Plan Talk: When Discussing Retirement Plans, Profitability is Key

 In Plan Talk, Podcast, Retirement Planning & Wealth Management

Have you ever had a great idea that just didn’t quite land the way you thought it would when you pitched it? Rather than letting those good ideas fall by the wayside, perhaps it’s time to consider reframing the conversation in a way that speaks clearly to your company’s financial goals. Retirement Director Ben Rizzuto offers key strategies for approaching retirement plan conversations by focusing on problem-solving and profitability.

Key Takeaways

  • Research shows a clear relationship between an employee’s financial stress and their work performance, making it essential for companies to actively support employee financial well-being.
  • Automatic plan features can benefit participants and make good business sense for plan sponsors, improving areas like workforce planning, financial benefits and employee engagement.
  • When conveying the value of well-designed retirement plans to your CFO or finance group, it is key to focus on research, profitability and problem-solving for both the company and participant.

Welcome to Plan Talk from Janus Henderson Investors. I’m Ben Rizzuto.

When I was growing up my dad was in politics. He was a state senator for Colorado so he represented the southeast corner of our state.

Along with that, he was part of what the state of Colorado calls the Joint Budget Committee. Many see this as the most powerful group of legislators in the state. Why? Well the committee is charged with studying the management, operations, programs and fiscal needs of the agencies and institutions of the Colorado state government. To put it more simply, they set the budget and they get to decide how money is allocated.

The Joint Budget Committee, thus, holds the purse strings for the state, and since Colorado’s Constitution requires a balanced budget, the group can be seen as somewhat stingy when it comes to funding since many times groups will sit before them to try to persuade them to fund certain projects only to have them say no. Because of this, I remember my dad telling me, that many times people would complain that the Joint Budget Committee was the place where ideas go to die!

Many of you may think of a group within your organizations where this sentiment rings true. Many times it’s the finance group, who is tasked with these responsibilities and seem weirdly happy to say no to what we think are our good ideas.

Sometimes finance says no to ideas and projects for valid reasons, but many times when finance or anyone for that matter says no it’s because they don’t understand or see value in a project from their standpoint. They might say sure this 401(k) enhancement sounds nice but it doesn’t seem to make sense financially, and because of that they say no.

Those of us who focus on and work with retirement plans know this all too well, but we also know that a quality retirement plan is incredibly important for companies and participants.

So with that I want to touch on a few pieces of research that will help you show the value of the retirement plan not only for participants but for your companies. These more directly frame the value of a quality plan from the standpoint of finance and business operations, and I think they can be incredibly helpful in discussions about retirement plan enhancements, their costs and their value.

As always, much of what I’ll be discussing today comes from our Top DC Trends and Developments Guide, so if you haven’t seen the latest edition, be sure to let us know so we can get you a copy.

Let’s start by thinking about how a CFO might look at a 401(k) plan, or the questions they might ask when it comes to that plan. In fact, there was a great study that we highlighted in our 3Q 2018 Top DC Trends Guide that did just this.

In this survey, by T Rowe Price, CFOs were first asked the following questions:

  1. Do you believe that a well-designed 401(k) plan can contribute to corporate financial performance?
  2. What impact does the 401(k) plan have on your organization? Does it impact your bottom line?
  3. What are the barriers to adopting the view that a well-designed and well-performing 401(k) plan can contribute to corporate financial performance?

The results showed that while over 50% of CFOs believe a well-designed 401(k) can influence corporate profitability, 50% were also skeptical value could be measured and 45% believed that 401(k) plan design has no impact on corporate profitability.

Overall, CFOs felt that the retirement plan can help employees prepare for retirement but not one mentioned a 401(k) plan’s possible role in enabling or enhancing profitability, which if you think about it is a CFOs or the finance department’s main goal.

Based on those beliefs you can see why conversations surrounding auto-features, financial wellness programs, or increasing the company’s match might not go very far, especially if they aren’t framed from the standpoint of profitability.

But even though that may be the case there was a silver lining. 75% of those CFOs were open to further research about how a retirement plan influences profitability.

So with that I want to share the other side of this story.

The study actually found that there is a significant correlation between 401(k) plan performance and corporate financial performance. Now, some might say “sure” if a company has more money, then they can put more money into the plan.

But let’s dig into findings a little more. Overall, T Rowe said that “great” 401(k) plans are very likely to be sponsored by companies that have 20% to 80% higher corporate profitability than companies with “average” plans. Plus, this went for companies within and across industry sectors, no matter the size of the company.

Besides this main point there were three other findings that came out in this study.

First, there is a correlation between higher gross margins and high-performing 401(k) plans. This helps us see that there may be symbiosis between higher-performing 401(k) plans and higher gross margins – which, of course, is a win for not only the company’s benefits team but the finance team, as well.

Second, net income per employee indicates that investing in the 401(k) plan could correlate to increased profitability. This matters because some critics of the research might again say that the correlation between better performance in retirement plans and higher gross margins simply means that more profitable companies can afford to fund better 401(k) programs.

But the correlation between plan performance and net income per employee suggests that there is, again, a symbiotic relationship between plan performance and corporate financial performance. Think about it this way. The common denominator in both plans that perform well and plans that perform poorly is their employees. These people directly benefit from the 401(k) plans and directly affect corporate profitability. So for CFOs, this gets to the heart of employee productivity, profitability and the operational leverage achieved by maximizing income per employee. And while it’s true that more profitable companies can invest more in their 401(k) plan, there is also a potential downside for companies that don’t invest in the 401(k) plan.

Finally, a well-designed and high-performing 401(k) plan can influence employee behavior. So while there may be higher costs associated with creating better 401(k) plans, the additional costs potentially could be mitigated through the added productivity and margin. In other words, we can actually see that there is a potential for a correlated return on investment.

