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Despite AOL news, 401(k) matches are not changing

Despite AOL news, 401(k) matches are not changing
AOL Chief Executive Officer Tim Armstrong
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NEW YORK (AP) - If you like your company's 401(k) match, you can keep it.

Despite a scare that AOL gave its employees recently, Corporate America isn't scaling back 401(k) programs, surveys and employee benefit experts say.

AOL CEO Tim Armstrong announced last week that instead of contributing to an employee's retirement each paycheck, the company would give a lump sum payment at the end of the year, a move that could lower costs but potentially hurt employees' savings.

The backlash was immediate, forcing Armstrong to backtrack within days.

While AOL's announcement made headlines, employees who have a 401(k) shouldn't worry. AOL's announcement doesn't reflect a growing trend, employee benefit experts say. Only eight out of 100 large U.S. companies wait until the end of the year to make contributions, according to a 2013 survey by AON-Hewitt, a large global human resources consulting firm. That level hasn't changed in two years.

IBM also generated headlines in late 2012 when it announced changing its 401(k) to an annual match, making it the largest company to use such a program. Some experts argued that a switch by IBM, one of the largest employers in the U.S. with more than 430,000 employees, could cause a shift in how employers handled retirement plans.

So far, the predictions haven't come true.

"Overwhelmingly, businesses have told us that 'we are unlikely to do this,'" says Rob Austin, director of retirement research at AON-Hewitt.

The 401(k) remains one of the most popular employee benefit programs in the country. Nine out of 10 mid-size to large companies offer a plan for employees. It's also the primary way employees save for retirement, as company pensions and profit-sharing agreements have fallen by the wayside in the last 30 years.

AOL would have been the first large company since IBM to switch to this type of match program, and the publicity was highly negative.

Switching from a per-paycheck match to an annual match hurts employees a few different ways. For one, it punishes employees who leave a company before the end of the year. Also, the employee would miss out on any rise in the stock market during the year.

If an employee had a salary of $50,000 and the company was contributing 6 percent of that salary to his or her 401(k), the company's contribution would be $3,000. If the employee had invested that $3,000 in an S&P 500 index fund, that $3,000 would have grown to $3,870 in 2013. An employee under an annual contribution program would have missed out on that $870 in gains.

The vast majority of companies that use an annual, lump-sum match are banks. At banks, the bulk of an employee's salary often comes from a year-end bonus. Without it, any match would be much smaller.

The other side to the argument is that employees who do stay at the company year after year would be unaffected by a switch to an annual match. Also, if the stock market had a year like it did in 2008, when it fell 40 percent, the employer's match would have been spared that decline.

"The reality is that the 401(k) is not being accessed for 20, 30, 40 years, so an annual match would smooth out over that course of time," says Bruce Elliott, manager of compensation and benefits for SHRM, the Society for Human Resource Management. "It's the employees leaving the organization that are taking a hit, and it especially hurts employees who are laid off."

Because so many employers now use a 401(k), any cutback is going to face resistance, Austin and other experts say.

"Employees are going to see it as a cutback," says AON-Hewitt's Austin.

A company might switch from a per-paycheck contribution to an annual contribution to save money in the short run. But it would come at a loss to worker productivity, morale and damage to recruiting.

"I don't see where you are going to get much bang for your buck by switching to an annual match," Elliott says.

In fact, many employers have been sweetening their employees' 401(k) program in the years since the Great Recession.

The most popular employer match used to be 50 cents for every dollar an employee would put into a 401(k), up to 6 percent of an employee's annual salary. For example, if an employee put $1,000 into their 401(k) each year, the employer would contribute $500 - making the total retirement contribution $1,500.

It's now more common that employers will match dollar-for-dollar on contributions. A third of companies surveyed by AON used a dollar-for-dollar match now, versus 20 percent of companies who use a 50-cents-to-a-dollar match.
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