Antecedents of Abrand Loyalty@ in 401(K) Plans As Clues to Purchase Criteria For Retirement Investments



Citation:

Magdalena Cismaru and Betsy Gelb (2005) ,"Antecedents of Abrand Loyalty@ in 401(K) Plans As Clues to Purchase Criteria For Retirement Investments", in AP - Asia Pacific Advances in Consumer Research Volume 6, eds. Yong-Uon Ha and Youjae Yi, Duluth, MN : Association for Consumer Research, Pages: 52-55.

Asia Pacific Advances in Consumer Research Volume 6, 2005      Pages 52-55

ANTECEDENTS OF "BRAND LOYALTY" IN 401(K) PLANS AS CLUES TO PURCHASE CRITERIA FOR RETIREMENT INVESTMENTS

Magdalena Cismaru, University of Regina, Canada

Betsy Gelb, University of Houston, U.S.A.

As the United States Congress considers various changes in the policies governing investment of pension funds, at least two issues emerge concerning purchase criteria for retirement investments. One pits those who say that employees will do better than the federal government has done in investing Social Security dollars vs. those who say they will do less well. The other, a consequence of bankruptcies at Enron and other highly visible companies, simply emphasizes giving employees more freedom to divest stock given to them by their employers as a means of funding their 401(k) pension plans.

Consideration of both issues would benefit from clues concerning the degree to which employees with freedom to select retirement investments will or will not concentrate those investments in their employers’ own stock, vs. diversifying. For many years, economists and financial advisors have been trying to educate employees about the need to diversify their portfolios, especially targeting those with heavy concentrations in any one instrument or company (Knutson 2002). In spite of this advice, the Enron collapse revealed an unexpected situation: thousands of employees had invested their entire 401(k) in only one company’s stockBthe company they work for.

Given awareness by marketers of the reality of brand loyalty in purchases ranging from automobiles to cereal, despite economic incentives to diversify bran choice, it seems plausible that non-economic factors might also be associated with consumer investment behavior reflected in concentration of one stock in retirement plan portfolios. The purpose of the research to be described here was to identify factors associated with this particular demonstration of "brand loyalty," making this study an investigation of a particular type of buyer behavior with public policy consequences. A variable that economists would predict as important in this context is the company’s financial performance. However, we also considered company size and age, because studies show that people are more likely to trust a larger company and an older one. Finally, but not the least important, we considered a measure indicating employee satisfaction with the company, taking into account the possibility that more satisfied workers would be more likely to trust the company and invest money in its assets, or at least let their funds remain in company stock provided by their employer as a "match" to employee contributions.

The paper is organized as follows: first, we define terms and emphasize the importance of this issue, which exemplifies the intersection of consumer behavior and public policy in marketing. Then we explain the variables in our model and the basis for their inclusion. Later sections list our hypothesis and describe the databases used, method, results and conclusions.

BACKGROUND

A 401(k) plan enables employees to deduct money from their paychecks to fund their personal retirement plans. According to Consumer Reports (2002), an estimated 55 million American workers, 75 percent of those whose employers offered retirement plans, participate in 401(k) or other tax-deferred, defined contribution plans.

In contrast to a pension plan, which relies on the employer to contribute money toward an employee’s retirement resources, a 401(k) is built from the employee’s investment decisions and pre-tax dollars. The payoff has been viewed as providing for employee control and ability to tailor a savings strategy to meet individual needs for retirement. However, these employees incur the higher risks associated with higher rewards. In contrast to pension plans, which are insured by the American Pension Benefit Guaranty Corporation, a federal agency, to provide a specified amount to the beneficiary if an employer or its pension plan goes under, 401(k) plans had, as of spring of 2002, no safety net. Thus, 401(k) investors had no way to recoup their funds even if they were lost because of corruption or malfeasance (Consumer Reports 2002).

Therefore, the United States Congress in 2002, the year following Enron and other conspicuous corporate bankruptcies, was offered legislation to give employees freedom to divest company stock after three to five years of employment, instead of waiting until age 50 or 55, as was common practice among companies before 2002. The proposed legislation also required that workers receive quarterly statements showing the value of their retirement investments with a prominent reminder about the benefits of diversification. Additionally, it provided for worker education concerning their investment options and advice to help them achieve their goals, according to presentation from a supporting group representing mutual finds (Investment Company Institute 2002). In sum, the proposal did not limit the ability of an employee to concentrate his or her plan in an employer’s stock; it simply provided communication concerning the merits of acting otherwise.

