This Type of Investment Is the One Reason Why Employees Aren't Loyal to Companies

Loyalty is a two-way street.

The 401(k) plan is a great way to prepare for retirement. In spite of this, a 401(k) cannot make an employee loyal to their company. In fact, there's an argument to be made that the switch from old-school retirement plans to the 401(k) model is one reason workers are less likely to stick around.

The employer's role

When the Wharton School of the University of Pennsylvania studied the issue, it found that it's common for a company to lose anywhere from 20% to 50% of its employee base yearly. However, it would be disingenuous to suggest that the employees are to blame for their lack of loyalty.

Whatever the actual employee attrition figure is, it's clear that employees feel increasingly disconnected from their work. This disconnect could result from watching companies cut huge swathes of employees with no regard for length of service or employee loyalty. It might be a result of disappearing benefits.

Pensions

There are two basic types of retirement plans. The first is a "defined benefit plan," more commonly known as a pension plan. A pension plan provides employees with guaranteed retirement benefits. The amount the employee can expect to receive is based on factors like retirement age, length of service, and earnings before retirement.

What made these pension plans so attractive was that employers shouldered the cost. There was no out-of-pocket for employees. The employer would add to their plan as long as they remained with the company.

The other type of retirement plan is called a "defined contribution plan." This is the type of retirement plan the majority of Americans are familiar with. You have a defined contribution plan if you have a 401(k). As the name suggests, the employee contributes each month to the plan. While some employers match a specific portion of an employee's contributions, it is ultimately up to the employee to invest the money.

According to the Bureau of Labor Statistics (BLS), 66% of private industry employees have access to a defined contribution plan. However, only 48% participate. This means employers are not responsible for matching the contributions of millions of workers who do not participate.

Greener pastures

In the early 1980s, 60% of all private sector employees were recipients of a benefit pension plan. By 2022, that percentage had fallen to 15%. That change has led to an increase in employees who regularly look for greener pastures.

Pension plan recipients

Let's say you work for a company that puts money into a pension plan on your behalf each month. You have several reasons to remain loyal to that employer:

• The longer you stay at the company, the higher your monthly pension payment will be in retirement.
• You feel as if your employer is looking out for you.
• You're more invested in moving up the ranks of your company to earn more money before retirement.

401(k) plan participants

Imagine that you work for a company with a 401(k) plan. However, you barely earn enough to get by and see no path to promotion. Any funds you've put into your retirement plan are convertible. If you leave one company for another, you take that money with you. You can either roll it into the 401(k) plan at your next employer or roll it over into an IRA plan through a brokerage firm.

When companies stopped contributing to retirement plans in any meaningful way, they also removed employee motivation to remain with that company.

The big change

Companies have always laid off workers. When no work was available, employers were forced to make cuts to keep the doors to their businesses open. However, the Wharton report pointed out that by the 1980s, healthy companies had started laying off workers. It wasn't because they needed more work to keep everyone busy or more money to keep the business afloat.

Layoffs became a norm strictly to keep shareholders happy. And happy shareholders mean more money in the bank for company executives.

Ask anyone who's ever experienced a layoff, and you'll likely learn that cuts occurred shortly before the company's annual report was due to shareholders. It's become common for businesses to announce pending cutbacks by saying they're doing it "in the long-term interest of our shareholders." You'll notice there is no mention of the employees whose lives are impacted.

If a company wants to juice up the annual report, it also cuts the amount it contributes to retirement plans and healthcare costs. Pushing expenses it once shouldered onto its employees is another way to appear more attractive to investors.

The bottom line is this: Employers have spent decades illustrating how little the rank-and-file means to them. It should come as no surprise that many employees now feel the same lack of loyalty.

Wharton management professor Adam Cobb sees a correlation between how employers treat employees and loyalty levels. "When you are talking about loyalty in the workplace, you have to think about it as a reciprocal exchange. My loyalty to the firm is contingent on my firm's loyalty to me. But there is one party in that exchange which has tremendously more power, and that is the firm."