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How Small Plans Are Different — And Not

In many respects, small plans mirror, or in some cases, echo by several years the structures of larger plans. But a new report suggests that a majority of smaller plans are reenrolling participants into a qualified default investment alternative when converting.

Among smaller plans — at least those covered by the Vanguard Retirement Plan Access (VRPA) offering, launched in 2011, and designed for retirement plans with up to $20-plus million in assets — 7 in 10 plans reenrolled participants to a QDIA at conversion and 95% using this strategy reenrolled to a target-date fund.

Size Differences

Additionally, according to the small business edition of Vanguard’s "How America Saves" report, VRPA plans were more likely to offer TDFs (97% compared with 88%, among the broader Vanguard record keeping client base), and their participants were more likely to use TDFs when offered (73% versus 66%). Smaller plans were considerably more likely to have designated a QDIA than their larger brethren (98% versus 71%) and more likely to offer a Roth option (75% versus 56%).

However, they were considerably less likely to allow immediate eligibility for employee contributions (23% compared with 58%) and automatic enrollment (18% versus 36%), though participation rates, availability and take up of Roth, catch-up and average deferral rates were comparable.

Compared with the larger Vanguard base of record keeping clients, smaller plans had much smaller average and median balances ($53,959 and $9,601, compared with $102,682 and $29,603, respectively).

Automatic Enrollments

As of December 2014, one-fifth of VRPA plans permitting employee-elective deferrals had adopted automatic enrollment. Six in 10 of these plans automatically enroll participants at a 3% contribution rate. Four in 10 of these plans automatically increase the contribution rate annually. Nearly all of these plans use a TDF or other balanced investment strategy as the default fund, with 95% choosing a TDF as the default.

Forty-three percent of VRPA plans provided only a matching contribution in 2014. Nine percent of plans provided both a matching and a nonmatching employer contribution. One in five plans provided only a nonmatching employer contribution. And 28% of plans made no employer contributions of any kind in 2014.

Six in 10 VRPA plans with an employer contribution had adopted a safe harbor design, most commonly a safe harbor match with a value of 4% on up to the first 5% of employee contributions (42% of safe harbor plans). One in 10 VRPA plans provided a safe harbor match with a value greater than 4% on up to the first 6% of employee contributions. About half of VRPA plans adopted a safe harbor nonelective employer contribution with a 3% value or higher.

Various studies have shown that income is one of the primary determinants of plan participation rates, and the Vanguard report notes that, while about half of eligible employees with income of less than $30,000 contributed to their employer’s DC plan in 2014, 86% of employees with income of more than $100,000 elected to participate. Even among the highest-paid employees, 14% of eligible workers still failed to take advantage of their employer’s DC plan.

Deferral Rates

Participation rates were lowest for employees younger than 25; only 48% of employees younger than 25 made deferrals to their employer’s plan in 2014, while about 7 in 10 eligible employees between ages 45 and 64 did. In 2014, deferral rates were lowest for participants younger than 25. This group saved only 4.8% of income. Deferral rates for participants ages 55 to 64 were about 75% higher, averaging 8.5%. Deferral rates also rose directly with employee tenure, and tenure also had a significant influence on plan participation; in 2014, only 6 in 10 eligible employees with less than two years on the job participated in their employer’s plan, compared with 8 in 10 employees with tenure of 10 years or more.

In 2014, participants with incomes between $30,000 and $49,999 had deferral rates averaging 5.4%, while participants earning $75,000 to $99,999 had deferral rates of 7.7%, about 40% higher. Deferral rates were 7.8% for participants earning $100,000 or more. Participants in the VRPA population earning less than $30,000 have higher deferral rates averaging 6.3%, though a minority of these participants (2%) have very high deferral rates.

Excluding participants deferring more than 50%, Vanguard found that participants earning less than $30,000 had deferral rates averaging 4.8%.

Nearly all VRPA plans offered catch-up contributions in 2014, though only 18% of participants age 50 and older eligible for catch-up contributions took advantage of this feature in 2014. Similarly, while at year-end 2014, the Roth feature was offered by three-quarters of VRPA plans, it had only been adopted by 14% of participants in plans offering the feature.

The average VRPA plan offered 20.1 investment options in 2014 and, counting a target-date series as a single fund offering, the median plan sponsor offered 20 investment options in 2014. In 2014, one in five plans offered more than 25 distinct investment options, while 7% of plans offered 10 or fewer. On average, VRPA plan participants used 2.7 funds and the typical participant held just one fund. (Remember that the researchers count each target-date fund used as a separate fund.)

Loans

In 2014, 71% of VRPA 401(k) plans permitted participants to borrow from their plan and 82% of participants had access to a loan feature. Only 9% of VRPA participants offered a loan had one outstanding at year-end 2014.

On average, the outstanding loan account balance equaled 12% of the participant’s account balance including the loan, and the average participant had borrowed about $8,400.

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