However, it should be noted that even had such legislation existed in 2001, it would not have precluded financial catastrophe for many Enron employees. Many who could have divested their Enron shares chose not to, and until 2002, the majority of company stock represented voluntary purchases by employees (Wilcox 2002).

The concentration of 401(k) plan asset was certainly not limited to Enron, where 57.7% plan assets were invested in the company’s stock. A study conducted by the American Institute of Management and Administration (IOMA) showed that of 220 company 401(k) plans analyzed, 25 had more than 60% of their assets wrapped up in company stock (2001). Three plans among those researched by IOMA had in excess of 90% of employee assets in company stock: Procter & Gamble, 94.6%; Sherwin-Williams, 91.6%; and Abbott Laboratories, 90.2%.

Of course, many such buyer choices proved unwise. Enron stock fell in value by 98.8% in calendar 2001. Other substantial declines during the same period were Coca-Cola Co. (81.5% of 401(k) assets in company stock) down 22.3%; Texas Instruments (75.6% in company stock) down 32.3%; Williams Cos., Inc. (75% in company stock) down 33.1%; and McDonald’s Corp. (74.3% in company stock) down 21.1% (IOMA 2001). Even when experiencing such losses, however, many employees kept company stock, according to an issue brief of the asset allocation, account balances and loan activity covering 11.8 million 401(k) participants (VanDerhei 2002). Thus, the relationship between a company’s financial performance and buyer response when those buyers are employees who owned stock seems weak, at least on a short term.

It therefore makes sense to examine other variables. Job satisfaction is one way to predict employee commitment to a company (Barling, Wade and Fullagar 1990; Caldwell, Chatman and O’Reilly 1990; Fullagar and Barling 1991). Often, it is correlated with compensation, and compensation is in turn a common correlate of company size, according to Hewitt Associates (1999). The third variable examined was company age, given that it is viewed as a subtle indication of worthiness and reliability, particularly for companies in less than venerable industries; e.g., high tech (Rieck 2000).

HYPOTHESES

Such reasoning led to the development of the hypotheses tested in this study.

H1: All else equal, satisfied employees invest a larger percentage of their 401(k) in the stock of the company they work for in comparison with less satisfied employees.

H2: Employees invest a larger percentage of their 401(k) in firms with higher business longevity in comparison with firms with lower business longevity.

H3: Employees invest a larger percentage of their 401(k) in larger firms in comparison with smaller companies.

H4: The company’s financial performance lacks a significant impact on the employees’ decisions to invest their 401(k) in its stock.

Thus, our basic prediction was: the concentration of 401(k) in the company’s stock is determined by employees’ satisfaction with the company and the company’s age and size, rather than by the company’s financial performance.

METHOD

The databases used to test these hypotheses began with the DC Plan Investing published by IOMA (www.ioma.com/products/prod_detail.php?prodid=12), which was used to assess the 401(k) plan assets invested in the company stock. The data provided was the last reported company stock as percent of Defined Contribution plan company stock holdings, December 2001, for 220 companies. These companies became the sample employed for analysis, and we sought predictive data concerning them, as follows:

* FortuneBBest Companies to Work for Database was used as a proxy measure of employees’ satisfaction with their job (www.fortune.com/lists/bestcompanies). While this list is not based on employee survey data, it emphasizes elements of compensation, which are often used as contributing to satisfaction with one’s employer (Hewitt Associates, 1999). The data was also for year 2001. Only 13 from the 220 listed in IOMA DC Plan Investing were included in this Fortune list, however.

* Fortune 500 America’s Largest Corporations was used to assess the size of the companies (www.fortune.com/indexw.jhtml) together with Business & Company Resource Center Database (www.galenet.galegroup.com/servlet/BCRC?locID=txshracd2588), for revenues in millions. The data was also for the end of 2001.

* Fortune 500 America’s Largest Corporations (www.fortune.com/indexw.jhtml) was used to assess the age of the companies together with Business & Company Resource Center Database (www.galenet.galegroup.com/servlet/BCRC?locID=txshracd2588) (year founded).

