How America Saves: Plan Design Has Big Impact

The power of plan design to help Vanguard Retirement Plan Access™ (VRPA) participants save for retirement is evident in How America Saves 2019: Small business edition. Find out more by reading the report.

Small businesses account for 99.7% of all employer firms according to the Small Business Administration (SBA). So how are VRPA clients helping their employees prepare for retirement? Consistent over two years, 77% of VRPA plans provided either an employer match or nonelective contribution, or both. Nearly all VRPA plans have designated a default fund, and 96% had selected a target-date fund option as the default option in 2018.

Change in participation rates

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 shows that plan sponsors and advisors can better prepare employees' retirement readiness through strong plan design. As of 2018, the participant-weighted participation rate—a measure that considers all employees in VRPA plans as if they were in a single plan—was 60%.

Younger and low-income employee trends

Plan participation within small- and mid-sized companies improved with age and job tenure. Only 35% of employees younger than 25 made deferrals to their employer's plan in 2018.

Tenure also has a significant influence on plan participation. In 2018, 44% of employees with less than two years on the job participated in their employer's plan. Employees with tenure of ten years or more had a participation rate of 80%.

Other highlights

• Among all VRPA plans, 97% of designated QDIAs were target-date funds.
• VRPA participants saved 7.1% of their income on average.
• 6 in 10 eligible employees are enrolled in their employer's voluntary savings program across the VRPA universe of participants.
• VRPA serves 11,300 plan sponsors with 480,000 participants.

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All investments are subject to risk, including the possible loss of the money you invest.

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 target-date funds is not guaranteed at any time, including on or after the target date.

Reduce Costs, Risks Associated with Former Employees’ Accounts

You can reduce the time and costs associated with maintaining the accounts of former employees by either rolling over small balances into IRAs or making cash payouts. Contact your Client Service Team to review your plan provisions and options, including ways to

• cut plan expenses
• limit administrative tasks
• avoid unnecessary tracking of former employees
• help manage fiduciary risk

Your Required Minimum Distribution (RMD) Package is Coming Soon

To help you meet your compliance responsibility for ensuring that affected participants and beneficiaries take their required minimum distributions (RMDs)—which generally must be distributed by December 31 of each year—we’ll post your 2019 RMD package to your plan website in October and send a reminder when it's available. In the meantime, refer to this overview for actions we recommend you start taking now.  

Increasing Plan Participation Matters

You should care how much your employees are saving for retirement. Find out why in this first in a series of articles designed to explain the benefits of increasing retirement plan participation.

• Streamlined compliance testing. Some plans must go through complex, annual compliance testing to ensure that highly compensated employees (HCEs) are not disproportionately benefiting relative to rank-and-file employees. Failing these tests can lead to added headaches and expenses: the employer may have to refund deferrals to HCEs or make contributions to non-HCEs in order to pass the test. The good news is that you can potentially avoid compliance testing failures through increased participation and contributions from non-HCEs.

• Enhanced productivity. Actuaries estimate financial stress costs 15% to 20% of the total compensation paid to your employees.* Focusing on financial wellness can help reduce financial stress among your staff, creating more job satisfaction, and driving better business performance.

Look for future articles in this series highlighting strategies you can use to encourage plan participation.

*“Measuring the ROI of Financial Wellness,” American Society of Pension Professionals & Actuaries, September 2018.