The 401(k): Small-Biz Superpower for Employee Retention
If you’re a small or midsize business (SMB), 401(k) plans can be a game-changer for employee retention.
Over 70% of employees are more likely to remain with an organization that offers a retirement plan, according to a survey from the financial services firm Voya.
Higher retention rates translate to financial gains. Research indicates 401(k) plans save SMBs $100,000 annually by reducing employee turnover. That’s twice the return on the startup costs of creating a 401(k). These figures come from a study by the benefits platform Gusto.
Keeping valued employees saves the time, effort and expense of finding and hiring talent. According to the management consulting company Gallup, replacing an employee costs businesses an estimated one-half to two times a person’s annual salary.
The Gusto study found 401(k)s to be powerful retention tools across industries. They can be even more effective in fields that typically don’t offer retirement plans, such as retail and food and beverage. The research found employees of SMBs were 40% less likely to leave an organization within the first year of being offered retirement benefits. That number increased to 54% for employees in sectors that traditionally don’t offer 401(k)s.
Matching contributions and vesting schedules
You can further increase the retention value of your 401(k) through plan design features such as matching contributions and vesting schedules.
Employer matching contributions increase plan participation and value. They also show employees you’re investing in their future and want them for the long haul. A typical example for SMBs is fully matching the first 1% of employee contributions and matching an additional 6% of contributions at 50%. In this scenario, employees saving 7% or more of each paycheck would earn a 4% employer match (1% plus 3%).
The financial literacy site TheStreet notes that vesting schedules also encourage employees to remain with organizations. Vesting schedules determine when employees fully own the employer contributions to their retirement accounts. Employees who leave before being fully vested lose the free money that comes with employer matches.
Some companies choose to vest employees immediately. These employees own all employer contributions, regardless of when they leave the organization. Others have graded and cliff vesting, which offer financial incentives for employees to stay.
- Graded vesting entitles employees to matching contributions gradually. For example, many companies vest 20% per year of plan participation. An employee would own 40% of the employer contributions to their 401(k) after two years, 60% after three and 80% after four. After five years of service, they would be fully vested.
- Cliff vesting similarly encourages retention, except it’s an all-or-nothing proposition. For example, with a three-year basis for cliff vesting, employees would become 100% vested after working for three years. However, they would forfeit all employer contributions should they leave before three years of service.
Get the most out of your 401(k) plan
If you’re an SMB, a 401(k) retirement plan is a valuable retention tool. Matching contributions and vesting schedules can provide further financial incentives.
To set up or redesign your 401(k) plan, contact your insurance broker or benefits adviser. They can help you explore industry benchmarks, matching contributions, vesting schedules and other factors to enhance employee retention.