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

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

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

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

Instead of understanding the relationship from a which-comes-first perspective, Dietch approaches it from a different angle.

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

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

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

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

“Great” plans—those with high participation rates, deferral rates, strong matching schedules and competitive fees—are sponsored by companies that post 20 percent to 80 percent greater profitability than companies with “average” plans.

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

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

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

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

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

Bridging HR with finance leadership

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

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

“We saw an opportunity to bridge that gap. Both benefits professionals and finance teams are working to the same goal—company profitability and success,” he added. “We see this research as way of bringing together two different constituencies within an organization that often look at the same problem through a different lens.”

Dietch imagines both plan sponsors and plan advisors putting the research into action.

“Companies are already benchmarking their retirement plans, and CFOs are always interested in how their companies compare to their peer group. I think the research expands how a sponsor can think about benchmarking both. That's a conversation that will resonate with a CFO,” said Dietch.

A clear factor

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

There are instances of strong companies with weak plans, and weaker companies with strong plans. But those are anomalies, said Dietch.

“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 high rate of confidence. This is representative of the universe of retirement plans,” he added.

The retirement and financial education unit that Dietch oversees, which includes economists, CFAs, and writers, sits outside of T. Rowe Price's business units. Several of those units were tapped to develop the study's methodology.

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

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