The initial phase of the research shows a“statistically significant” correlation between strong retirementplans and strong corporate balance sheets, according to T.RowePrice's Joshua Dietch. (Photo: Shutterstock)

Do profitable companies happen to offer great 401(k) plans, or do great 401(k) plansmake companies more profitable?

Joshua Dietch, vice president and group manager of T. RowePrice's retirement and financial education unit, does not thinkthat's a chicken-or-egg question.

Recently, Dietch and his team released research showing what hesays is a “significant correlation” between the profitability ofpublicly traded corporations and the quality of their 401(k)s.

The study shows that companies with the best retirement plans claim higher grossmargins, better net income per employee, and better gross profitand revenue per worker compared to companies that offer average orbelow average retirement plans, as rated by BrightScope.

Instead of understanding the relationship from awhich-comes-first perspective, Dietch approaches it from adifferent angle.

“Start with a blank piece of paper. What strategies do youdeploy to make a great company? This (a great retirement plan) isone way to create an engaged workforce to become a profitablecompany,” he told BenefitsPRO.

“Or, look at it from the perspective of an underperformingcompany. What do you do to improve that? Are your comp and benefitpackages competitive? If not, would there be ROI on improving yourbenefits strategy?” he added.

The question of how 401(k)s influence company performance hasgnawed at Dietch for some time. T. Rowe Price's research is thefirst of its kind, said Dietch, who came to theBaltimore-headquartered firm 14 months ago.

The research explored 332 public companies that sponsor 485plans across industrial sectors, and looked at plans ranging thesize spectrum.

“Great” plans—those with high participation rates, deferralrates, strong matching schedules and competitive fees—are sponsoredby companies that post 20 percent to 80 percent greaterprofitability than companies with “average” plans.

And poorly performing plans post profitability that is up to 80percent lower than companies that sponsor average plans.

Dietch, and the study itself, are somewhat circumspect in itsconclusion: 401(k) plans “could be” a potential lever companies canuse to juice profitability, the study says.

He plans to explore the correlation further, calling this firststage of research a starting block.

But he is clear in that the initial phase shows a “statisticallysignificant” correlation between strong retirement plans and strongcorporate balance sheets.

“We know profitability is composed of many differentthings—productivity, competition, quality of management, etc. Thecorrelations we found are real, so then the question is can youfind causality. With any problem, when you do regression analysis,you are asking how one thing relates to many things. We did findthat a company retirement plan could be contributing toprofitability. Now there is the question of causality. That'ssomething we want to explore further,” explained Dietch.

Bridging HR with finance leadership

Using the strength of a 401(k) plan to attract and retain talentis a strategy with deep resonance among human resource leaders.

But the same resonance is not always found among CFOs and othersenior finance leadership, says Dietch.

“We saw an opportunity to bridge that gap. Both benefitsprofessionals and finance teams are working to the samegoal—company profitability and success,” he added. “We see thisresearch as way of bringing together two different constituencieswithin an organization that often look at the same problem througha different lens.”

Dietch imagines both plan sponsors and plan advisors putting theresearch into action.

“Companies are already benchmarking their retirement plans, andCFOs are always interested in how their companies compare to theirpeer group. I think the research expands how a sponsor can thinkabout benchmarking both. That's a conversation that will resonatewith a CFO,” said Dietch.

A clear factor

Clearly, the impact of a 401(k) on company profitability is butone factor. But it is a factor, underscores Dietch.

There are instances of strong companies with weak plans, andweaker companies with strong plans. But those are anomalies, saidDietch.

“With any statistical analysis, there are degrees of confidence.With this study, the performance of any one plan doesn't matter.There is a statistical significance. The results fall within a highrate of confidence. This is representative of the universe ofretirement plans,” he added.

The retirement and financial education unit that Dietchoversees, which includes economists, CFAs, and writers, sitsoutside of T. Rowe Price's business units. Several of those unitswere tapped to develop the study's methodology.

“There were a lot of moving pieces. We were able to take broadresources from T. Rowe to pull it all together. We tried to come upwith some original thinking. We're pleased with the results,” saidDietch.

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