Thursday, March 31, 2016

Small business plans stand tall in latest report

Crystal Hardie Langston, Head of Vanguard Retirement Plan Access

Although our team has been working on the Small Business edition of our How America Saves 2015 report for many months, I could hardly wait for the finished product. In the past year that I’ve had the privilege of leading Vanguard Retirement Plan Access™ (VRPA), I’ve observed first-hand the efforts small businesses are making to help their employees meet their retirement goals. It’s gratifying to see how well their defined contribution (DC) plans are doing. And with this report it’s pretty powerful to see the success of those plans in aggregate. You might expect plan design and participant behavior to differ between large and small firms, but we’re tracking encouraging trends across the board and the data are remarkably similar.

For example, 69% of eligible employees at larger companies contribute to their plans compared to 65% at small companies represented by VRPA. Participants at large and small companies also take advantage of Roth contributions, catch-up contributions, and “max out” their contributions at a similar rate.

Interestingly, smaller plans are even doing better than larger plans in these areas:

  • State-of-the-art offer. Most plan sponsors don’t actively ensure that their DC offer is “state-of-the-art” on a regular basis. However, if the plan moves to another provider, they usually do an evaluation. Because VRPA plans either converted within the last three years or were new start-ups, they are likely to have state-of-the-art offers.
  • Target-date funds. Nearly all VRPA plans offer TDFs, which translates to a higher allocation of assets and contributions to these funds.
  • Balanced portfolios. More than half of VRPA plan participants hold a single TDF, which contributes to the data showing nearly 80% of VRPA plan participants hold balanced portfolios.
  • Reenrollment strategy. 70% of VRPA plans used a reenrollment strategy at conversion and 95% reenrolled into a TDF.

Of course, these numbers aren’t really a surprise to those of us who work with VRPA clients. A few years ago when Vanguard took a closer look at this marketplace, it was clear that small businesses were being underserved and overcharged. It’s the reason we launched VRPA in 2011. As a leading retirement plan provider with deep expertise, we felt we could make a difference by supporting and partnering with plan sponsors and their financial advisors to create better retirement outcomes.

We love the opportunity to work with new plan sponsors who are eager to set their employees up for success. One of the first small businesses we partnered with was a boutique investment firm with a highly sophisticated workforce. Their management team was eager to move their plan to Vanguard because of our low costs and investment philosophy. While their employees certainly had the investment expertise to design their own portfolios, our team recommended a best-practice approach to design a state-of-the-art program by implementing reenrollment into target-date funds. This would help keep costs low and portfolios diversified, and would satisfy the QDIA requirements to gain fiduciary relief. Their plan is now among the many offering target-date funds as a way of helping their participants maintain balanced portfolios over time.

Although VRPA plans are doing well overall, it is engrained in our culture here at Vanguard to constantly look for ways to improve. Based on the data from our report, there are several ways small business plans can improve their employees’ retirement outcomes:

  • Adopt automatic enrollment with higher initial contribution rates.
  • Implement automatic annual increases with a total participant contribution cap of at least 10%.
  • Default employee contributions at a level that maximizes the employer match and increases their deferral rate until individuals are saving at least 10% of their pay.

How America Saves, Small business edition
 is a great research tool for plan sponsors and advisors. This year’s report shows a number of positive trends and highlights what small businesses are doing to provide essential retirement benefits for their employees. VRPA is making a difference, and that’s definitely good news for small plans and their participants.

How does your plan shape up?


  • Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a target-date fund is not guaranteed at any time, including on or after the target date.
  • All investing is subject to risk, including the possible loss of the money you invest.

About Crystal Hardie Langston
Crystal Hardie Langston is an officer and head of Vanguard Institutional Sales’ Small Market Department. Her department is responsible for Vanguard Retirement Plan Access™, a comprehensive suite of 401(k) retirement plan services for small businesses. Before her current position, Mrs. Langston was an officer in Vanguard Corporate Strategy. Her previous Vanguard roles include leading the relationship management team and internal sales organization in Vanguard Financial Advisor Services™ and serving as chief of staff for the institutional division. Mrs. Langston started her Vanguard career as a relationship manager. Before Vanguard, she was an analyst with Banc of America Securities debt capital markets department. Mrs. Langston earned a B.S. from the University of Virginia and an M.B.A. at Duke University’s Fuqua School of Business. Mrs. Langston is a cofounder and leader of the Vanguard Black Professional Network. She is also board chair for Urban Tree Connection, an organization focused on community-based urban greening in Philadelphia.