Think a Company Retirement Plan is Expensive? Try Not Having One.

By Alan Gross

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.

Given the number and types of group plans (MEPs, PEPs, and others) and well as low-cost startup 401Ks for individual companies, there has probably never been a time with greater market pressure driving costs down and making starting and operating a plan more affordable. At the same time, the entire labor market has changed since the start of COVID.

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.

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 there are also small business tax credits available thanks to the SECURE Act that could save $500 to $5000 per year for three years for new plans starting up. 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 people will much time to acquire.

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.”

Benefit plans are not free, but in the context of overall compensation, they are arguably an important 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. 

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