The U.S. economy remains in the midst of a labor crunch where employers must fight hard to retain and attract talent. As of September 2022, there were 2 job openings for every unemployed person, and the rate at which workers are quitting their jobs for more attractive positions has hovered near record levels for the past year. As rising costs squeeze business owners from every angle, employers need to think creatively about compensation to keep their best people, without ballooning their bottom line.

Data from Gusto, the all-in-one people platform serving over 200,000 small- and medium-sized businesses, shows one move offers the best bang-for-the-buck: offering retirement benefits. Employer-sponsored 401(k) offerings dramatically increase employee retention – so much so that the costs pay for themselves several times over in lower staff turnover. 

In addition, the impact to Americans’ financial security can’t be overstated. 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.

Most small businesses don’t offer retirement benefits – but they’ll soon need to. Fourteen U.S. states have enacted legislation pushing private businesses to offer some form of retirement benefit, typically traditional or Roth IRAs. Regulations vary state-by-state, but the penalty for failing to have retirement benefits in place can run as much as hundreds of dollars per employee.  

Businesses quickly moving to offer retirement benefits have the advantage – they’ll keep top talent, while staying compliant with state regulations. Ultimately this protects their bottom line in an uncertain economy.

Key Findings

  • Smaller businesses are currently less likely to offer retirement plans: Overall 22% of firms on Gusto’s platform offer some form of retirement benefits. But there are significant differences by size: for businesses with fewer than 10 workers, retirement plans are available to 15 percent of employees. At the same time, 65 percent of employers with 100+ employees were offered access to such a plan. 
  • Across all industries, retirement benefits lead to greater retention: On Gusto’s platform, workers 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%. This effect is highest for firms in Personal Services sectors such as Retail and Food & Beverage, which are the least likely to offer retirement plans.
  • Retirement benefits offer strong returns: Finding new workers is costly and time-consuming, and one of the best ways a company can avoid those costs is by offering a 401(k) retirement plan for its employees. 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). 

On average, employees with an active 401(k) plan are 32% less likely to leave their current employer in any given month.

There are a number of reasons employers may be unable to offer retirement benefits – perceived costs, complexity in finding the right providers, or because they’re simply not aware employees want them. 

Whatever the reason, the data is clear that businesses of all sizes and in all industries are leaving significant value on the table when they do not offer these plans. Workers value these benefits so much that they are significantly less likely to leave when their employer offers them. 

First, we compared the likelihood of quitting within the first year among all employees with an active 401(k) retirement plan against those who did not. We found that employees with an active plan were, on average, 32% less likely to leave in any given month during their first year on the job, compared to employees without the benefit.

Figure 1: On average, an employee with a 401(k) has a 40% lower chance of quitting by the end of their first year

Figure 1 plots the probabilities that a typical employee with and without a 401(k) will remain at her job over the course of the first year. By the end of the first twelve months, there is a 44% chance that an employee without a 401(k) plan remains at that job. That rate improves to 62% when that employee has a 401(k) plan – a 40% reduction in the likelihood of quitting their job.

Offering a 401(k) retirement plan leads to an estimated annual cost savings of more than $100,000 for small and medium sized businesses

Across workers of all ages and in all industries, having a 401(k) benefit is associated with a higher rate of retention and a lower risk of quitting. These results translate directly into cost savings for employers because finding new workers is costly and time-consuming. Given the relatively small expense incurred by offering 401(k) benefits, employers can realize cost savings of over $100,000 per year in reduced turnover alone.     

Estimates of the cost to replace an employee range from half an employee’s annual salary, or as much as double. Replacement costs include the explicit cost of recruitment as well as lost productivity and the cost of training new employees. 

To illustrate the cost savings of offering a 401(k) plan, consider two scenarios. First, a company has 20 employees making $95,000 per year on average. Using the overall reduction in the chances of quitting that we found above, offering a 401(k) at a company of 20 employees would translate to 3.6 fewer employees lost in a year (see Appendix for details on this calculation).

As estimated above, it can cost anywhere from 0.5 to 2x of an employee’s annual salary to replace them. Assuming the cost is in the middle, replacing an employee could cost 1x of their annual salary of $95,000.

If 3.6 employees leave, ultimately it could cost this company $342,000 within one year to recruit, train, and get back up to previous levels of productivity. 

The cost to offer a Guideline Core 401(k) over the course of one year comes to $107,008, including fees and a 5.5% salary match from the employer. Taking into account replacement costs, the employer in this scenario would realize cost savings of $234,992. That amounts to a 168% return on investment.

Businesses will need to offer retirement benefits to stay compliant. Getting started earlier can pay dividends

Over the coming months and years, more states will be rolling out retirement savings programs and requiring businesses of all sizes to either offer private plans, or to enroll their employees in state plans. In 2022 alone, California, Illinois, and Oregon implemented hard deadlines requiring businesses of certain sizes to comply – or risk paying penalties of hundreds of dollars per employee. You can track deadlines for your state through our 401(k) partner Guideline’s state mandate tracker.

Depending on average employee income and company size, many businesses may opt for a private 401(k) instead of a state-sponsored plan. All state-sponsored plans are IRAs, which are  less flexible than 401(k) plans.

With a 401(k) plan, businesses can:

  • Contribute to their employees’ accounts, or match their employees’ retirement savings
  • Provide employees with a larger range of investment options
  • Provide employees with higher contribution limits
  • Receive tax credits

With more states requiring businesses to offer some type of retirement benefit, and more employees seeking retirement plans, businesses that move quickly will have the advantage. By taking steps now to get the best possible plans in place, employers can keep their top people over the next few years. They’ll save as much as hundreds of thousands of dollars, while also winning in a fiercely competitive labor market. 

For more information on the benefits of offering a 401(k) plan to your employees, see our blog post or speak with a benefits expert at Gusto.

For more of our data findings and analysis, download the full report here.

Gusto is not a client of Guideline. Guideline pays a fee for each 401(k) and SEP IRA client referred by Gusto as outlined in Guideline’s written solicitation arrangement with Gusto. Guideline will provide additional disclosures prior to opening an account with them.

Luke Pardue is an Economist at Gusto, researching how public policies help small businesses and their workers thrive. He received his Ph.D. from the University of Maryland, where he studied the effects of government programs on disadvantaged populations' housing and labor market outcomes. Luke currently lives in Washington, D.C.
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