401(k) Plan Design, Employee Engagement and Corporate Financial Performance

By Faron Miller, CFP®

Faron Miller, CFP®

Faron Miller, CFP® Retirement Plan Advisor

Many companies offer 401(k) plans as a benefit to help attract and retain talented employees, but most business owners and CFOs do not look at 401(k) plans in relation to corporate profitability. The plans are treated as a necessary expense, a cost of doing business. Most companies benchmark 401(k) outcomes and corporate profitability separately.

A study done by the investment firm T. Rowe Price looked at the relationship between 401(k) plan design, employee engagement and corporate profitability. The study found a significant correlation between the quality of 401(k) plan design and corporate profitability. This applied to every size company and regardless of which measure of profitability or income was examined.

The study used ratings from Brightscope, a 401(k) plan research firm. Brightscope considers factors such as company contributions, vesting schedules, fees, eligibility periods and other data to develop their ratings. As mentioned on their website, the Brightscope Rating “is a quantitative 401k plan rating developed with the help of leading independent fiduciaries, finance professors and 401k experts. The BrightScope rating algorithm takes in 200+ unique data inputs per plan and calculates a single numerical score for every 401k plan in the country.”

In the study, T. Rowe Price used statistical analysis to ascertain if there was a correlation between the Brightscope Rating and five measures of corporate financial performance: profitability, capital allocation, risk, growth and ESG (environmental, social & governance) criteria. More statistical studies were done to determine if correlations existed between corporate performance and specific 401(k) metrics: company generosity, participation, deferrals and account balances.

Key Findings:                                                                                                                                                                                     

  • There appears to be a symbiotic relationship between 401(k) plans and corporate financial performance.
  • 20% - 80% higher corporate profitability associated with companies that have “great” 401(k) plans
  • Poorly performing 401(k) plans tend to be associated with companies that have corporate profitability up to 80% lower than companies with average plans
  • Companies with higher-performing plans are more likely to have significantly higher gross margins than average plans.
  • There are correlations between plan performance and net income per employee.
  • Well-designed 401(k) plans can positively influence employee behavior.
  • The additional expense of creating a better 401(k) plan could be mitigated through added productivity.

The common denominator between companies with excellent 401(k) plans and companies with subpar 401(k) plans is their employees, who benefit from the plan and directly affect company profitability. Investing more in the plan could result in higher financial performance for the company by increasing employee engagement. There are potential benefits when companies invest in their 401k plans and downsides when they don’t. The correlation between 401(k) plans and corporate profitability is one area a company could explore to see if enhancing the 401(k) could enhance employee engagement and positively affect the company’s financial metrics.

If you are interested in discovering how a 401(k) plan might benefit your employees and corporate profitability, contact us today. 

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— Posted on July 01, 2020 by Faron Miller, CFP®

— Topics: Investments, Financial Planning