A robust correlation exists between corporate financial performance and overall 401(k) plan quality, regardless of a company’s industry or retirement plan size, according to research released Monday by T. Rowe Price Retirement Plan Services.
The study also found significant correlations between four success metrics of a 401(k) plan and four measures of corporate profitability.
Researchers evaluated 485 401(k) plans, each with more than $50 million in assets and a BrightScope Rating, which served as a proxy for 401(k) plan quality, at 332 U.S. publicly traded companies.
A BrightScope Rating is quantitative analysis of a retirement plan’s quality, based on fees, company generosity (company match or other employer contribution), deferral rate, participation rate and account balance.
“While correlation isn’t the same as causality, our findings provide strong evidence that there’s a connection between better-designed and higher-quality 401(k) plans and a company’s bottom line,” Joshua Dietch, head of T. Rowe Price’s retirement and financial education unit, said in a statement.
Dietch said the research demonstrated that companies with strong 401(k) plans had higher margins and revenue per employee.
“Though there may be higher costs associated with stronger 401(k) plans, such as more generous matching or the immediate ability to participate in the plan, the potential profitability gains may outweigh the potential costs,” he said.
Plan Quality’s Effects
BrightScope ratings and underlying components are expressed as a numerical index score as well as on a five-point scale of “great,” “above average,” “average”, “below average” or “poor.” T. Rowe Price’s analysis is based on a comparison to 401(k) plans rated as average.
The research findings showed that 401(k) plans with an above average rating were strongly associated with companies that had between 20% and 80% higher profitability measures than those with 401(k) plans rated as average.
401(k) plans rated poor were strongly associated with companies that had profitability measures up to 80% lower than companies with 401(k) plans rated average.
Companies with 401(k) plans rated great were more likely to have gross margins that were 20% to 40% higher than companies with plans rated average.
Companies with plans rated great were also likelier to have net income per employee that was 40% to 80% higher than companies with plans rated average.
Revenue per employee was between 20% and 60% higher for companies with 401(k) plans rated great than for companies with plans rated average. Companies with plans rated below average or poor had as much as 80% lower revenue per employee.
T. Rowe Price also engaged a third-party firm to interview 22 chief financial officers, on a blind basis, about their views on the value of 401(k) plans to corporate financial performance.
More than half of CFOs surveyed believed a well-designed 401(k) plan could influence corporate profitability. At the same time, 50% were skeptical that a plan’s effects could be measured, and 45% said a plan’s design had no effect.
However, three-fourths of respondents said they were open to further research about the potential correlation between 401(k) plan quality and corporate financial performance.
The challenge, T. Rowe Price noted, was twofold:
- A need exists for a framework to assess how 401(k) plan performance and corporate profitability are connected
- CFOs need access to data in order to assess the connection
“As both an asset manager and recordkeeper, we were able to tap the rigorous research capabilities of our investments team as well as our insights and expertise on 401(k) plan design to create this study, deriving actionable conclusions that can help guide capital allocation to benefits programs,” Aimee DeCamillo, head of T. Rowe Price Retirement Plan Services, said in the statement.
“Most companies benchmark 401(k) plan metrics and corporate profitability separately. This research suggests that analyzing them jointly could provide greater insight into performance and better inform decision making.”
— Check out Best 401(k) Plans Ranked by Investors: J.D. Power — 2018 on ThinkAdvisor.