Overall, I think this highlights that many times, companies benchmark 401(k) outcomes and corporate profitability separately, but here we see that they should be looked at in concert and then compared against industry peers to gain greater insight into how well your company is doing against competition. Plus, these findings are perfectly framed for a conversation about the financial impacts that a retirement plan can have on a business.

Now by framing things in this way you may pique the interest of your CFO, but let’s give you a little more ammunition for the conversation.

That last point in that T Rowe study regarding employee behavior led me to another piece of research that explores this idea a little further.

The most recent Willis Towers Watson Global Benefits Attitude Survey shows a clear relationship between employees’ financial worries and their work performance, engagement and absence.

In order to find this they used an employer’s records of work quantity and quality for a relatively homogeneous group of 17,000 employees – all of whom served in consumer-facing roles. Financial stress levels of high, medium or low were calculated for each employee. They were based on those records and also took into account a number of indicators of financial insecurity, such as:

  • Not contributing to the employer’s 401(k) plan
  • Hardship withdrawals being taken from the plan
  • Active wage garnishment
  • Recent qualified domestic relations orders
  • And loans being taken from the 401(k) plan

Employees were then split into two subpopulations according to their job specifics: field technicians or phone agents. Based on the research, field technicians demonstrated a stronger association between financial stress and job performance. Along with that high financial stress, field technicians demonstrated significantly poorer work performance relative to peers with low financial stress. For phone agents, the pattern of differences was similar but not as pronounced.

Now while they found differences between the two groups, which suggests that the impact of financial stress varies based on occupation or functional area, I think it really does highlight how financial stress should be top of mind for all employees no matter the job type.

This is especially true when those employees are client facing since it can have a significant impact on customer satisfaction and customer retention, which are both key determinants in profitability. Plus, this impact could be even more worrisome in industries where worker impairment can create a hazard for coworkers or the public, such as utility, transportation, construction, petroleum, food, chemical and pharmaceutical production, and medical, just to name a few.

One final tidbit that I think is interesting for both HR and finance is that the study found a relationship between financial stress and time lost to absence measured by sick days, unpaid leave and non-pregnancy-related disability leave. Highly stressed employees took 1.7 absence days to every one day taken by low-stress employees.

So the bottom line here is that financial stress isn’t good for employees. It affected both groups in this study. It led to poorer work performance and increased absences, and all of these affect the operations and overall profitability of a company.

Of course employee populations will vary but here we see how important it is for a company to support the financial well-being of its employees. This could be through a financial wellness strategy, financial education programs, the use of auto-features, or simply strategic communication campaigns, just to name a few. Overall, these ideas usually stem from a company’s retirement and benefits plan and this study does a great job in showing how this piece of a company can truly affect all the other parts of the company.

Along with these two pieces of research, I’ve seen others over the years that have specifically spoken to why automatic plan features, such as automatic enrollment and auto escalation not only help participants but also make good business sense for plan sponsors.

The three main areas where benefits can be seen are workforce planning, employee satisfaction and engagement, and finally based on the focus of this episode, financial benefits.

First, looking at workforce planning, by ultimately making it easier for those approaching retirement to retire “on time,” a company creates the opportunity for talent to be continuously deployed optimally across the organization. Delayed retirements, on the other hand, may reduce the employer’s ability to hire new employees, reducing the flow of new ideas and talent into the organization.

Second, looking at employee satisfaction and engagement, research shows that employers who promote an outcome-oriented view of their retirement plan, instead of positioning the plan as a savings vehicle, can actually help employees begin to perceive the plan as the primary means by which the employer is facilitating the employee’s income in retirement. Doing so implies a long-term relationship between the employer and employee, potentially leading to better outcomes for both parties.

Third and finally, let’s look at the financial benefits associated with auto-features. First, by implementing an auto-features program, a plan is likely to attain greater assets, resulting in stronger negotiating power for plan-related fees. Along with that these automatic features can also help plan participation and/or contribution rates among non-highly compensated employees, which could reduce the need for a non-discrimination safe harbor or an unexpected qualified non-elective contribution (QNEC).

So here again we see some great ideas that will allow you to frame your conversation around retirement plan improvements in a way that makes sense to not only the finance group but the other members of your investment committee.

So, in the end, why is it that ideas die? Or another way, why is it that people say no to ideas?

They say no because those ideas may not be seen as solving a problem or the numbers and associated costs don’t seem to add up. But as I said in the beginning maybe it’s just because we haven’t framed up the value of that idea in a way that speaks to the other person’s goals. Finance inherently deals with money so if we’re going to talk about anything we need to make sure the money question is answered. If we can do that then we’re able to communicate that idea in a language or currency that they transact in, and that idea has a much better chance of seeing the light of day and being implemented.

We all know that retirement plans serve a very important purpose for our companies and our participants, and with the research we covered today, I feel that we can better communicate that value to not only the CFO and finance group but others throughout our companies.

Remember, we’ll continue to provide these important ideas in our Top DC Trends Guide, the Janus Henderson Blog and through out this podcast.

Until next time, I’m Ben Rizzuto and this is Plan Talk.

The information contained herein is for educational purposes only and should not be construed as financial, legal or tax advice. Circumstances may change over time so it may be appropriate to evaluate strategy with the assistance of a professional advisor. Federal and state laws and regulations are complex and subject to change. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information provided. Janus Henderson does not have information related to and does not review or verify particular financial or tax situations, and is not liable for use of, or any position taken in reliance on, such information.
A retirement account should be considered a long-term investment. Retirement accounts generally have expenses and account fees, which may impact the value of the account. Non-qualified withdrawals may be subject to taxes and penalties. For more detailed information about taxes, consult a tax attorney or accountant for advice.
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