment plans is over 42 percentage points higher than in plans without auto-enrollment (87% participation for auto-enrollment plans compared with 45.4% for non-auto-enrollment plans) in 2017.
The report also found that participation in auto-increases is more than five times higher in plans that use the opt-out versus opt-in option.
For the first time, the number of retirement plans with a 6% default deferral rate surpassed the number of plans with a 3% default rate, which is considered the industry standard, the report found.
Also, 32.4% of plans had a default deferral rate of 6%, compared to the 31.9% that had a default rate of 3%.
The study also found that the adoption of Roth contributions increased by nearly 55% since 2014, and 67% of plans offered Roth contributions in 2017, up from 60.3% in 2016.
Participant usage has grown as well, but at a slower pace, increasing by just under 19% from 2014 to 2017, according to the report.
Nearly every age group saw increases in the percentage of participants making Roth contributions, with the largest contributors between the ages of 20 and 40. The report found that usage has been driven primarily by younger participants age 20 to 40.
“This could demonstrate an increased understanding of the tax benefits Roth offers: Younger participants may be taking advantage of their comparatively lower salaries (and, therefore, lower income tax brackets) by paying taxes on their contributions now so they can benefit from potentially tax-free earnings in the future,” according to the report.
Plan sponsor adoption of target date funds reached a 10-year high, rising to 94% in 2017, according to the report. For the first time, target date funds accounted for the largest percentage of plan assets under management, surpassing all other investment types.