Small
businesses account for 99.7% of all employer firms and more than half 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 2018: Small business edition.
A
supplement to How America Saves 2018,
this edition focuses on trends relevant to Vanguard Retirement Plan Access™
(VRPA) clients, who include full-service plan fiduciaries for plans under $20
million. Not surprisingly, given the SBA statistics, VRPA has seen significant
growth since its inception in 2011. VRPA served 8,900 retirement plans and
370,000 participants by the end of 2017.
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 2018.
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, 7.1% of their income (up from
6.9% in 2016) in their employer’s plan versus the 6.8% participant deferral
rate for large-company participants. 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.
At
year-end 2017, 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 2017, 87% of terminated VRPA
participants eligible for distributions 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 HowAmerica Saves 2018: 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 $2.6
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 2017, three-quarters
of VRPA plans offered employer match contributions at an average value of 4%.
VRPA plan participants
could choose from 20.3 investment options, on average, by year-end 2017. The
median plan sponsor offered 19 options in 2017. Only 5% 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
(98%) offered TDFs. And among new plan entrants, 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 both 2017 and 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.
The year-over-year data
consistency within How America Saves 2018: 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.
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.