Employee retention rate may help determine your company’s stability and ability to grow.
Retention rate measures the percentage of employees who stay with a company over a period of time.
A requested benefit from employees, a 401(k) plan may be a cost-effective way to help improve retention.
What is employee retention rate and why does it matter?
A company’s employee retention rate is the rate at which employees stay with a company over a specified period of time. Retention rates may be an indicator of the satisfaction of your employees. This can affect how likely they are to stay with your company—which in turn, impacts how much time and money your business spends on hiring.
Keeping an eye on your retention rate can help alert you to potential challenges that can contribute to employee turnover, as well as help you plan for any hiring the company is likely to need to do.
A drain on your workforce slows down your business. Hiring to replace an employee is costly, particularly for small to medium-sized businesses. Some data estimates businesses spend an average of $4,000 to hire a new worker. Other estimates suggest it can cost anywhere between 30% and 50% of a worker’s salary to recruit, hire, and train a new employee, or six months before a business breaks even.
How do you know if your company has a strong retention rate? Some industries, like leisure and hospitality, have high turnover rates, so it’s important to benchmark your retention rate within your industry. For example, retail and wholesale businesses had a 37% voluntary turnover rate according to 2019 US Mercer Turnover Survey data, while the overall average of voluntary turnover across industries is 15%.
What’s the difference between retention and turnover?
Retention rate measures the rate at which people stay with a company over a period of time, while turnover measures the rate at which people leave a company, either voluntarily or because of a decision made by the employer (involuntarily). Turnover also tracks employees who joined and left during the period being measured; retention only measures those who were employed at the beginning of the period.
An indication of a company’s stability, retention is often measured over a longer period of time (like a year). Turnover rates can be more useful when measured over shorter periods of time (monthly or quarterly) to take seasonal fluctuations into account. It can be useful to track both retention and turnover rates, as the former may complement the latter and provide a more holistic view of worker movement.
How to calculate employee retention rate
Here’s a step-by-step process for calculating your company’s retention rate:
Determine the time period for the calculation.
Identify the number of employees at the beginning of the specific time period.
Determine the number of employees who left during the specified period.
Subtract the number of employees who left from the number of employees at the beginning of the period.
Divide the number of employees left at the end of the period by the number of employees at the beginning.
If you’re interested in seasonal fluctuations, for example, or you’re interested in what happens after particular events like performance reviews or contract renewals, you’ll want to do monthly or quarterly calculations. This rate counts only those already employed during the period for which the rate is being calculated, not employees hired during that period.
How to calculate turnover
Turnover is calculated by dividing the number of separations by the average number of employees over a particular period of time.
Why does measuring employee retention matter?
The short answer is that low retention (and high turnover) can be costly. In the near term, that’s because replacing workers is costly (to reiterate, an average of $4,000). But in the long run, companies that can’t keep the best employees with the appropriate skills may have a more difficult time serving their customers or growing their businesses. Those are problems that may get more costly over time.
A company’s retention rate is an important metric of employee engagement, which may have a significant effect on business success. In a 2020 analysis of the relationship between employee engagement and performance, Gallup compared engagement among business units and teams. Businesses in the top quartile (i.e., those with lower turnover), were 23% more profitable than those in the bottom quartile, with higher turnover (i.e., those with higher turnover).
Broadly speaking, the Gallup report claimed that businesses that ranked among the top half in employee engagement metrics more than doubled their odds of success, compared with those in the bottom half. During a recession or periods of rough economic waters, Gallup notes that employee engagement can serve as an even stronger predictor of performance.
Strategies to improve employee engagement
Calculating your company’s retention rate may help boost your retention. But understanding your retention (and turnover) rates can also help you plan for seasonal shifts, labor shortages, and other recruiting needs, both financially and strategically. Poor retention numbers may suggest employees are dissatisfied with one or more of the following:
Compensation, including available benefits like a retirement plan
Opportunities for advancement, investment in employees’ careers
Work/life balance or company culture
Management and/or other personnel
Simply giving employees a bonus may not fix a management problem, while improving management may not fix dissatisfaction with uncompetitive compensation. That’s why applying more than one tool for improving retention may be key to success. Hiring the right people can help ensure workers feel they have supportive management and meaningful work. Along the same lines, making employee recognition a regular part of the company culture may increase retention.
Retirement can round out benefits packages
Employees aren’t just thinking about take-home salary these days. A 2021 survey found that employees ranked medical and retirement as two primary benefits they considered when evaluating a compensation package. Benefits can also impact retention. In addition to factors like low pay, a PEW survey found that workers who quit a job in 2021 said that a lack of good benefits (e.g., health insurance and paid time off) was a reason they left. As this suggests, comprehensive benefits packages are becoming more valued among job seekers. In fact, a 2022 Human Interest survey found that retirement plans are the second most-wanted benefit after healthcare.¹
Retirement benefits can also be an effective, cost-effective way to increase compensation and make employees feel valued. Offering an employer match in a company’s 401(k) plan can help small businesses benefit from SECURE 2.0 Act tax credits and tax deductions. In fact, for some small businesses, an employer match could cost one-third of an equivalent raise through applicable tax benefits.
To illustrate, we’ll compare the cost of an employer match against an equal salary increase or bonus for a business with 10 employees earning an average of $50,000 per year and contributing 70% to their 401(k). This company has a 30% employee attrition rate and a 25% marginal tax rate.
|Offering a $2,000 (4%) employer match||Offering a $2,000 salary increase/bonus|
|70% of employees get a $2,000 (4%) match, for a total of $14,000||All employees receive $2,000 each|
|Employer eligible for $7,000 employer contribution tax credit in year 1 BEFORE tax deduction applies²||Employer’s $20,000 is tax deductible|
|Employer eligible for $7,000 tax deduction AFTER tax credit applies||No additional tax credits|
|Net cost estimate³ in year 1 = ($14,000 matched - $7,000 credit) * (1-25% tax deduction) = $5,250||Net cost estimate in year 1 = $20,000 paid * (1-25% tax deduction) = $15,000|
How a 401(k) plan can help retain employees
A 401(k) plan can help increase retention by addressing some common reasons employees leave a job: Dissatisfaction with compensation and a lack of investment in employees. Some data suggests that employees are 32% less likely to quit in any given month if they can access a retirement plan. And among new employees, a 401(k) makes workers 40% less likely to quit during their first year.
Of course, it’s never just about the money. Offering workers a retirement plan demonstrates a commitment to their long-term financial well-being, particularly if it’s a service provider that offers ongoing participant education. It lets employees know employers recognize and value them beyond the job itself.
Interested in learning how to make a 401(k) part of your benefits package? Contact Human Interest.
Article ByTrenton Reed
Trenton Reed is the Manager of Content Strategy at Human Interest. He has nearly a decade of experience writing for Fortune 500 and SMB companies across finance, technology, and other verticals.