Equity Is Not a Retirement Plan: New Data Shows Why Both Matter

For employees at private startups, equity is often the headline benefit, emphasized just as much as salary. Stock options offer a stake in the company, and if the business grows, that stake grows with it. In some outcomes, equity may become a meaningful part of someone's long-term financial picture.

A 401(k) plan can matter just as much, but for a different reason. Where equity is a bet on one company's future, a 401(k) is the steady, diversified base that's there no matter what.

Stock options and a 401(k) plan are both tools that can help employees build wealth and aid employers in recruiting and retaining talent, but one is not a substitute for the other. New data from Vestwell and Carta shows how they work together. Here’s how they’re different, and how they complement each other.

The Difference Between Equity and Retirement Benefits

Equity Benefits

Equity is concentrated in a single company, and it's illiquid, meaning an employee can't decide when to cash it out. Its value depends on a future liquidity event, like a sale, an IPO, or an acquisition, that may or may not happen. According to Carta data, over 70% of vested stock options are never exercised at all. In other words, many employees who earn the right to buy shares at a set price never actually do it, so the wealth those options represent on paper doesn't always turn into something they can use.

Keeping track of equity cap tables, vesting schedules, option exercises, and more is where equity providers like Carta come in, giving both companies and employees a clear view of what's owned and when it can be exercised.

Retirement Benefits

On the other hand, a 401(k) plan is built to help employees set aside part of every paycheck, often with an employer match, so that money grows tax-advantaged over time. Unlike equity, its growth doesn't hinge on a single event like a sale or an IPO.

Both can belong in a well-rounded benefits package, and neither replaces the other. But right now, close to half of the U.S. companies on Carta's platform don't yet offer a 401(k) plan. That gap represents an opportunity to pair equity with a workplace savings plan, giving employees a fuller financial picture and giving growing companies a benefits story that keeps pace with their team.

What the Vestwell x Carta Data Shows

Vestwell and Carta looked at plan adoption, savings balances, and option exercise behavior across the companies on Carta's platform. Five findings stand out.

1. At smaller companies, 401(k) plans are less common.

Just under 40% of companies with fewer than 25 employees offer a 401(k) plan. That rises to 49% at companies with 25 to 100 employees, and 58% at companies with 101 to 500 employees. Even among companies with more than 500 employees, only about 60% offer one. The 100-employee mark is the dividing line: above it, a majority of companies offer a plan; below it, a majority don't.

2. Lower earners at large companies receive little equity and have low 401(k) balances.

Employees at smaller companies tend to receive bigger equity grants, while employees at larger companies tend to have bigger 401(k) balances. But that trade-off breaks down for the employees who need it most, where lower earners at the largest companies have both the smallest equity grants and the smallest 401(k) balances in the data. In other words, the employees least able to absorb a financial shock also have the least of either benefit to fall back on.

3. High-earning employees save 10x more in their first year of 401(k) enrollment.

How much someone saves in year one of having a 401(k) can set the pace for years to come. Carta and Vestwell data show that, on average:

• The median employee earning under $75,000 saves $1,825 in their first year.
• The median employee earning over $200,000 saves $22,770 in their first year.

That gap often comes down to how much is left over after covering the basics, and for many lower earners, some of that difference reflects building an emergency fund before retirement savings can be a priority. It's exactly why plan features like auto-enrollment and auto-escalation, along with easy-to-access emergency savings, matter.

4. After the first year, 401(k) savings grow at a similar rate regardless of salary.

From year one to year four, both low earners and high earners see similar growth in their 401(k) balance, between 4.6 and 4.9 times what they started with. That consistency says that employees remain committed to growing their savings no matter how much they make.

But because the starting amounts were so different, that still leaves a significant dollar gap, about $120,000 by year four, that only continues to widen over time (especially after compound growth).

5. Companies with a 401(k) have higher option exercise rates.

Among companies on Carta:

• 26.1% of employees with a 401(k) plan through their employer exercise some or all of their vested options.
• 22.8% of employees without a 401(k) plan exercise some or all of their vested options.

This data point suggests that employees with a fuller benefits package, one that pairs equity with a 401(k), tend to be more engaged with the equity they're granted.

What This Means for Employers

The instinct to treat equity as the whole compensation story is understandable, especially at early-stage companies where cash is tight, and equity can be an important retention lever. But exercising options costs money upfront, sometimes a lot of it, with no certainty about when or whether it pays off. An employee without a retirement savings plan may be less likely to take that risk.

When an employee is less engaged with their equity, retention may weaken, too. An employee who doesn't have enough of a financial cushion to exercise their options has less reason to stay through their next vesting milestone.

This can cause the company to lose one of the strongest reasons it offers equity benefits in the first place: to keep people invested in the company's long-term success, not just their next paycheck.

A 401(k) plan can give employees the financial footing to actually exercise their options when the time comes, which means the equity a company grants can do the job it was meant to do.

Policy Tailwinds

Some states already require employers to offer a workplace savings program, through state-administered savings programs or otherwise. Others don't, and some early-stage companies feel like they can't fund a plan yet.

However, the policy environment is making that easier to change. The SEC recently clarified that pooled employer plans (PEPs), which let unrelated employers share a single 401(k) plan, may rely on existing securities law exemptions. That removes a meaningful share of the administrative cost that has kept smaller employers from offering a plan at all. Under the SECURE 2.0 Act, many small employers can also claim up to $16,500+ in tax credits over the plan’s first three years, plus a separate credit for employer contributions.

The Bottom Line

Setting up a plan is more achievable than it was even two years ago. And, the combination of equity and a 401(k) plan gives employees a real shot at building savings, and the stability to make the most of the upside they're helping create. Get started and launch a 401(k) plan with Vestwell today.

Read the full Employee Equity and Savings Report featuring Vestwell and Carta data to learn more about how equity and retirement savings work together, and where the gaps still are.