Small businesses
account for 99.7% of all employer firms and 64% of all private-sector
employees, according to the Small Business Administration (SBA). So how are
small businesses preparing their employees enrolled in defined contribution
(DC) plans for retirement? And how effectively are small- business employees
using this benefit? Vanguard addresses questions surrounding small-business
retirement behavior in its recent research How America Saves 2017: Small
business edition.
A supplement to How America Saves 2017, this edition
focuses on trends relevant to Vanguard Retirement Plan Access™ (VRPA) clients,
who include small- to mid-size plan fiduciaries. Not surprisingly, given the
SBA statistics, VRPA has seen significant growth since its inception in 2011.
VRPA served more than 6,500 retirement plans and more than 270,000 participants
by the end of 2016.
A testament to
VRPA’s success is the overall consistency of participation rates and other
measures between VRPA clients and the corporate behemoths that feature more
prominently in the parent publication How America Saves 2017. The data similarities in each
of these studies suggest small- and large-company plan sponsors are on target
in preparing their employees for retirement.
For example, VRPA
participants saved, on average, 6.9% of their income in their employer’s plan
versus the 6.2% participant deferral rate for large-company participants. Both
VRPA and large-company employees shared a median deferral rate of 5.0%. In
other words, small-business participants were doing well in these measures even
without the scale of administrative and educational resources available to the
largest corporate plans.
Participant employee-elective deferral rates
At year-end 2016,
participants in both large and small companies allocated roughly three-quarters
of their plan contribution assets in equities, including the equity portion of
balanced funds. About half of all contribution dollars, for both large and
small companies, were in target-date funds (TDFs).
Plan contribution allocation summary
In 2016, 88% of
terminated VRPA employees eligible for distributions and 90% of large-firm
employees preserved their retirement assets either by rolling them over to an
IRA or by keeping them in the employer’s plan.
These are a few
examples that show how small businesses measure up to larger ones. The findings from How America Saves 2017: Small
business edition show how small-business
sponsors and advisors are preparing their employees for retirement readiness
through strong plan design.
Strength in plan design
Retirement plans
administered by VRPA are divided into two populations: start-up plans, which
began within the last three years, and established plans, which began more than
three years ago. Altogether, the average VRPA plan has 42 participants and $2.3
million in plan assets.
Since VRPA’s 2011
inception, each plan has gone through plan design or review, which speaks to
the consistency in annual data. Research highlights show the influence of plan
design on participation and accumulation within small-business plans.
In 2016,
three-quarters of VRPA plans offered employer match contributions at an average
value of 4.8%. In 2015, 72% of VRPA plans provided employer match
contributions, with an average contribution value of 5.8% and median value of
3.5%.
Plan participation
within small- and mid-sized companies improved with age and job tenure. In both
2015 and 2016, 8 in 10 employees with ten or more years on the job participated
in their company’s plan, while about half of employees with two or fewer years
were enrolled. Employees ages 45 to 64 were the largest age group enrolled, with
7 in 10 participants both years. Employees younger than 25 accounted for only
38% of plan participants in 2016 and 45% in 2015.
Automatic
enrollment helps get employees into the plan, but the data show most employees
could be saving more by increasing the 3.0% default deferral rate. The average
deferral rate for automatically enrolled employees was 5.7% to 22% lower than
voluntarily enrolled employees, with an average 7.3% deferral rate in 2016.
Deferral rates from 2015 were nearly identical. Previous research has shown higher default rates don’t lead to higher quit rates.
VRPA plan
participants could choose from 20.2 investment options, on average, by year-end
2015 and 2016. The median plan sponsor offered 19 options in 2016 and 20 in
2015. Only 6% of plans offered 10 or fewer investment options, while 1 in 5
offered more than 25.
Of the investment options on the VRPA plan
menu, nearly all small- and mid-size employer plans (99%) offered TDFs in 2016,
a two-percentage-point increase from 2015. And three-quarters of their
employees were invested in TDFs.
TDFs have become a regular fixture in the
small-business employee’s investment lineup. But perhaps the most notable area
VRPA plans are seeing improvement is in portfolio construction. In 2016, 80% of
participants had broadly diversified portfolios, as more portfolios have
professionally managed allocations. Less than 1% of participants were heavily
invested in company stock. The chart below shows the allocation breakdown.
Participant portfolio construction
The year-over-year
data consistency within How America Saves 2017: Small
business edition indicates
small-business plan sponsors continue to optimize their retirement plans through
strong plan design. More details on small-business retirement
behavior are available in the complete report.
Notes
- All investing is subject to risk, including
the possible loss of the money you invest. Diversification does not ensure a
profit or protect against a loss.
- 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 the target-date
funds is not guaranteed at any time, including on or after the target date.
Vanguard opened an important three-month proxy
voting campaign on August 16, 2017. Shareholders are being asked to elect their
fund trustees and approve several policy changes across Vanguard’s
U.S.-domiciled fund lineup. 
