A 401(k) plan: The small business superpower for employee retention
Retaining talent is now a top priority for any business but workers whose employers offer a 401(k) retirement plan are on average 40% less likely to leave in their first year, according to Gusto economists.
It’s no secret we’re in a historically tight labor market. There are currently 1.6 job openings for every unemployed American. On top of that, 4 million Americans are turning 65 each year and edging towards retirement. Your employees have options – and if they’re not feeling valued, they might look for a change.
As an employer, how can you retain your best people, especially if you can’t keep raising wages/? Enter the competitive benefits package. Here’s the math on how retirement benefits and health insurance can boost retention, saving you as much as hundreds of thousands of dollars in turnover costs.
Small businesses lag behind in benefits
At Gusto, we help more than 300,000 small and mid-sized businesses take care of their teams with payroll, benefits, and HR. We also have a team of economists who tap into the data on our platform to uncover unique, anonymized insights about the state of compensation, hiring, pay trends, and so on across the U.S.
Our economists found smaller businesses tend to be much less likely to offer benefits than larger ones. Among businesses with fewer than 10 workers, retirement plans are available to just 15% of employees.
So what’s holding businesses back? We often hear business owners say they’re concerned about the cost of offering benefits. But in a tight talent market, where it’s critical to hold onto top performers, failing to offer them can actually cost your business more in the long run.
Benefits can offer an ROI of hundreds of thousands of dollars
Retaining talent is a top priority for any business – especially with a “forever labor shortage” in play. But offering benefits isn’t just a perk to keep employees healthy and happy. It’s also one of the easiest ways to reduce turnover.
Gusto’ economists found with a 401(k) plan, workers are on average 40% less likely to leave in their first year. Imagine cutting your quit rate by 40%! That jumps to 54% in industries where retirement benefits are much less common — like Personal Services, which includes retail or food and beverage.
That retention superpower also applies to health insurance. Employees with health insurance are 25% less likely to quit during their first year of employment. That number rises to 30% in the Professional Services sector, likely because it’s more common and expected among these types of businesses.
But keeping your best people on board and engaged isn’t just great for your teams’ productivity. Reducing turnover is also a massive cost-saving initiative – so massive that spending the money to provide attractive health and retirement benefits can actually have a positive ROI.
Finding new workers is both costly and time-consuming. The time to hire, onboard, and train often invisibly eats into your team’s productivity and profits. But how much?
Take the example of a company of 20 employees making an average of $95,000 per year – if 3 or 4 of their employees were to quit, it could cost them as much as $342,000 within one year to recruit, train, and get back up to previous levels of productivity. In some cases, offering a 401(k) plan can provide as much as a 2x return on its initial costs.
How to choose the right benefits plans:
- Survey your team to understand their needs. Talk to your team – whether directly or through an anonymous survey – to get a sense for the amount of coverage they’re looking for and how much they’re willing to spend. Whatever plan you choose should find a sweet spot of price and flexibility.
- As you narrow down choices for health insurance plans, ensure they comply with Affordable Care Act (ACA) requirements. Note your chosen plan must be a major medical plan that costs less than 9.78% of your employees’ income. In addition, if you have more than 50 employees, you must cover at least 60% of the expected total cost of services if they have more than 50 employees. A licensed benefits advisor can be a huge help here, as they can talk you through what would be best for your individual situation.
- Ensure health insurance plan premiums fit your budget if you’re making employer contributions. On average, small employers paid 84% of their employees’ single coverage premiums, and 60% of family coverage premiums.
- When choosing retirement benefits, look at a number of factors, like the size of your business, the average salary of your employees, and how much liability you’d like to carry in relation to your plan. The best plan for your business will depend on a number of factors. For example, businesses with just a few employees may find a SEP IRA easier to manage, but larger businesses will likely choose a 401(k) plan. That said, 401(k)s require a fiduciary and involve active management and employer liability.
- Decide if you want to offer matching to make your retirement benefits more competitive. Both 401(k)s and SIMPLE IRAs allow employee contributions (SEP IRAs do not), though 401(k)s have a much higher limit. SIMPLE IRAs require employer matching, but have reduced compliance requirements.
Related: The power of better benefits: 8 reasons they’re worth the extra cost
If this all seems like a lot, there’s help out there. Licensed benefits advisors can walk you through the best options and plans for your team. For example, Gusto has over 9,000 plans from more than 30 carriers, as well as licensed advisors who can help craft the right plan for your team’s needs and budget. In addition, your accountant may be able to advise you on the financial considerations behind offering benefits, and how they can fit into your budget.
And here’s one other consideration in choosing retirement benefits. If you’re in a state that has enacted legislation around retirement programs, you may be facing deadlines to enroll your employees for some type of retirement benefits—either a state-sponsored retirement program, or your own, like a 401(k) plan.
Generally these types of programs mandate employers of a certain size must offer retirement benefits to their employees by a specific deadline – or risk paying penalties. So if you’re on the fence about choosing a retirement plan for your company, keep an eye on your state’s deadlines – you may need to choose soon.
Offering benefits is an investment in your people and your business. We believe when you take care of your people, they’ll take care of your business. Benefits aren’t just another tool in the compensation toolbox. They’re a win-win for both employees and employers, helping you keep your best people while saving you money in the long run.
Riley Bingham is Head of Benefits, Product and Operations, at Gusto.