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.