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

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.”