The Role of the 401(k) in Today’s Tight Labor Market

In his role as managing director and head of retirement plan services at Schwab Retirement Plan Services, Brian Bender spends a lot of time thinking about the interplay of retirement benefits, compensation structures and employee retention.

According to Bender, ongoing cultural shifts have influenced both employees’ expectations concerning workplace benefits and the evolving role of the 401(k) plan in talent management.

“We always have to talk about participants’ needs, but I also want to talk about the people that I feel sometimes get overlooked by the retirement plan industry,” Bender said. “I’m talking, of course, about you—the plan sponsors, consultants, committee members. These folks are the backbone of plan design and implementation.”

Bender emphasized that retirement plans are, on the one hand, about meeting participants’ investment needs, but they are also an important business tool. This is especially true during times of higher turnover and greater competition for talent, which U.S. employers are facing today. According to Bender, designing a retirement plan that meets the needs of the business—and today’s employees—requires a fresh outlook.

“It requires considering the perspectives of both sponsors and participants,” Bender said.

Higher Turnover Isn’t Surprising  

Bender said the sharp increase in job and career changes seen in the last year shook up an already shaky economy, and the current market seems to have ushered in a new era of employee negotiations and expectations.

“Read any article or watch any news report on the subject, and you’d think this happened all of a sudden,” he observed. “But if you look closer, you’ll see that it didn’t happen overnight—and in hindsight, it isn’t too surprising either.”

Bender pointed to data from a 2022 Forrester report, in which analysts theorize that the Great Resignation is actually a continuation of several events that have been occurring over the past decade.

“The report shows average quit rates from the U.S. Bureau of Labor Statistics show a steady increase from 2011 to 2019,” Bender observed. “There is a sudden drop in 2020 and a sharp spike in 2021—which is what the Great Resignation refers to. But it’s clear that this was a long time coming.”

The data show that specific sectors, such as the tech industry, were suffering talent shortages prior to the pandemic. The reasons varied, but historically, these shortages seemed to stem from a perception of too much work, minimal career progression and a lack of worker compensation.

“Sound familiar?” Bender asked. “Naturally, people are also retiring. Since 2011, approximately two million workers from the Baby Boomer generation have retired each year—another slow but steady drain on the labor pool.”

Bender suggested that, in an important sense, resignations themselves aren’t the most important aspect of the Great Resignation. He cited, instead, a cultural shift: workers increasingly value self-fulfillment and work-life balance.

“Grappling with the constantly changing outlook of the pandemic, generations young and old are prioritizing personal well-being, peace of mind and financial security, making conscious efforts to take charge of these aspects of their lives,” Bender said.

The Implications for Employers  

Bender said these changes and shifts in priorities aren’t limited to one industry or specific to a generation.

“They represent the philosophical transformation of a collective workforce whose experiences over the past few years have reshaped their personal values and financial goals,” he said. “The result of this reshaping? A rise in demand for specific and comprehensive job benefits—and the willingness to hold out for something that meets their expectations.”

Bender pointed to research from the Society for Human Resource Management which estimates that, on average, it can cost a company 33% of an employee’s annual earnings to replace that person.

“Stack multiple resignations on top of one another, and costs compound quickly,” Bender said. “Naturally, nobody here wants to pay that bill, and fortunately, everybody has the power to reduce the risk of this happening by keeping their employees satisfied.”

Bender said a “major pillar” of an employee’s workplace satisfaction and potential career outlook stems from their relationship with their employer. This includes how their workplace benefits evolve over time.

“Your plan is not just for attracting talent but for keeping the talent you already have,” Bender added. “In 2022, 85% of participants considered a 401(k) a must-have when looking for a new job. In 2021, it was 86%. In 2020, 85%, and in 2019, it was 87%. The consistency of this data is telling on two fronts. First, 401(k) is something people require, and it isn’t going anywhere. Second, when something becomes a constant, its perceived relevance begins to fade.”

Today, a 401(k) is table stakes, Bender said.

“It isn’t the closer—the benefit that seals the deal,” he said. “Job seekers are more interested in compensation and benefits that appear to deliver more value or have a more direct and immediate impact on their daily lives. Factors like base salary, profit sharing, bonuses and equity compensation all have an impact on whether someone accepts a job.”

According to Bender, the question on job seekers’ minds has gone from “Do you offer a 401(k)?” to “What do you offer beyond a 401(k)?”

“If you want to ensure your retirement benefits are competitive, you need to be prepared to answer that question,” he warned. “And that means taking a hard look at your plan. Do the services and features included in it address the challenges participants are up against? What additional support and resources can your consultant and plan provider bring to the table?”

The Benefits Frontier

“While a 401(k) and health insurance remain top must-haves year over year, we have seen a subtle yet significant rise in demand for other benefits,” Bender pointed out.

In 2022, Schwab survey data show 41% of workers want a health savings account, 23% want a financial wellness program, 20% want company discounts or discounted rates for financial services and 20% want access to financial advisers.

“Those last few may not top the list, but they have seen sizeable growth in recent years and represent an opportunity to appeal to employees in different ways,” Bender said. “It is also important that we don’t just think about what people are asking for but what they’ll need, and those two can be very different at times. Life can be unpredictable, and we have to prepare participants for real obstacles they may face, like having to care for an elderly parent or being unable to work any longer.”

Bender said competitive retirement benefits offer a broad array of solutions to help employees address their financial challenges. These solutions can be in-plan, like advice and investment options, or beyond-the-plan, like emergency savings accounts.

“Why so broad?” he asked. “Because employees are complex. Their lives are not as simple as a 401(k), and they are looking for our help.”