401(k)s are “substantial” retention tools for small & medium-sized employers

Offering a retirement plan can lead to an annual cost savings of more than $100,000 in reduced employee turnover costs alone for SMBs – a 2x return on the initial costs of offering a 401(k), says a new study.

A new study finds that small and medium sized businesses (SMBs) can save as much as $100,000 a year by offering retirement benefits. The research by Gusto, a benefits platform designed for SMBs, found that the talent retention by smaller businesses that offer retirement benefits can be substantial, which is important in today’s tight labor market.

“Our research shows that retirement benefits can be one of the best possible investments for businesses seeking to attract and retain top talent,” said Tom Bowen, an economist at Gusto. “The economy is making it challenging for many business owners—we’re seeing high inflation, rising costs, and an incredibly tight labor market. There are currently two job openings for every unemployed person, so businesses need to work hard to find great employees and keep their current staff.”

Retirement benefits = greater retention across all industries

One of the interesting findings of the Gusto research is that retirement benefits can offer strong returns—across all industries. In a recent Gusto blog post Luke Pardue, also a Gusto economist, wrote that for SMBs, finding new workers can be costly and time-consuming. “One of the best ways a company can avoid those costs is by offering a 401(k) retirement plan for its employees,” he wrote. “Our calculations show a 401(k) plan can lead to annual cost savings of more than $100,000 in reduced employee turnover costs alone – a 2x return on the initial costs of offering a 401(k).”

In these tough economic times, Pardue added, many Americans feel financially insecure, and retirement benefit offerings can have a strong appeal to workers. And the numbers show it is a valuable tool in growing wealth. “Today, more than 40 million employees don’t have access to retirement benefits. If they received them through their employers, collectively they’d be able to save as much as $5.7 trillion in 20 years.”

Pardue’s research found that workers in SMBs are on average 40% less likely to leave in the first year when they are offered retirement benefits. For some jobs, this jumps as high as 54%. The higher numbers are seen more in areas such as retail and food and beverage jobs, which traditionally are the least likely to offer retirement plans.

Regulations trending toward mandatory retirement offerings

The Gusto research noted that 14 U.S. states have enacted legislation creating state options and requirements for retirement plans, and that, in some states, penalty for failing to have retirement benefits in place can run as much as hundreds of dollars per employee. Within the past year, California, Illinois, and Oregon have implemented hard deadlines mandating that businesses of certain sizes offer retirement benefits.

Steve Abbott, head of public policy at Gusto, noted that many states are requiring employers to either offer a privately sponsored retirement plan, or to enroll their employees in the state auto-IRA.

Related: State, national legislation provide opportunities for smaller plan sponsors

Abbott said that all state auto-IRAs so far have been Roth IRAs, which have lower contribution limits and don’t allow for employer contributions or matching. “So, for SMBs that want a competitive edge in attracting and retaining talent, offering private 401(k) plans can give them much more flexibility, as well as the possibility of securing tax credits,” he said. “In the next few years, industry observers believe more states are likely to enact auto-IRAs, even if there is no federal program for retirement benefits.”

Federal legislation in this area has been discussed, but the Gusto researchers said it may be more advantageous for SMBs to get their own programs going now—considering how tight the labor market is likely to remain, and how slowly federal legislation moves.

Abbot said there could be some upsides to federal legislation but noted that more than one bill has been considered, and that legislation is still in discussion. A bill called SECURE 2.0 could build on earlier federal reforms but would need to be reconciled with a similar Senate bill.

“Both SECURE 2.0 and the Senate Finance’s version (EARN) include increases in the tax credit for smaller employers to offer a new retirement plan,” he said. “They also introduce new credits for employer contributions, incentivizing businesses to add a matching provision to their plan. These provisions would likely be a catalyst for SMBs to offer new private plans to their employees, beyond the state auto-IRAs.”