Small business owners are in some cases offering less of a retirement benefit to their employees, with the absence of 401(k) employer contributions much more prevalent among small plans when compared to their larger counterparts.
Whereas only 5% of larger defined-contribution plans don't offer any type of employer contribution — including matching and non-matching contributions — that proportion increases to 28% among small plans, according to data from two new Vanguard Group reports.
Small-plan data encompasses Vanguard-administered DC plans with up to $20 million in assets, with larger plans representing all other plans in Vanguard's record-keeping business. Vanguard is one of the U.S.' largest record-keeping firms, with
close to $400 billion in DC assets under administration.
Among small plans, start-up plans were (perhaps unsurprisingly) the least generous, with 33% not offering employer contributions to employees. The proportion for “established” plans, or those at least three years old, is 25%.
“Larger employers have more generous benefits all the way around. That's what you're seeing there,” Jean Young, senior research analyst in Vanguard's Center for Retirement Research, said.
Smaller employers compete at a different level than large employers regarding workplace benefits. Large employers “practically have to offer an employer match” to attract and retain talent, according to Ms. Young, who authored Vanguard's How America Saves 2016 reports, the
small-business edition of which was published Jun. 28 and the
other earlier in the month.
“I would not criticize anybody offering a plan for not offering an employer contribution,” she said. “The power here is they make it very easy for their employees to save.”
Small employers are also less likely to adopt automatic enrollment, a plan-design feature pretty universally touted as a best practice for its ability to boost plan participation.
Only 16% of small plans had adopted automatic enrollment by the end of last year. On the other hand, 41% of larger plans had adopted auto-enrollment, which swelled to more than 60% when accounting only for the largest plans (those with more than 1,000 participants).
Automatic enrollment is less necessary among small employers, because they're able to lend more of a personal touch to benefits enrollment generally, Ms. Young said. They are more able to meet face-to-face with employees to discuss retirement benefits, whereas large employers have many times outsourced plan enrollment to record-keeping firms, she added.
However, “to the extent that a smaller plan sponsor really wants to make sure everyone gets in [the plan], auto enrollment is still the right way to go,” Ms. Young said.