Why small businesses are adding 401(k)s to hold onto workers

Small-business owners are increasingly turning to 401(k) plans as a retention tool, even when they cannot yet afford health insurance.

Sara Marye promoted a part-time employee to full-time at her school-curriculum business, The Stellar Teacher Company, in 2024. She wanted to keep her. Marye, an educator who started the company in 2015, thought about what she could afford on top of existing flexible perks. Offering a 401(k) was the answer – a benefit that also helped Marye herself and her four part-time workers, many of whom are former teachers staying home as parents.

"The fact that they are able to have a part-time job with a 401(k), I think, gives them a lot more comfort that they aren't having to sacrifice their future financial security for the time they want to spend raising their family now," Marye said. She has offered the plan since 2025.

A Gusto analysis of its internal small-business data showed that offering a 401(k) translates to roughly 8% fewer quits in the first year of employment compared with businesses that do not offer one.

Nich Tremper, a senior economist at Gusto, said employers face the greatest risk of an employee quitting in their first year. A retirement plan can reduce that risk, even if workers cannot enroll right away. "We see 401(k)s having the highest ROI on retention," Tremper said, "because it's a benefit that tells your employees that you are invested in their long-term financial future."

Howard Telson has run the remote accounting firm Scale CPA since 2022. He started offering a 401(k) about a year and a half ago. He uses it to recruit and keep staff, many of whom come from larger companies where the perk is standard. "We're often competing against bigger companies or bigger firms that do offer these types of benefits," he said. "It's been important to be competitive."

Payroll platforms like Gusto and ADP offer 401(k) plan management at relatively low costs for small businesses, charging a modest base fee and single-digit monthly fees per participant. Bureau of Labor Statistics data showed the average employer contribution for family medical care coverage at businesses with fewer than 50 workers has surpassed $1,000 per employee since 2021. Retirement plans tend to be cheaper.

Ashley Kent, founder and CEO of Clearstart, a marketing brand and growth consultancy for healthcare organizations, offers a 401(k) but not healthcare. "It allowed me to offer this to employees and was something that was very attractive to new employees coming in here," Kent said. Her 10 full-time workers are eligible after a year, and she thinks it helps with retention. "Agencies are known for very high turnover," she said.

Data from Indeed covering all employer sizes showed job postings mentioning 401(k)s have risen since 2020. Laura Ullrich, director of economic research in North America at the Indeed Hiring Lab, thinks employers are doing so to improve recruiting. Some reasons include more thorough job descriptions, job seekers wanting the full compensation picture, and the post-COVID mismatch between available jobs and skills.

Employers are also advertising better matches. In a report, Indeed Hiring Lab economist An Nguyen wrote that "the three-month-moving-average share of postings advertising a 401(k) match of 5% or higher has risen more than fivefold" relative to January 2020, outpacing growth in any other retirement-benefit category.