Low startup costs and reduced turnover spur more small business to offer 401(k)s

If HR leaders are holding onto any notion that only full-time, salaried workers are interested in contributing to a 401(k) plan, it’s safe to say they can retire that belief.

New research from payroll and benefits platform Gusto finds that the share of small businesses offering a retirement plan has grown steadily over the last seven years, with a notable pickup among those in sectors with high shares of hourly workers.

Some 31% of small businesses now offer a retirement plan to their employees, up from 19% in 2019, according to Gusto. Industries where retirement plans were rare prior to the pandemic, such as hospitality, recreation, and agriculture, saw adoption grow by more than 100% during this time period (hospitality alone saw a 200% increase). Unsurprisingly, more hourly workers now have access to a retirement plan as well, with the share of employees in this category rising to 38%, up from 21% in 2019.

What’s more, “most of that growth has been happening at very smallest employers,” with fewer than five or 10 employees, Nich Tremper, head of Gusto Insights and a senior economist with the company, told HR Brew.

SECURE 2.0 legislation helps drive adoption. One obvious reason more small employers are now offering retirement benefits has to do with policy.

As of June, 18 states had enacted “auto-IRA” programs that require most private employers to either offer a retirement plan of their own, or help their employees enroll in one managed by the state, according to tracking from the American Association of Retired Persons. Adoption of IRAs was higher in states with such mandates, Gusto found.

A provision in the SECURE 2.0 Act also makes it more affordable for small businesses to offer retirement plans, as employers with 1–100 employees are eligible for tax credits to offset the cost of starting a new retirement plan for up to three years.

But such policies, while helpful, don’t tell the whole story, Tremper said. Small business owners are picking up on other economic benefits from offering 401(k)s, such as less turnover. Separate Gusto research shows that businesses offering a 401(k) have 8% less attrition during the first year of hiring someone compared to those that don’t, he noted.

“It’s expensive to have to go back out into the market and find somebody new and train them, and then also all of the lost productivity while you’ve got vacancies,” he explained.

There’s also been a mindset shift among employers that tend to now view retirement as an important part of the total compensation package they offer, akin to healthcare. “This is a small business owner saying, ‘Hey, I care about I value your work, so I give you a paycheck…But I also want to show you and help support your financial well-being through a 401(k),’” Tremper said. “That soft statement is such a big and important thing to employees.”