Vanguard Reports Small Businesses Bucking Narrative Of Retirement Plan Inadequacy
VALLEY FORGE, Pa., June 28, 2016 /PRNewswire/ -- Vanguard has issued the third annual How America Saves: Small business edition, an extensive report detailing the plan design and participant savings trends of the small business 401(k) plans served by Vanguard Retirement Plan Access™ (VRPA). Vanguard researchers found that small businesses are employing state-of-the-art plan design features, including automatic enrollment and target-date funds, prompting encouraging savings behaviors in their employees.
VRPA is a comprehensive service for retirement plans with up to $20-plus million in assets. As of year-end, VRPA served 4,500 plans and 200,000 participants, up from 445 plans and 16,000 participants served as of year-end 2012. With small businesses representing 99.7% of American employers, VRPA was launched in 2011 to provide access to cost-effective 401(k) plans for small business owners in this over-charged and under-served segment of the market.
"The 401(k) plan is making a difference in the retirement readiness of countless American workers," said Crystal Hardie Langston, principal and head of VRPA. "We designed this service to bring high-quality, low-cost retirement plans to employees of small businesses. Five years later, notable metrics of success include the progressive plan construction utilized by our sponsors and the positive savings behaviors exhibited by our participants."
Mirroring one of the most positive innovations of the larger 401(k) market, one-sixth of VRPA plans have adopted automatic enrollment. Automatic enrollment recasts the retirement savings decision and overcomes the initial hurdle of participation. In VRPA plans with automatic enrollment, researchers reported participation rates that were nearly 50% higher than voluntary enrollment plans. In addition, more than one-third of these plans have instituted automatic annual escalation that results in gradual savings increases and the potential for better retirement outcomes.
As of year-end 2015, participant savings metrics remained steady and encouraging, with average deferral and median deferral rates reported at 6.7% and 5.0%, respectively. Most significantly, 12% of VRPA participants saved to the maximum dollar amount of $18,000 ($24,000 for participants age 50+), a slight uptick from the prior year. In addition, nearly one in five participants saved 10% or more of their annual income.
"We recognize that small business owners juggle many varied responsibilities. Yet, on top of the obligation of providing thoughtfully designed, well-managed retirement plans, they are more than doing their part to drive savings rates," said Jean Young, author of the report and senior researcher in Vanguard Center for Retirement Research. "In 2015, three-quarters of VRPA sponsors offered an employer contribution. Notably, this is resulting in an average total contribution rate of 9%—a figure that is nearly on par with their larger-plan counterparts."
Small plan sponsors are also increasingly utilizing default investments. Nearly all VRPA plans have designated a default fund, and 96% had selected a target-date default in 2015. As of year-end, 75% of participants used a target-date fund when offered. In aggregate, more than 6 in 10 VRPA participants were invested in a professionally managed allocation—the majority of them in a single target-date option. In large part due to target-date allocations, 80% of VRPA participants have a more optimal, broadly diversified investment portfolio.
Vanguard: A legacy of retirement leadership
A leader in the defined contribution (DC) marketplace, Vanguard manages more than $800 billion in DC assets as of March 31, 2016. Vanguard's recordkeeping business serves more than 5,900 plan sponsors and more than 4.1 million participants, including the 4,500 plans and nearly 200,000 participants served by VRPA (as of December 31, 2015). The firm also leads the industry in target-date assets, and is the number one recipient of cash flow into target-date funds, most of that coming from DC plans1.
Drawing on its rank as the largest DC plan asset manager in the United States2, Vanguard serves as a strategic partner to sponsors and advocate investors, leading the way with groundbreaking retirement and investment thought leadership and services. How America Saves, now in its 15th year, serves as the firm's flagship DC report and is recognized as a go-to resource for plan sponsors and premier benchmarking tool in the industry.
Investments in Vanguard Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.
About Vanguard
Vanguard is one of the world's largest investment management companies. As of May 31, 2016, Vanguard managed more than $3.5 trillion in global assets. The firm, headquartered in Valley Forge, Pennsylvania, offers more than 350 funds to its more than 20 million investors worldwide. For more information, visit vanguard.com.
All figures as of May 31, 2016, unless otherwise noted.
For more information about Vanguard funds and ETFs, visit vanguard.com or call 800-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.
Vanguard Marketing Corporation, Distributor.
1 Source: Morningstar and Vanguard.
2 Source: Pensions & Investments.
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