More than three-quarters of small businesses employees who participate in their firm’s 401(k) plan have well-constructed, appropriately diversified investment portfolios, in many cases because their employer placed them in a professionally managed investment option, Vanguard researchers said today.
Vanguard Retirement Plan Access 2014, the small business version of Vanguard’s How America Saves 2014 report on retirement planning trends and behaviors within 401(k) and other defined contribution (DC) plans that Vanguard administers, showed that 76% of participants in small company plans held broadly diversified investments in 2013. More than half of those participants did so through a professionally managed investment option of a target-date fund, another type of balanced fund, or a model portfolio.
Many of those participants are in a professionally managed option because of action their employer took when it moved their plan to Vanguard Retirement Plan Access™ (VRPA), a service launched in 2011 to provide 401(k) and other plans to small businesses. During the switch to Vanguard, two-thirds of the plan sponsors chose to reenroll their participants’ assets into the plan’s qualified default investment alternative (QDIA). The QDIA consisted of a professionally managed balanced investment option, namely, a target-date fund (46% of participants held a single target-date fund), another type of balanced fund (4%), or a model portfolio (2%).
“Because these plan sponsors took such proactive steps, the portfolio construction of their participants tends to be strong,” said
Vanguard Retirement Plan Access has grown rapidly since it launched and now has sufficient data to share through the report, which can be a useful tool for small business owners making decisions about offering quality workplace retirement plans and for retirement plan advisors working with business owners to design retirement plan features. “This report can be helpful to small business owners who already offer plans to determine how their plans compare with others, as well as to small employers considering whether to add a retirement plan to their benefit offerings,” said
Plan sponsors that moved their plans to, or started them at, VRPA also implemented many other important features that can help their participants save or invest wisely. For instance, 98% of those sponsors designate a qualified default investment alternative, 97% offer target-date funds, 73% offer a Roth feature that enables participants to contribute on an after-tax basis, and 99% offer catch-up contributions that enable participants age 50 and older to save an additional amount.
Fewer of these plans, however, automatically enroll participants or automatically increase their annual contributions. Only 19% of small plans had automatic enrollment, with 41% of those including an automatic annual contribution increase (compared to 34% and 69%, respectively, of larger plans).
Other key metrics used to assess retirement planning behaviors were on par with the broader Vanguard participant population tracked in How America Saves, including participation rates, participant contribution rates, Roth usage, and the percentage of participants contributing at the maximum statutory limit (both reports cite 2013 data). See the chart for comparisons.
|How America Saves||Vanguard Retirement|
|2014||Plan Access 2014|
|Participants with professionally managed allocations||40%||52%|
|Participants using target-date funds (when offered)||61%||67%|
|Participants using single target-date fund||31%||46%|
|Participants using single risk-based balanced fund||6%||4%|
|Participants using managed account program or model portfolio||3%||2%|
|Participants with balanced investment strategies||66%||76%|
|Extreme participant asset allocations (100% fixed income or equity / 0% fixed income or equity)||14%||12%|
|Average participant deferral rate||7.0%||7.1%|
|Average total contribution rate (participant and employer)||10.2%||9.5%|
|Participants using catch-up contributions (when offered)||14%||17%|
|Participants using Roth (when offered)||13%||13%|
|Participants contributing at maximum statutory limit||12%||12%|
Vanguard Retirement Plan Access 2014 is based on an analysis of the retirement saving and investing behavior of more than 60,000 participants in more than 1,400 small plans served through Vanguard Retirement Plan Access at the end of 2013.
Investments in Target Retirement 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
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All investing is subject to risks, including possible loss of principal. Diversification does not ensure a profit or protect against a loss.
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