Strong 401(k)s linked to strong com­pany per­for­mance

Employee Benefit News - - Contents - BY MARGARIDA CORREIA

Em­ploy­ers with “great” re­tire­ment plans are sig­nif­i­cantly more likely to have higher mar­gins and rev­enue per em­ployee than those with av­er­age plans.

Em­ploy­ers now have even more rea­son to beef up the qual­ity of their 401(k) plans.

New re­search from T. Rowe Price finds that com­pa­nies with strong 401(k)s had sig­nif­i­cantly bet­ter fi­nan­cial per­for­mance — re­gard­less of their in­dus­try or the size of their re­tire­ment plans.

Com­pa­nies with ro­bust 401(k) plans — as mea­sured by BrightS­cope rat­ings, which looks at mea­sures in­clud­ing the size of the em­ployer’s match­ing con­tri­bu­tions, the rate at which em­ploy­ees par­tic­i­pate in the re­tire­ment plan and the per­cent­age of salary they save — were shown to have higher mar­gins and rev­enue per em­ployee than those with weaker plans.

Em­ploy­ers with 401(k) plans rated great, for ex­am­ple, were more likely to have net in­come per em­ployee that was 40% to 80% higher than com­pa­nies with plans rated av­er­age. They were also more likely to pro­duce rev­enue per em­ployee that was 20% to 60% higher, ac­cord­ing to the study.

“It sup­ports the no­tion that an in­vest­ment in hu­man cap­i­tal bears a re­turn on in­vest­ment,” says Joshua Di­etch, head of T. Rowe Price’s re­tire­ment and fi­nan­cial ed­u­ca­tion team.

Com­pa­nies with weak plans, in con­trast, had sig­nif­i­cantly lower prof­itabil­ity and pro­duc­tiv­ity lev­els. Plans rated poor were strongly as­so­ci­ated with com­pa­nies that had prof­itabil­ity mea­sures up to 80% lower than com­pa­nies with 401(k)s rated av­er­age. And those with be­low av­er­age or poor plans had up to 80% lower rev­enue per em­ployee.

“If you in­vest in your em­ploy­ees, you stand to ben­e­fit,” Di­etch notes. “If you don’t in­vest in your em­ploy­ees, you stand to lag be­hind those that do.”

While Di­etch stressed that cor­re­la­tions do not prove causal­ity, he be­lieved that they were sig­nif­i­cant enough in this case to be mean­ing­ful and valu­able to em­ploy­ers.

“If you see smoke com­ing from a build­ing, you don’t re­ally know for sure there’s a fire there — but it’s not an un­rea­son­able as­sump­tion,” he says by way of anal­ogy to ex­plain the strong re­la­tion­ship be­tween 401(k)s and com­pany per­for­mance.

Di­etch ar­gues that the higher costs of a strong 401(k) plan are out­weighed by the po­ten­tial prof­itabil­ity gains. “It’s not purely an ex­pense line. It en­cour­ages be­hav­iors that are ul­ti­mately ben­e­fi­cial to the com­pany that has made the in­vest­ment,” he says.

The find­ings also may help to bring to­gether HR and ben­e­fits “ex­tolling the virtues of of­fer­ing a good re­tire­ment plan” and the CFO look­ing at it as an ex­pense. “They see that they both have a com­mon vested in­ter­est in the out­come,” Di­etch says.

The study eval­u­ated 485 plans with more than $50 mil­lion in as­sets at 332 U.S. pub­licly traded com­pa­nies.

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