At year-end 2020, nearly all VRPA participants were in plans offering target-date funds. Eight in ten participants had all or part of their account invested in target-date funds.
Such investments continue to be the increasingly popular choice among small-business retirement plans. In fact, in 2020, more than half of all contribution dollars were directed to target-date funds.
As of December 31, 2020, 16% of VRPA plans permitting employee-elective deferrals had adopted automatic enrollment. This represents 37% of VRPA plan participants. (Typically, larger plans adopt autoenrollment more frequently than smaller plans.)
Autoenrollment can mitigate the impact of demographics, as those who are younger, shorter- tenured, and in a lower-income bracket exhibit a much higher participation rate when autoenrollment is available.
Sixty-nine percent of VRPA plans with an employer contribution had adopted a safe harbor employer contribution design as of year-end 2020. The most common design was one with a value of 4%—up to the first 5%—of employee contributions (representing 39% of safe harbor plans).
A safe harbor 401(k) plan allows a plan sponsor to automatically pass certain annual tests to ensure compliance with IRS regulations—if specific contribution, vesting, and participant notification requirements are met.*
* If an employer makes contributions, either matching, nonelective, or discretionary, that exceed certain limits/requirements, the employer is required to treat them as non-safe harbor contributions and subject the plan to ACP and top-heavy testing. After-tax employee contributions also subject the plan to these tests.
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All investing is subject to risk, including possible loss of principal. Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target date funds is not guaranteed at any time, including on or after the target date.