Small businesses can save $100,000 per employee by offering 401(k) benefits

If you're a small business owner, it may feel next to impossible to offer your employees retirement benefits. But doing so may secure their financial future — and that of your company, too.

While just 22% of small and medium-size businesses offer retirement benefits, compared to 65% for larger organizations, the financial incentives for doing so can pay for themselves. Research from people management platform Gusto found that workers are 40% less likely to leave in their first year when they're offered retirement benefits, saving employers tens of thousands in turnover costs. 

"Business owners can't afford not to offer these benefits," says Luke Pardue, an economist at Gusto. "By offering a 401(k), you can see returns of over $100,000 in reduced employee turnover costs. If we can increase take up, we can see a lot of return in both employee satisfaction and financial security." 

Read more: Small businesses are turning to employee benefits to retain talent

Small companies account for nearly 60% of the businesses in the U.S., employing over 12 million people, according to the U.S. Small Business Administration Office of Advocacy. And with retirement savings challenging enough, it's imperative employers and employees understand the importance of planning for their financial futures. 

"Retirement savings is one of these things that people don't value until they realize that they need it," says Steve Abbott, head of public policy at Gusto. "That's indicative of the fact that employers don't necessarily think that they need to offer it to be competitive." 

Abbott says employers don't always know that their employees value these financial benefits, and are more focused on offering must-have benefits, like healthcare coverage. While important, the pandemic highlighted the need to have a financial safety net — and employers and even state and federal governments are becoming more invested in making sure that happens. 

Already, 14 states require employers to either enroll employees in a state-sponsored retirement plan, which is typically a Roth IRA, or offer a plan through the private market. Additionally, the SECURE Act 2.0, which has yet to be signed into law, would offer a "Starter 401(k)" program, which would limit contributions to $6,000 with no option for an employer match. 

Read more: 5 ways 'SECURE 2.0' legislation could change retirement savings 

These plans are beneficial for getting employees to save something for their retirement, and the incentives for employers are substantial, too: currently, companies with fewer than 50 employees receive a tax credit to cover up to 50% in retirement plan administrative costs. If the SECURE Act 2.0 passes, 100% of the administrative fees would be covered, and employers with up to 100 employees would qualify. 

"As an employer, you're missing out on all of the tax advantages for yourself," Abbott says. "Why wait for a requirement deadline when you can get ahead of it and it's beneficial for you in a lot of ways to do so." 

Pardue says offering a 401(k) or another retirement benefit now can be an important  differentiator, as employees continue to change jobs amid the Great Resignation.  

"The margin of offering now versus later is the difference between having 401(k) plans be a differentiator to potential and current employees, versus an expectation," Pardue says. "Down the line, when more and more states are requiring 401(k) plans, that's not going to be a differentiator for you. A year down the line, you're not going to be able to make that claim." 

Whether a 401(k) plan is a recruiting or retention strategy, or just the right thing to do, the reality is that employees are prioritizing their financial security more than ever before. Employers will need to have the resources at the ready. 

"Everybody's personal and financial lives were upended [during COVID], and coming out of that, a lot of employees are placing more value on their financial security," Abbott says. "We're seeing more of a focus around financial health and wellness, and employers need to put a holistic picture around it."