Despite significant market uncertainty during the first half of 2020, small business employees maintained a long-term perspective in saving for retirement, according to new research by Vanguard.
The firm reports in How America Saves Small Business: An update on 2020 that 95% of participants in Vanguard small business retirement plans did not make a single trade between January and June 30 of this year. The report was issued as an accompaniment to the firm’s annual How America Saves Small Business Edition, as well as its annual How America Saves study.
Participant withdrawal activity remained low on an absolute basis, with only 1.3% of Vanguard Retirement Plan Access (VRPA) participants taking a withdrawal in the first six months of the year. Although a low figure, the study notes that the withdrawal rate is up slightly when compared to the first six months of 2019, in which 0.7% of participants took out a withdrawal. Of the 2020 withdrawals, 30% were Coronavirus-related distributions under the CARES Act.
Participation and Deferral Rates Rise
By contrast, participation and deferral rates rose slightly in the first six months of 2020, with the number of participants with professionally managed allocations holding steady, indicating participants remained disciplined throughout the volatility, the study notes. As of June 30, 2020, 67% of VRPA participants were invested in a professionally managed allocation, identical to the percentage at year-end.
Plan-weighted participation rates (calculated by taking the average of participation rates among a group of plans) were 74% through June 2020, up from 72% at year-end. And participant-weighted participation rates (calculated as if all employees in Vanguard-administered plans were in a single plan) were 63%, compared with 59% at year-end. Vanguard’s data also shows that the average deferral increased from 7.1% at year-end 2019 to 7.6% by June 2020.
Not surprisingly, account balances did fall, but the decrease was expected based on market performance. The average account balance as of June 2020 was $60,226—a 4.8% decrease from $63,274 at year-end 2019. The median balance was $11,084—a 4.2% decrease since year-end.
Vanguard notes that while COVID-19-related uncertainty persists, plans offering features such as automatic enrollment and defaulting participants into target-date funds, can help small business employees continue to save for their retirement goals.
“With so much economic uncertainty, it’s important to focus on what you can control, such as implementing automatic enrollment, accelerating total saving rates and encouraging the use of TDFs,” the firm observes in the small business edition.
For example,employees enrolled in plans with an automatic enrollment feature have an overall participation rate of 83%, compared with a participation rate of only 52% for employees hired under plans with voluntary enrollment.
Moreover, the study shows that, as of June 30, 2020, 78% of new plan entrants hold a single target date fund, compared to 63% of participants overall, which was the same as in 2019.
