VALLEY FORGE, PA (July 17, 2019)—Vanguard today issued its sixth annual How America Saves: Small business edition—a comprehensive assessment of plan design trends and participant savings behavior in small business 401(k) plans served by Vanguard Retirement Plan Access (VRPA).
The new research, a companion piece to the firm’s recently published How America Saves report on retirement savings in corporate retirement plans, finds that small business plan participants are benefiting from enhanced plan design features, including professionally managed allocations, which have led to increased plan participation and optimized portfolio construction. Similar to their large corporate counterparts, participant behavior has improved, which is reflected by decreased trading activity and reduced plan withdrawals.
The expanded use of professionally managed allocations is one of the most notable effects of plan investment menus on participant choices. In 2018, two-thirds of VRPA participants were invested in a professionally managed allocation, with a total of 61% of participants invested in a single target-date fund. Among new plan entrants, three-quarters of participants were invested in a single target-date fund.
The increased use of professionally managed allocations has also improved portfolio construction and reduced extreme equity allocations. The percentage of participants holding broadly diversified portfolios was 79% in 2018, while the percentage of participants with no allocation to equities was 3%. At the other extreme, the fraction of participants investing exclusively in equities was 7%.
In addition to the increased use of professionally managed allocations, Vanguard reports the following:
“Positive participant behaviors coupled with the increased use of professionally managed accounts is making a difference in the retirement readiness of small business 401(k) plan participants,” said Jean Young, author of the report and senior research associate in the Vanguard Center for Investor Research. “The increased use of the features and tools available points to the continued commitment by plan sponsors to further drive these improved outcomes.”
According to the Small Business Administration, small businesses represent 99.7% of American employers. VRPA—which is a service for retirement plans with up to $20 million in assets—was launched in 2011 to provide access to cost-effective, flexible 401(k) plans for small business owners and their employees. Recordkeeping and other services are provided through Ascensus, one of the nation’s top recordkeeping firms, and include a call center, compliance testing and documentation, participant education materials, dedicated plan sponsor and participant websites and trustee services. Through VRPA, Vanguard serves 11,300 plan sponsors with 480,000 participants as of year-end 2018.
“VRPA was launched in order to improve the experience of saving for retirement for small businesses, said Steve Holman, head of Vanguard Retirement Plan Access. “It’s encouraging to see small business plan owners taking advantage of the tools and innovations available to them, and putting them to action in order to better save for their retirement future.”
Vanguard is one of the world’s largest investment management companies. As of May 31, 2019, Vanguard managed $5.4 trillion in global assets. The firm, headquartered in Valley Forge, Pennsylvania, offers 414 funds to its more than 20 million investors worldwide. For more information, visit vanguard.com.
Asset figures as of May 31, 2019 unless otherwise noted.
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