* DC Plan Investing Database was used to assess the company’s financial performance. This database provided returns of investment data for three years (1999, 2000, and 2001) (www.ioma.com/products/prod_detail.php?prodid= 12).

EMPIRICAL MODEL

We employed a linear model to test the effect of the employees’ satisfaction, company’s age, size and performance on the percentage of 401(k) invested in the company’s stock. The selection of the dependent variable (percentage of 401(k) invested in the company’s stock) and the independent variables (company’s size and age, employees’ satisfaction, and company’s financial performance measured by returns of investment) were based on literature reviewed here. All the variables are metric with the exception of satisfaction which is dichotomous (on the Fortune list or not).

The model tested was:

Perc401(K)i=a + d1Sati + d2Agei + d3Sizei + d4Finperfi + eI,

where

Perc401(K)i=Percentage of 401(K) invested in the company’s stock for a company i

Sati=Employees’ satisfaction toward the company i (present in the Best Company to Work For Fortune list or not)

Agei=Age of the company i (number of years since the company was founded)

Sizei=Size of the company i (revenue in millions)

Finperfi=Financial performance of the company i (return of investment)

RESULTS

To determine the relative importance of each independent variable in predicting the dependent variable, multiple regression analysis was employed. Specifically, the regression analysis permitted examination of the variance in the percentage of 401(k) invested in company’s stock explained by the size and age of the company, the satisfaction of the employees (a Fortune leader or not) and the financial performance of the company.

We examined standardized regression coefficients (beta coefficients) to assess the relative strength of each independent variable in the equation. Consistent with our first hypothesis, we found that the presence of an employer on a list indicating high employee satisfaction significantly predicts a greater proportion of 401(k) funds invested in the company’s stock. We employed several models that took into consideration the satisfaction proxy and in all of them we found the categorization of a company as "best to work for" had an important and a significant influence on the percent of 401(k) invested in the stock (p’s<.004).

Our second hypothesis predicted that a company’s age would have a positive impact on the percent of 401(k) invested in the company’s stock: the older the company, more likely that employees will invest in the company’s stock. Although the relationship was in the direction expected, the coefficient did not reach statistical significance (p>.3). Thus, starting with the second model we excluded company age from the analysis.

The third hypothesis, stating that employees invest a larger percentage of their 401(k) in bigger firms in comparison with smaller companies, found support, using sales revenue as the indicator of size. The sales revenue beta coefficient reached significance in all models employed (p’s<.005).

TABLE 1

COMPARATIVE REGRESSION RESULTS AMONG THE MODELS EMPLOYED

Recall that we expected that a company’s financial performance to have a less than significant effect on the percent of 401(k) invested in the company’s stock, even if the relationship is positive. In other words, we expected to find that satisfaction and company size and age have a bigger influence on the percentages of 401(k) invested in the company than the financial performance of the company. We found support for this hypothesis. Although the beta coefficient for returns was positive, its level did not reach significance in any of the models (p’s>.2).

We also excluded the satisfaction dummy variable from the analysis to see the contribution of the other variables in its absence (Model 4 and Model 5). We found that revenues, which represent company size, remained an important predictor of our dependent variable (p<.005). In contrast, financial return was insignificant again (p>.2). Thus, this additional analysis also supported our hypotheses.

Finally, in Model 5, we redid the analysis with all variables as dummies. Since we had expressed satisfaction as a dummy variable, because of the small number of companies found in the 100 Best Companies to Work For, we were concerned that we might have forced the difference and that this methodological issue explained why satisfaction was found to be an important predictor. Thus, by making all variables dummies we tried to assure equal chances for all our variables in the model. We obtained the same results as before.

The F values and the significance values showed that all our models provided a good fit. However, seeking parsimony we considered the second model to be best. In this model, only two variables, size of the company and employees’ satisfaction, made a significant contribution in predicting the dependent variable, whereas financial performance represented by return on investment had an insignificant role.

DISCUSSION

Limitations of a study of this kind include the problem that causality can only be inferred after the fact. There is no way to say that viewing a company as a good place to work, or trust in that company based on its size, led to the level of purchase employed here as a dependent variable.

