A Pooled Employer Plan (PEP) may be worth considering for small and medium-sized businesses looking to build a competitive 401(k) plan.

Offering a 401(k) benefit can boost small and medium-sized businesses’ (SMBs) recruiting and retention efforts while saving them as much as $100,000 a year in reduced employee turnover costs, according to a study from Gusto, a benefits platform for SMBs. That’s a 2x return on the initial costs of offering a 401(k). 

As talent shortages persist across all industries, including tech, small and medium-sized employers must differentiate themselves. Offering a competitive benefits package is one way to stand out. Prospective employees value having a 401(k) plan that provides them an opportunity to save and invest for the future. They may be more likely to sign on to work for an organization that offers a 401(k) benefit, and they’re more likely to stay, according to Gusto. 

Specifically, the study found that employees are 40% less likely to leave their employer within the first year when offered retirement benefits. In some industries, such as retail and food and beverage, where 401(k) plan benefits are less common, that figure is as high as 54%. Another stat in favor of offering a 401(k): Employees with an active 401(k) plan are less likely to leave their current employer in any given month. 

The Reality of Employee Turnover in Tech

The tech industry is plagued by talent shortages and high churn, making increasing retention paramount. According to Forbes, even when tech companies are able to recruit candidates with specialized skills, their retention rate is less than one year. The tech sector has the highest turnover rate of any business sector, at 13.2%, according to a recent turnover report from LinkedIn. That rate of churn costs tech companies billions in recruiting and turnover costs.

Losing an employee can cost a company an estimated 1.5 to 2x the employee’s salary. That figure fluctuates depending on the employee’s level of seniority. On average, turnover costs $1,500 per employee for hourly employees. For technical positions, the cost soars to 100-150% of salary. And on the high end, C-suite turnover can cost 213% of salary. That doesn’t even account for intangible “sunk costs,” such as lost productivity and knowledge.

What’s driving tech employees to leave their jobs at such high rates? Unfair treatment and toxic work environments, particularly among underrepresented populations, are the primary drivers of turnover, according to a report from Kapor. Employees also leave due to a lack of advancement and professional development opportunities, according to a LinkedIn report cited in Forbes. Additionally, the Great Resignation has put negotiating power in the hands of employees, meaning they won’t waste their time entertaining job opportunities that don’t offer a competitive salary and benefits, according to Forbes.

Inclusion’s Impact on Retention

Given the current labor environment and the outsized demand for talent, anything employers can do to make employees feel valued is a benefit. Offering a 401(k) plan may help attract highly skilled workers while creating more “stickiness” in your organization. It can also help bridge the compensation gap—in a recent Willis Towers Watson survey, 50% of employees said they were willing to sacrifice higher pay in exchange for time off and better health and retirement benefits.

Granted, a 401(k) benefit isn’t a panacea—it won’t solve diversity, equity, and inclusion (DEI) gaps in your organization on its own. However, “401(k) DEI initiatives typically encourage greater levels of engagement, access, and participation for minorities, women, younger and lower-income workers—demographic segments that have been historically under-saved and under-served in our 401k system,” according to 401kSpecialist.

What does that look like in practice? For starters, implementing plan design features like auto-enrollment (i.e., the employee does not have to make a voluntary election to participate) and auto-escalation, where contribution rates increase gradually over time, can help promote retirement savings equity and improve outcomes across the board. Additionally, focusing on DEI in participant education and communication efforts can help underrepresented employees feel more included and engaged with the 401(k) plan. 

Why Offering a 401(k) Makes Sense Now

Why consider establishing a 401(k) plan now? Given the ongoing talent shortage, tight labor market, and how slowly legislation moves, employers may be better off getting their own programs off the ground sooner than later. 

Additionally, federal legislation recently passed that builds on sweeping retirement plan reforms passed in 2019 is designed to help bolster retirement preparedness by making available additional retirement savings opportunities for workers. Additionally, companies may eventually be required to automatically enroll employees in individual retirement accounts (IRAs) or 401(k)-type plans. It’s clear that policymakers are focused on shifting the employer-sponsored retirement plan landscape to make it easier and more accessible for Americans to save for the future.

Employers already have access to various 401(k) solutions, such as single-employer plans, which provide retirement benefits to employees of a single company, and pooled employer plans (PEPs), which enable smaller businesses to share the administrative burden of offering a tax-advantaged retirement savings plan to their employees. On its own, a small company may not be equipped to handle the administrative costs, complexity, liability, and sheer amount of paperwork involved in many plans. Given these factors, it may make sense for an employer to outsource these responsibilities by joining a PEP.

Why consider the PEP? 

While most employers recognize the importance of offering key benefits like a retirement plan, many small businesses struggle to set it up on their own. The WTIA 401(k) team takes the guesswork out of implementation. The PEP is a turnkey retirement savings plan solution built by tech, for tech, which makes it easy and seamless to set up. However, employers can opt to customize their individual plan designs and offerings to suit the unique needs of their employee population.  

For instance, the PEP offers built-in plan design flexibility, including the ability to add an automatic enrollment feature. Not only would this meet the auto-enrollment requirement should the proposed retirement legislation become law, but it would also help boost participation and savings rates. Typically, automatic enrollment defaults employees into the plan at a date of the employer’s choosing (i.e., upon hire or after a three-month eligibility waiting period), however, there is an opt-out provision that allows employees to elect not to participate. 

According to recent research from Vanguard, participation rates triple to 91% among new hires when automatic enrollment is offered, compared to 28% with voluntary enrollment. And nine in 10 participants increase their deferral rate over time, either through automatic contribution increases or on their own. Pending legislation notwithstanding, these positive trends demonstrate the benefits of offering a retirement plan with an automatic enrollment provision.

Other benefits of the WTIA Tech PEP include:

• The ability to leverage group purchasing power, which makes offering an employer-sponsored retirement savings plan more affordable for most companies, even growing and benefit-conscious businesses. We can set up a plan for as few as one or two employees, but with the PEP, employers receive the same caliber of service as larger plans.
• The plan design is customizable, meaning you can select options that make sense for your company and employee population.
• Flexible employer contribution options, such as matching, profit sharing, and more
• A diverse lineup of top-performing fund families, including Vanguard’s target date series, Oppenheimer, and American Funds. Also available are socially responsible funds from Calvert and Pax. 
• Administrative support, including discrimination testing, annual Form 5500 filings, and audits
• Dedicated, personalized customer service, including one-on-one plan education for participants
• The PEP benefits from partnerships with the experienced retirement planning professionals at Sound Consulting Services, which provides independent advice to 401(k) plan fiduciaries and participants, and the experts at NWPS, which delivers plan consulting and design, recordkeeping and actuarial, compliance and administration, and communication and participant services.
• A free WTIA membership is included when you join the PEP. You can read more about membership benefits here.

The WTIA PEP delivers holistic fiduciary and administrative support for employers, along with pricing efficiencies and total transparency that other types of retirement plan offerings may not. In addition, it is run by a dedicated governing board for PEP members that includes participating employers as well as WTIA members, which means members’ best interests are a top priority. For all of these reasons, joining the WTIA PEP is an option worth considering. 

Offering a 401(k) plan can positively impact your organization’s ability to attract and retain the brightest talent in today’s ultra-competitive labor market. Reach out to us to discover how WTIA can help you build a retirement plan benefit for you and your employees. Visit https://www.washingtontechnology.org/services/401k/, or contact the 401(k) team at 401k@washingtontechnology.org.