Research shows that retirement benefits offer a powerful way to help businesses avoid employee turnover costs. In this article, we provide a way of analyzing the costs associated with each. This article was adapted from a post published by Common Wealth, a Canadian based, technology driven retirement savings provider.
In comparing the likely cost of a retirement plan with the potential savings and reduced turnover cost from having a plan, there are three main parts to the analysis:
Determine the cost of turnover
Determine the cost of a new retirement plan
Estimate the impact of the retirement plan on turnover
The Cost of Voluntary Turnover
You intuitively understand the pain of valuable employees walking out the door, but to measure the real impact of employee turnover, you can use a formula to calculate the annual cost:
Cost per departing employee x number of departing employees / year
The cost per departing employee should include:
Offboarding costs: knowledge transfer, exit interviews, unpaid vacation, and lost productivity by the departing employee.
Recruitment costs: time to define the new position, job posting and advertising fees, external recruiters, resume screening, interviews, reference checks, hiring bonuses, relocation costs, cost of other candidate evaluations
Onboarding and training costs: training, management and coaching time by the team to bring the new employee up to speed
Lost productivity: time it takes for the new employee to become a fully productive member of the team, which can vary widely by role and industry.
Other costs resulting from a resourcing gap: slower customer service, delayed product development, increased operational mistakes, and low employee morale during the time it takes to recruit and ramp up a new hire.
According to Gallup, these costs can add up to between 50% and 200% of an employee's annual salary. A 2021 survey of Canadian hiring decisionmakers conducted by The Harris Poll found the total to be about $22,000 per year on average or about 36% of the average wage.
The Harris Poll survey also found that per-employee costs increased with company size, with 35% of companies with 100+ employees saying that turnover cost them over $50,000 per employee. The more specialized the workforce, the higher the recruiting and onboarding timelines and costs.
The calculation to determine the cost of turnover at your organization is therefore calculated as:
Average salary x 36% - 200% depending on the specialization of your organization x number of employees leaving within a calendar year
The Cost of a New Retirement Plan
Calculating the cost of a retirement plan considers these three elements:
Employer match costs: Calculate your match using an average participation rate of 70%. In a deferred profit sharing plan (DPSP), match costs are likely to be lower because employer contributions are returned to the employer if an employee departs within a maximum two-year vesting period.
Set up and administrative costs: Determine the internal costs associated with administering a retirement plan. This can be reduced by using a provider with enhanced technology.
Tax / source deduction savings (if using a Deferred Profit Sharing Plan): Employer contributions into a DPSP are not subject to CPP or EI premiums or provincial payroll taxes.
The Impact of a Retirement Plan on Voluntary Turnover
Research indicates that having a workplace retirement plan has a significant positive impact on retention. The US HR tech firm Gusto found in 2022 that a retirement plan reduced the risk of quitting by 40% during an employee's first year.
The Center for Retirement Research found that offering a retirement plan increased employee tenure by between 2.7 and 5.8 years, depending on the type of plan being offered.
Common Wealth conducted a study with the Healthcare of Ontario Pension Plan, where Canadian employers ranked retirement benefits as the second most powerful tool for retention.
You might use a range of 20%-40% reduction in turnover if dealing with a higher-income group, and 50-60% if dealing with a lower-earning group.
In Conclusion
In this example, the return on investment is over 100% when a group savings plan is introduced.
We'd love to discuss how a group savings plan can align with your organization's goals. Book a meeting today.