American small businesses continue to adopt best practices in defined contribution plan design, according to Vanguard's second annual How America Saves: Small business edition report. Serving as a complement to How America Saves, the firm's comprehensive annual examination of the defined contribution plans of large- and mid-sized companies, the newly issued report focuses on the retirement planning trends and behaviors of plans served by Vanguard's small business 401(k) service, Vanguard Retirement Plan Access. Vanguard found that small businesses are prompting positive savings behaviors and outcomes for their employees, mirroring trends observed in their larger-plan counterparts.

Small Business Administration data show that small businesses represent 99.7% of employers in the United States and employ half of all private-sector employees. As such, it is important to a large segment of Americans saving for retirement to have access to low-cost, well-designed defined contribution plans.

"We started offering DC plan services to small businesses, recognizing that this segment of the market was underserved and overcharged. We are pleased with the adoption of the service and the commitment by small business owners to offer robust, thoughtfully constructed plans to their employees," said Crystal Hardie Langston, Vanguard principal and head of VRPA. "Vanguard and industry data consistently demonstrate that plan design has the most substantial influence on participant outcomes."

Vanguard's small business sponsors, similar to the broader plan sponsor community, are better meeting the retirement savings needs of their employees by making participation easier and automating certain savings and investment decisions. Sixty percent of Vanguard small business sponsors require one year or less of service for employees to make voluntary contributions to the plan, and a quarter of VRPA plans allow employees to make contributions immediately after joining the company. Additionally, at the end of 2014, 72% of plans offered some type of employer contribution. In aggregate, more than half of employees in these plans are saving more than 5% of their income, while nearly 20% are saving 10% or more.

Reflective of the industry's movement toward automation, one in five VRPA sponsors had adopted automatic enrollment by the end of 2014. Of those plans, 40% also automatically increase contribution rates annually. Automatic enrollment has boosted employee participation in this subset of Vanguard 401(k) plans as well, spurring a participation rate that is 50% higher than in voluntary enrollment plans. Employees in auto-enroll VRPA plans have an overall participation rate of 89%, compared with a participation rate of 59% for employees in a voluntary enrollment plan.

In another move toward automation, participants are increasingly being directed into default investments selected by plan sponsors. As of year-end, nearly all VRPA plans had designated a default fund, and 94% had designated a target-date fund option as the default. With target-date funds available to almost every VRPA participant, three-quarters had all or part of their account invested in them. Moreover, 54% were invested in a single target-date fund, and three-quarters of new plan entrants invested in a single target-date fund.

"Early adoption and popularity of target-date funds among small business plans is an encouraging trend. Target-date funds have considerably improved the portfolio construction of participants by providing a well-balanced, diversified portfolio in a single option," said Jean Young, lead author of How America Saves. "As a result, nearly 80% of VRPA participants hold a balanced portfolio."