Small Businesses Increasingly Using Best-in-Class Design Features

Like their large corporation counterparts, small business 401(k) plans are increasingly implementing best-in-class design features to improve the retirement readiness of their employees, Vanguard says in a recent report.

The growing use of automatic enrollment, target-date funds, employer contributions, Roth options and loan flexibility are among the positive trends Vanguard researchers cite in the report. In addition, the increasing influence of financial advisors supporting the small business 401(k) market is cited as a positive trend.

“In large part due to the invaluable support of advisors, we’re seeing meaningful developments in small business plan design, which is really moving the savings dial for more working Americans,” said Crystal Hardie Langston, principal and head of Vanguard Retirement Plan Access (VRPA).

Similar to the large plan market, automatic enrollment features are boosting employee participation in small business plans, the report notes. In 2016, for example, the overall participation rate for employees subjected to automatic enrollment was 82%, compared with a participation rate of 57% for plans with voluntary enrollment.

Target-date funds appear to be the overwhelming favorite for default investment options. With the growing use of automatic enrollment, participants are increasingly being directed into default investments selected by the plan sponsor. The study shows that nearly all VRPA plans have designated a default fund, and 95% had selected a TDF option as the default option in 2016. Among all VRPA plans, 97% of designated QDIAs were TDFs, 2% were balanced funds, and 1% selected a model portfolio.

Employer contributions are another key feature helping small business owners leverage their 401(k) plans as a more comprehensive benefit to employees. In 2016, 75% of small business plan sponsors provide some type of contribution – either an employer match, nonelective contribution or both.

Other key features that small business plan sponsors are implementing include Roth contributions and plan loans. At year-end 2016, the Roth feature was offered by 8 in 10 VRPA plans and had been adopted by 15% of participants in plans offering the feature. For plan loans, the data shows that 70% of VRPA plans permitted participants to borrow from their plan in 2016. While only about 1% of total VRPA assets had been borrowed by participants at year-end, Vanguard said it believes that the availability of a loan option “can provide participants with peace of mind and an additional financial resource in challenging times.”

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