Equity comp not enough to secure workers' retirement, Carta data show

Despite the widespread use of equity compensation as a long-term incentive among startup employees, new research from Carta and Vestwell suggests that the pitch won't work in the real world unless paired with a tried-and-true retirement savings solution: a 401(k) plan.

According to the analysis, roughly half of U.S. companies on Carta's platform still do not offer a 401(k) option to employees, even as equity grants remain a standard part of compensation packages at private firms.

The data draws a sharp line between the two benefits, arguing that even the most generous grants of stock options and restricted stock units can't fully make up for a diversified, liquid retirement account.

As Carta's researchers explained, equity is concentrated in a single company whose value for retirement security hinges on a future liquidity event, such as an acquisition or public offering, that may never materialize. A 401(k), by contrast, is diversified and can be accessed in retirement regardless of what happens to any one employer.

Read more: Stock plans reshape retirement outlook as Fidelity finds surge in first-time investors

Carta found that more than 70% of vested stock option grants are never exercised, and even those that are exercised often fail to generate meaningful wealth for the employees who hold them. In other words, the life-changing windfalls experienced by employees at SpaceX and the like are the exception, not the rule among startups.

Smaller companies are the least likely to offer a workplace retirement plan at all: From Carta's vantage point, just 39% of firms with fewer than 25 employees provide a 401(k), which climbs to 49% among companies with 25 to 100 workers.

The gap narrows, but doesn't totally close, as companies scale – about 60% of firms with more than 500 employees offer a 401(k), versus roughly 40% of the very smallest companies on Carta's platform.

In what could be the most telling finding for advisors, Carta found employees with access to a 401(k) plan are more likely to exercise their vested stock options than those without one. Carta reported an exercise rate of approximately 26.1% among employees with a workplace 401(k), compared with approximately 22.8% for those without. For a 500-person firm, that difference could translate into roughly 15 more employees electing to exercise their options.

Carta's researchers suggest a sense of financial stability could be at work, as workers who feel secure in their long-term savings appear more willing to take on the risk of exercising options, which in turn aligns their financial interests more closely with company performance.

Read more: Equity compensation emerges as key retirement tool for American workers, Schwab says

The findings arrive as regulators look to encourage workplace plan adoption among smaller employers. The report noted a recent clarification from the Securities and Exchange Commission that pooled employer plans, which allow multiple unrelated employers to share a single 401(k) structure, may rely on existing securities law exemptions. That shift eases the burden for smaller companies, which have historically held off on plan sponsorship because of perceived administrative costs.

Beyond that, provisions under the SECURE 2.0 Act now require most new 401(k) and 403(b) plans to automatically enroll eligible employees at a starting contribution rate between 3% and 10%. Those measures, along with auto-escalation mechanisms to support mandatory annual increases, can help keep lower-income workers from opting out of such programs totallly.