Employee satisfaction is not measured directly but through "best company to work for" database. A validation of this measure might be done by finding secondary research data on employee satisfaction studies that have correlated this construct with the age of the company in which the employee worked. In addition, observation of "best company to work for" is limited to 13 companies out of 190 in the sample. Also, with the exception of financial returns, it was not possible to find data for several years for the other variables. Thus, one can draw conclusions only on the basis of a very limited set of companies.

Moreover, in this study, control variables could not as a practical matter be considered, such as how long each company requires investors to hold shares contributed by the company before allowing them to diversify, average size of employees’ assets, or information about the length of time workers have been employed at the firm. It might be possible that companies with relatively young workers would have fewer dollars in such plans and therefore be more likely to have a higher percentage of their assets invested in company stock. In contrast, companies where most workers have been employed for a long period of time would be more likely to have reached a level where they are able, under plan rules, to sell company stock to purchase other assets to diversify their portfolio.

Keeping these limitations in mind, however, these findings suggest that a Congressional decision to give employees freedom to divest themselves of company stock after three or five years of service, instead of waiting until age 50 or 55, might have less impact than expected. Since company financial performance appears to have only a minimal impact on employee decisions to invest in their company’s stock, giving employees freedom to sell their stock after three years might not make a difference in preventing disasters such as Lucent and Enron. Consequently, although it might constitute an administrative headache and could prompt employers to cut back on contributions (Wilcox 2002), measures like limiting the amount of company stock that 401(k) participants may own to a fixed percentage (say 10% or 20% of their account), in addition to education programs about the risk of overconcentration, might constitute a better way to help prevent overwhelming loss of savings.

There is a broader marketing policy implication, also, in the evidence presented here that investment purchases are like the purchases of cars, cereal, or magazine subscriptions in the role played by factors beyond economic calculations. In a sense, employees may be "buying" comfort with the purchase of something familiar, the virtuous feeling of supporting their employer, and the avoidance of choosing among a complex set of possible investment vehicles when they concentrate 401(k) purchases in the stock of their employer. Those considering turning over the investment of funds now invested through a central Social Security system might take these findings into account. In fact, any legislation concerning the purchase of any investment vehicle will presumably benefit from greater understanding of how such choices are made.

REFERENCES

Barling, Julian, Bill Wade and Clive Fullagar (1990), "Predicting Employee Commitment to Company and Union: Divergent Models," Journal of Occupational & Organizational Psychology, 63 (September), 49-68.

Caldwell, David F., Jennifer A. Chatman and Charles A. O’Reilly (1990), "Building Organizational Commitment: A Multifirm Study," Journal of Occupational & Organizational Psychology, 63 (September), 245-68.

Consumer Reports (2002), "Investing for Tough Times: Shoring up your 401(k)," 67 (March), 36-38.

Fllagar, Clive and Julian Barling (1991), "Predictors and Outcomes of Different Patterns of Organizational and Union Loyalty," Journal of Occupational & Organizational Psychology, 64 (October), 129-148.

Hewitt Associates (1999), "Large firms continue to offer generous benefits packages: Hewitt Survey," Employee Benefit Plan Review, 53 (June), 57.

Investment Company Institute (2002), "The 401(k): An Opportunity for Americans, An Opportunity for Congress," advertisement, multiple publications, September 30.

IOMA’s DC Plan Investing (2001), "Enron Debacle Will Force Clean Up of Company Stock Use in DC Plans," Report of Investment Management Performance, (December), 1-7.

Knutson, L. Lawrence (2002), "Bush Promotes Proposed 401(k) Change," Associated Press Online, (February), www.ap.org/pages/indnews/.

Rieck, Dean (2000), "Direct Mail - No Testimonials? No Problem! How to Build Unbeatable Credibility with Little Creativity," Direct Marketing, 63 (October), 24-29.

VanDerhei, Jack L. (2002), "EBRI Special Report. Company Stock in 401 (k) Plans: Results of a Survey of ISCEBS Members," Employee Benefit Research Institute, (January), 1-23, www.ebri.org.

Wilcox, Melynda D. (2002), "The New Look of Pensions," Kiplinger’s Personal Finance Magazine, 56 (April), 23-24.

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Authors

Magdalena Cismaru, University of Regina, Canada
Betsy Gelb, University of Houston, U.S.A.



Volume

AP - Asia Pacific Advances in Consumer Research Volume 6 | 2005



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