Enhanced plan design features, including professionally managed allocations, have led to increased involvement and improved portfolio construction among participants of small business defined contribution plans, according to a report from Vanguard Group.
The research, Vanguard's sixth annual How America Saves: Small Business Edition, finds that participant behavior from small businesses has improved, as demonstrated by reduced trading activity and plan withdrawals.
Plan investment menus that feature participant choices has resulted in greater use of professionally managed allocations. In 2018, two-thirds of Vanguard Retirement Plan Access participants were invested in a professionally managed allocation, with 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. Seventy-nine percent of participants held broadly diversified portfolios in 2018, while 3% had allocation to equities. Meanwhile, 7% were investing exclusively in equities.
Vanguard's annual report also reveals that automatic enrollment is increasing plan participation and plan deferral rates. Employees enrolled in plans with an automatic enrollment feature have an overall participation rate of 82%, compared with a participation rate of only 54% for employees hired under plans with voluntary enrollment.
"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, in a news release. "The increased use of the features and tools available points to the continued commitment by plan sponsors to further drive these improved outcomes."
Vanguard, which had $1.4 trillion in DC plan assets under management as of March 31, served 11,300 plan sponsors with 480,000 participants as of Dec. 31 through VRPA.