Think a company retirement plan is expensive? Try not having one.

By Alan Gross

This is an update to our 2022 story reflecting continued changes in workplace dynamics as well as the impact of SECURE Act 2.0.

Is it a company’s responsibility to help their employees save for retirement? Is it good business or just another expense? On a basic level, we might answer it is the responsibility of each person to save for their future. And, sure, some do. We also know that for many millions of people, the income they earn at work is the only income stream they have and, that left to their own devices, many will not save on their own. And if they do not set aside a portion of these dollars for retirement, life often gets in the way and consumes the rest.

Today, employers are forced to compete harder than ever in a “war for talent” that began with the pandemic. Arguably, a company without a retirement benefit plan is at a competitive disadvantage when it comes to recruiting and retaining employees. At the same time, SECURE Act 2.0 introduce even more generous tax credits for new retirement plans than had been available under SECURE Act 1.0. Together, these two forces make for a compelling argument to start a 401k or other company retirement plan right now.

COVID disrupted the labor market and initially put millions out of work. And even though today the labor market boasts sub 4% unemployment nationally, COVID continues to contribute as an employment disrupter of the idea of the “office” as millions of companies and tens of millions of employees have reevaluated their work environment, physical space, and much more. The “Great Resignation” that began to make headlines in 2021 found that many people were motivated to leave an employer even without another job, adding to hiring pressures. Since then, many employers have had to adjust to employee expectations around job flexibility and benefits.

Nearly half of employees who walked out the door said the lack of a retirement plan mattered to them. And what would have been the cost of providing such a benefit? Annual plan fees plus per participant fees range in the open market, but thanks to the SECURE Act 2.0, starting in 2023, companies can save up to 100% of plan fees for the first three years for new plans (up to $5,000 per year). And, on top of that, the Act provides generous tax credits for matching contributions for the first five years. And remember, these are not deductions, these are dollar for dollar credits against a company’s tax liability.

Perhaps the more important question to ask as the title of this piece suggests, what is the cost of not offering a plan? Employees quitting diminish business productivity, service and product quality, and can absolutely impact brand experience by customers. It can even destabilize a business. Ask any restaurant owner who has been struggling to maintain days and hours open with limited staff in front and back of house about this. Then there are the very real costs of recruiting, hiring, and training new talent. And this doesn’t account for what may be the most expensive component of attrition, the loss of accumulated business and customer knowledge new employees will struggle to overcome.

If the totality of this sounds expensive, here’s a reality check on the estimate. Research by SHRM suggests that the cost of replacing an employee can be as high as 50%-60% of compensation with overall costs ranging anywhere from 90%-200%.⁴

Compare the staggeringly high cost of turnover with this stat from SCORE:

“Despite business owners’ concerns about expense, retirement savings only cost employers 2.4% of an employee’s compensation, on average.”

And to bring the argument home, SCORE also shares:

“94% of small business owners who offer 401(k) plans report that these plans drive recruitment and retention.”

In the context of overall compensation, retirement plans are arguably an essential competitive benefit. And if the lack of a company-sponsored retirement plan contributes to attrition that causes a business real pain and even threatens operational stability, a 401k is a bargain by any measure. And for now, the SECURE Act’s tax credits make starting a plan more attractive than ever.