Data and Research September 17, 2018

Correlation Found Between Profitability and Quality of 401(k) Plans

Above-average-rated plans are more apt to be found at companies with 20% to 80% higher profitability than are average-rated plans, says T. Rowe Price.

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T. Rowe Price Retirement Plan Services Inc. learned in new research, which it is reporting in “Where 401(k) Design and Corporate Profitability Cross Paths,” that companies with strong performance have quality 401(k) plans. The study evaluated 485 401(k)s with more than $50 million in assets and a BrightScope rating, which served as a proxy for 401(k) plan quality.

T. Rowe Price discovered that 401(k)s with an “above average” rating are strongly associated with companies that have between 20% and 80% higher profitability measures than companies with 401(k) plans rated as “average.”

Further, 401(k) plans rated as “poor” are strongly associated with companies that have profitability measures up to 80% lower than companies having average-rated plans.

Companies whose plans are rated “great” are more likely to have gross margins between 20% and 40% higher than companies with average-rated 401(k) plans. Companies with a “great” 401(k) are also more apt to have net income per employee between 40% and 80% higher than are companies with average-rated plans.

Revenue per employee is between 20% and 60% higher for companies with 401(k) plans rated great than companies with 401(k) plans rated average, and companies with plans rated “below average” or poor have up to 80% lower revenue per employee.

“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,” says Joshua Dietch, head of T. Rowe Price’s retirement and financial education team, which conducted the study with the company’s customer and market insights team and quantitative equities group. “We’ve long believed this was the case, but this is the first time we’ve been able to prove the correlation.”

Aimee DeCamillo, head of T. Rowe Price Retirement Plan Services Inc., adds: “Our research shows that there may be corollary benefits when companies invest in their 401(k)s—and disadvantages when they don’t.”

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Data and Research September 17, 2018

Institutional Investors Entering New Asset Classes, Paying Less in External Fees

Cost reductions are evident across asset classes—not just in equity.

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The investment consulting firm bfinance released its 2018 Global Asset Owner Survey, compiling the responses of approximately 500 investors with combined assets of $8 trillion.

Commenting on the survey, David Vafai, bfinance CEO, says the research reveals a fundamental tension faced by investors.

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“There is a gulf between the returns that many investors require and the widespread expectations for what a traditional portfolio may be expected to deliver through the coming decades,” he warns. “With investors making substantial changes to improve long-term risk-adjusted returns, the job of the investor CIO is getting harder and successful delivery is becoming increasingly reliant on the quality of implementation decisions.”

The majority of respondents are from pension funds (66%). Fifty-three percent of respondents are from North America. Result highlights of the report include the following:

  • Sixty-six percent of investors have entered a new asset class or strategy in the last three years. Private debt, infrastructure, real estate, emerging market equity and alternative risk premia (rules-based, multi-asset, long/short investment strategies which have historically been employed by hedge funds), are the most popular new additions.
  • Despite rising complexity and illiquidity, only 27% of investors are spending more overall than they did three years ago—41% spend less. At the same time, 51% are paying less in external manager fees, versus 17% who have seen fee spend increase.
  • Cost reductions are evident across asset classes—not just in equity. Key tactics include renegotiation, mandate consolidation, external fee benchmarking, transaction cost analysis (TCA) and co-investment. Only 37% believe that performance fees are an effective way of aligning interests.
  • Thirty-one percent have shifted towards passive management and 20% have moved towards smart beta. But respondents expect active managers to outperform in the next 12 months.
  • Thirty-two percent of investors have made significant changes to risk management in the last three years, with another 14% planning to do so in the next 12 months.
  • Forty-one percent say environmental, social and governance (ESG) will play a major role in future manager selection; 10% have terminated/changed managers due to ESG reasons. While 45% believe that good ESG integration requires an active (as opposed to a passive/systematic) approach, 19% disagree.
The full report is here.

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