We recently reported that employer-sponsored 401(k) plans with above-average performance criteria are likely to be offered by companies that have 20-percent to 80-percent higher corporate profitability than companies with average-rated plans. This was all according to new T. Rowe Price research. Today we have new analysis of that report by our Benefits Editor, Jane Meacham.
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Conversely, poorly performing plans are strongly associated with companies that have up to 80-percent lower corporate profitability, the investment and retirement plan management firm said in a report released September 17 titled, “Where 401(k) Design and Corporate Profitability Cross Paths.”
Specifically, companies with higher-performing plans, those ranked “great” by independent retirement plan ratings firm BrightScope, tended to have higher gross margins and be more profitable than their peers with lower-rated plan performance.
Joshua Dietch, head of T. Rowe Price’s retirement and financial education team, which conducted the study with T. Rowe Price’s customer and market insights team and quantitative equities group, said in a press release: “We’ve long believed this was the case but this is the first time we’ve been able to prove the correlation. Our research demonstrates that companies with strong 401(k) plans—using higher BrightScope ratings as the indicator—have higher margins and revenue per employee.
| “Specifically, companies with higher-performing plans, those ranked ‘great’ in BrightScope ratings, tended to have higher gross margins and be more profitable than their peers with lower-rated plan performance.” |
“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,” Dietch said.
All Company Sizes, Sectors
Rowe Price said the “significant” correlations it found in its research occur in companies of all sizes and in all industry sectors.
“Most companies benchmark 401(k) outcomes and corporate profitability separately,” the firm said in an introduction to the report. “Comparing [those elements] together against your peers could provide greater insight into how well you’re doing against the competition—both for internal analysis and external performance measures.”
While correlation isn’t the same thing as causality, “there is a strong correlation between the two, and the relationship is significant,” T. Rowe Price said.
“[S]howing the C-suite why they should invest more in the 401(k) plan has been challenging because it’s difficult to demonstrate the true financial return a retirement program offers the company,” T. Rowe Price said regarding its impetus for conducting the study.
The firm’s data set included plans with more than $50 million up to $36 billion in plan assets. The research looked at 485 plans rated by BrightScope that are sponsored by 332 publicly traded companies. Regression analysis was used to determine if correlations exist between four corporate financial performance measurements and four specific 401(k) outcomes: company generosity of match, participation, deferrals, and account balances.
Rowe Price said the statistical significance of its research supports high confidence (greater than 95 percent) that the reported correlations are different from the baseline between performance measures and “average” plan outcomes.
Net Income Per Employee
The study also cited net income per employee as evidence that sponsors investing in their 401(k) plans could correlate that expenditure to increased overall profitability. To bear this out, companies with “below average” or “poor” 401(k)s as rated by BrightScope are more likely to have lower net income per employee. At the same time, companies with “above average” or “great” plan attributes are more likely to have higher net income per employee, the T. Rowe Price report said.
The firm said it highlighted this correlation to counter the potential argument that better-performing retirement plans correspond to higher gross margins simply because more-profitable companies can afford to fund better 401(k) programs.
In addition, T. Rowe Price said, well-designed and high-performing 401(k) plans can influence employee behavior. “Having a ‘great’ 401(k) plan is potentially an advantage to the company’s bottom line, while having a ‘poor’ plan similarly is potentially a disadvantage,” the firm concluded. The research showed that companies with high-rated 401(k)s have a higher per-employee productivity and per-employee revenue.
| Jane Meacham is the editor of BLR’s retirement plan compliance publications. She has nearly 30 years’ experience as a writer/editor of financial services news. |