If you’re an AOL employee who went away for a long weekend you might have missed the hubbub about your 401(k) plan. Here’s a recap: On Thursday AOL announced that it would make its 401(k) matching contribution to workers’ 401(k) plans in one lump sum at the end of the calendar year. The outcry was immediate. By Saturday, the furor over the change was loud enough that the company reversed its decision and reinstated the policy of making its matching 401(k) contribution with every paycheck instead of once at the end of the year. See the memo AOL sent to employees here.
Why were employees so upset about AOL’s initial change to its 401(k) match? No matter how you look at it, the change would have been a dramatic benefit cut. Mirroring a move by IBM in 2012, AOL’s switch from a biweekly contribution to a once-a-year contribution robs employees of a key feature of retirement savings plans: compound interest. A biweekly matching contribution allows employees to see their retirement accounts benefit from contributions made throughout the year in a way that doesn’t occur when the match is made at the end of the year.
In addition, the change would have limited the company’s 401(k) match to only those who were employed by the company as of December 31 of each calendar year. Work at AOL for 11 months, but leave the company on December 1? No 401(k) match for you. This is true whether you leave to take another job, you get fired, or you get laid off.
Unfortunately, IBM isn’t alone in making year-end matching contributions. According to a San Francisco Chronicle article, the Plan Sponsor Council of America estimates that 17 percent of employers match contributions only once a year. I should note that some of these companies do give employees who leave their company before the end of the year a pro-rated amount of their match. Of course, we’d prefer that companies make their matching contributions with every paycheck, but this is better than no match at all. Charles Schwab, Morgan Stanley, JPMorgan Chase, Deutsche Bank and Citigroup are all mentioned as having policies similar to IBM’s. In a curious twist, the Washington Post points out that Charles Schwab’s policy is in stark contrast to what the company recommends investors do to get the most out of their retirement savings.
Giving 401(k) matches as one lump sum is yet another way that employers are saving money at the expense of their employees’ retirement security. Let’s hope that the negative publicity surrounding AOL’s now-abandoned change will encourage other companies to continue to match their employees’ 401(k) contributions throughout the year.