Tim Armstrong’s recent decision to defer AOL’s 401(k) employer match contributions until year-end was alarming enough. Blaming that change on the expense of healthcare costs to treat employees’ seriously ill babies demonstrated stunning lapses in judgment and serious flaws in leadership. One wonders who is advising AOL’s CEO and what led to these blunders.
The good news is that public outcry apparently led AOL to reverse its decision to defer match contributions until year-end. AOL’s company match contributions will be made as they had been, at each payroll. Here we visit the 401(k) match deferral and the problems caused by a downgrade of benefits – for that’s what deferring the match would be.
Research shows that the way companies structure their 401(k) plans makes a material difference in employee savings rates, and can enhance or detract from retirement participant outcomes. The goal, of course, is having enough money to retire.
Employers can influence employees to save more for retirement by optimizing how they match employee contributions; using automatic enrollment and escalation of savings rates over time; and ensuring that fees paid by the plan and its participants are reasonable, according to research from National Bureau of Economic Research, Harvard, AON Hewitt, Employee Benefit Research Institute, the Society for Human Resource Management and the Department of Labor.
Sponsoring a 401(k) plan and the company match for a 401(k) plan is voluntary. For many companies a defined contribution 401(k) plan is also a way to relieve the company of the pension liability burden they held when defined benefit pension plans were the norm, and guaranteed an income for life for retired employees. At that time, ERISA 401(k) plans were a supplemental savings vehicle, for employees who wanted to save more for retirement. Now, defined contribution 401(k) plans are the primary retirement savings vehicle. As such, they shift retirement risk away from the company, to the employee.
AOL’s effort to change to its employee matching contribution to year-end is a way to slash benefits that would rob employees of important retirement savings advantages: the compounding effect of the match being contributed regularly throughout the year, the advantage of dollar-cost-averaging, and the beneficial behavioral effects of the periodic company match boosting employee contributions. There’s also the issue of whether the match would be paid at all if an employee left before year-end.
Most companies, “about 71%, match each payroll,” while about 12% “match monthly or quarterly,” according to San Francisco Chronicle columnist Kathleen Pender, in an article entitled “401(k) match at year-end can undermine benefit.”
Pender mentions that though only 17% of firms match only at year-end, “Charles Schwab – one of the top 401(k) plan administrators - Morgan Stanley, JPMorgan Chase and Deutsche Bank all have this policy.”
AOL’s decision to reinstate the match with every paycheck is in the best interest of AOL employees who participate in the 401(k). It is a better choice. We hope the dialogue will inspire other companies to step up to the every-payroll company match and look at the research that indicates what other steps companies can take to help employees maximize their retirement savings. — Kathleen M. McBride
For more, please see the research and resources below:
National Bureau of Economic Research – EMPLOYER MATCHING AND 401(K) SAVING: EVIDENCE FROM THE HEALTH AND RETIREMENT STUDY – Gary V. Engelhardt, Anil Kumar http://www.nber.org/papers/w12447.pdf
Harvard University – Saving For Retirement on the Path of Least Resistance — James J. Choi, Harvard University; David Laibson, Harvard University and NBER; Brigitte C. Madrian, University of Chicago and NBER; Andrew Metrick, University of Pennsylvania and NBER http://www.nber.org/programs/ag/rrc/04-08LaibsonFinal.pdf
AON Hewitt – 2013 Trends & Experience in Defined Contribution Plans – An Evolving Retirement Landscape http://www.aon.com/attachments/human-capital-consulting/2013_report_Trends-Experience-DC-Plans_Highlights.pdf
Department of Labor – A look at 401(k) Plan Fees http://www.dol.gov/ebsa/publications/401k_employee.html
Employee Benefit Research Institute http://www.ebri.org/research/retirement-research-centers/
Society for Human Resource Management http://www.shrm.org/hrdisciplines/benefits/articles/pages/match-thresholds.aspx