Small Firm 401(k)s Favor Professionally Managed Investments

June 25, 2014 (PLANSPONSOR.com) – More than three-quarters of small business employees who participate in their firms' 401(k) plans have well-constructed, appropriately diversified investment portfolios, according to Vanguard.

In many cases, says the investment management firm, this is because their employer has placed them in a professionally managed investment option. The “Vanguard Retirement Plan Access 2014” research shows 76% of participants in small business retirement plans held broadly diversified investments in 2013. More than half of those participants did so through a professionally managed investment option such as a target-date fund, another type of balanced fund, or a model portfolio.

In looking at its own Vanguard Retirement Plan Access service for small businesses, Vanguard found two-thirds of plan sponsors chose to reenroll their participants’ assets into the plan’s qualified default investment alternative (QDIA). The QDIA consisted of a professionally managed balanced investment option, namely, a target-date fund (46% of participants held a single target-date fund), another type of balanced fund (4%), or a model portfolio (2%).

“Because these plan sponsors took such proactive steps, the portfolio construction of their participants tends to be strong,” says Jean Young, author of the report and a senior analyst in Vanguard’s Center for Retirement Research, based in Valley Forge, Pennsylvania. “We’re seeing a rapidly growing number of participants in plans of other sizes also take advantage of professionally managed investment options, particularly target-date funds, but the prevalent usage of these options so quickly in small plans is especially encouraging.”

Plans reviewed for the report were grouped into categories based on the type of employer contributions made to the plan in 2013, which include:

  • Matching contributions only (44% for 2013, 45% for 2012);
  • Nonmatching contributions only (21% for 2013, 22% for 2012);
  • Both matching and other nonmatching contributions (10% for 2013, 15% for 2012); and
  • No employer contribution (25% for 2013, 18% for 2012).

The report also reveals that plan sponsors that moved their plans to, or started them at, the VRPA service also implemented important features to aid participants in saving or investing wisely. For instance, 98% of those sponsors designate a QDIA, 97% offer target-date funds, 73% offer a Roth feature that enables participants to contribute on an after-tax basis, and 99% offer catch-up contributions that enable participants age 50 and older to save an additional amount. However, fewer of these plans automatically enroll participants or automatically increase their annual contributions. Only 19% of small plans had automatic enrollment, with 41% of those including an automatic annual contribution increase, compared with 34% and 69%, respectively, of larger plans.

“This report can be helpful to small business owners who already offer plans to determine how their plans compare with others, as well as to small employers considering whether to add a retirement plan to their benefit offerings,” says Jing Wang, head of the Vanguard Retirement Plan Access (VRPA) service. “In particular, the report shows how proper plan design can have a positive impact on participants’ retirement savings.”

The report is based on an analysis of the retirement saving and investing behavior of more than 60,000 participants in more than 1,400 small plans served through Vanguard Retirement Plan Access at the end of 2013. A copy of the report can be found here.

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