Strong 401(k)s linked to strong company performance
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.
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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.