Vanguard’s 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), reveals that as of December 2015, one-sixth 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. More than one-third of these plans automatically increase the contribution rate annually. Nearly all of these plans use a target-date or other balanced investment strategy as the default fund, with 96% choosing a target-date fund as the default.
In 2015, VRPA’s plan-weighted participation rate was 72%. Plans with automatic enrollment have higher participation rates than plans with voluntary enrollment. Plans with an automatic enrollment feature have an overall participation rate of 88%, compared with a participation rate of only 58% for plans with voluntary enrollment.
Plans with automatic enrollment have higher participation rates across all demographic variables. For individuals earning less than $30,000 in plans with automatic enrollment, the participation rate is more than double that of plans with voluntary enrollment.
However, the predominant use of a 3% default deferral rate means participants enrolled in plans through automatic enrollment are saving less. Participants joining a plan under an automatic enrollment feature have an average deferral rate of 5.5%, compared with 7.2% for participants joining plans under voluntary enrollment—a deferral rate that is about one-quarter lower overall. Even participants earning less than $30,000 save more than twice as much on average under voluntary enrollment designs.
Vanguard suggests that higher default deferral rates would be amenable to plan participants in automatic enrollment designs. “Our research on automatic enrollment indicates that ‘quit rates’ do not deteriorate when higher default percentages are used to enroll employees,” the report says.NEXT: Improved participant investment diversification
Increasingly, participants are being directed into default investments selected by the plan sponsor, rather than making active investment choices on their own, Vanguard’s analysis finds. Nearly all VRPA plans have designated a default fund, and 95% had selected a target-date fund option as the default option in 2015.
Ninety-eight percent of plans had specifically designated a qualified default investment alternative (QDIA) under Department of Labor (DOL) regulations. Among all VRPA plans, 96% of designated QDIAs were target-date funds, 3% were balanced funds, and 1% selected a model portfolio.
In 2015, six in 10 VRPA participants were invested in a professionally managed allocation. A total of 57% of participants were invested in a single target-date fund in 2015. Among new plan entrants (those entering the plan for the first time), three-quarters of participants were invested in a single target-date fund.
Most VRPA plan sponsors chose to reenroll participants in a QDIA at conversion. VRPA was launched in 2011 and the majority of these plans converted between 2012 and 2015. Seven in 10 plans reenrolled participants in a QDIA at conversion, and 96% using this strategy reenrolled in a target-date fund.
From an investment perspective, an asset allocation to equities of 80% or more may appear appropriate in light of the long-term retirement objectives of most defined contribution (D)C plan participants, Vanguard says. The growing use of professionally managed allocations within DC plans, including target-date funds, is reshaping equity allocations by age and reducing extreme allocations. The fraction of participants with no allocation to equities was 3% in 2015; the fraction of participants investing exclusively in equities was 7%.
This rising use of professionally managed allocations is also improving portfolio construction. The fraction of participants holding broadly diversified portfolios was 80% in 2015. Less than 1% of VRPA participants were holding concentrated stock positions.VRPA is a comprehensive service for retirement plans with up to $20-plus million in assets. As of year-end 2015, VRPA served 4,500 plans and 200,000 participants. For more plan design and participant savings trends among these plans, the report may be downloaded from here.
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