Small business owners are offering their employees the same state-of-the-art options for retirement savings as large businesses, says Vanguard.
The options are leading to higher participation rates for employees and higher savings rates, Vanguard said in a report released Tuesday. The report shows plan design and participant savings trends for small business 401(k) plans in the Vanguard Retirement Plan Access (VRPA) program.
Vanguard Retirement Plan Access includes retirement plans with up to $20 million in assets, which includes 4,500 plans and 200,000 participants, which compares to the 445 plans and 16,000 participants Vanguard served at the end of 2012.
“Mirroring one of the most positive innovations of the larger 401(k) market, one-sixth of VRPA plans have adopted automatic enrollment,” the report says.
Participation rates in plans with automatic enrollment are 50 percent higher than those in voluntary enrollment plans. One third of the plans that have automatic enrollment also have automatic annual escalation of savings.
“As of year-end 2015, participant savings metrics remained steady and encouraging, with average deferral and median deferral rates reported at 6.7 percent and 5 percent,” says Vanguard.
Twelve percent of small plan participants saved the maximum amount of $18,000, a slight increase from the previous year, and one in five participants saved 10 percent of their salary.
“In 2015, three-quarters of VRPA sponsors offered an employer contribution," says Jean Young, author of the report and senior researcher in Vanguard Center for Retirement Research. "Notably, this is resulting in an average total contribution rate of 9 percent, a figure that is nearly on par with their larger-plan counterparts.”
Small plan sponsors are also increasingly utilizing default investments. Nearly all Vanguard small business plans have designated a default fund and 96 percent have selected a target-date default. As of the end of 2015, 75 percent of participants used a target-date fund when offered.