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Small Business 401(k) Plans on the Up and Up

A new study reveals a number of remarkable developments in plan design trends and participant savings behaviors among small business defined contribution plans.

In Vanguard’s fifth annual “How America Saves: Small business edition,” small business DC plans experienced a surge in coverage — from roughly 1,400 plans in 2013 to nearly 8,900 in 2017, with the number of participants increasing six-fold to more than 370,000 over the same period.

The findings are based on small business 401(k) plans supported by Vanguard Retirement Plan Access (VRPA) clients, which includes full-service plan fiduciaries for plans under $20 million.

Deferral rates also continue to increase, according to the data, which shows that the average participant contribution rate at 9.7% in 2017, up from 9.3% the previous year. This figure takes into account both employee and employer contributions. In addition, deferral rates, not surprisingly, were found to increase with job tenure and age — from 5.2% for employees age 25 and younger to 10.6% for those age 65-plus.

Plan Design

Small business plans are also increasingly adopting plan design features that can lead to improved retirement readiness of their employees, Vanguard reports.

Nearly two-thirds of all eligible employees participated in their small business 401(k) plan in 2017, but employees subjected to automatic enrollment have higher participation rates across all demographic variables. According to the findings, plans with automatic enrollment had an 83% participation rate, compared to 58% for plans with voluntary enrollment.

Meanwhile, one of the most notable changes in plan design is the near-universal availability of, and growing usage of, target-date funds (TDFs). A total of 96% of plans offer TDFs as the QDIA and more than two-thirds of participants use TDFs, with 59% invested in a single TDF. Moreover, among new plan entrants, 75% of employees were invested in TDFs.

Jean Young, author and senior research associate in the Vanguard Center for Investor Research, explains that within the small business marketplace, the firm “expect[s] that the use of professionally managed allocations, predominantly TDFs, will continue to increase over the next few years, helping to increase diversification, lower investment costs, and ultimately improve outcomes.”

In addition, the availability of a Roth option is also becoming widespread among smaller plans, based on Vanguard’s data, which shows that a total of 8 in 10 plans offer a Roth feature. Adoption seems to be lagging somewhat, however, as only 15% of participants in these plans used the feature.

The firm also found data similarities among both small- and large-company plan sponsors, suggesting that small-businesses were doing well in preparing their employees for retirement even without the scale of administrative and educational resources available to the largest corporate plans. For example, the report explains that 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.


Other 2017 VRPA benchmarking data from the report shows that:

  • 87% of terminated 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.

  • 75% of plans offered employer match contributions at an average value of 4%.

  • The average account balance for participants was $61,525, while the median balance was $11,182.

  • 20% of plans allowed employees to make voluntary contributions immediately after they joined their employer, while 40% of sponsors required eligible employees to have one year of service before they could contribute.

  • 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.