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About Face: AOL’s 401(k) Match Mistake

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

NY Nonprofit Revitalization Act – What Do You Need to Know?

What Do You Need to Know About the NY Nonprofit Revitalization Act?

For stewards of nonprofit organizations operating in New York and those who advise them, New York State has updated nonprofit regulations aimed at better governance, which will be effective July 1, 2014. If you think that your nonprofit is exempt because it’s incorporated outside of New York, keep reading – if an organization raises money in New York, it will likely be affected, even if incorporated or based elsewhere

The new law is the first major update of New York State law for not-for-profits since the 1960s. One of the drivers of the new statute was the number of nonprofits that were badly burned in the Madoff Ponzi scheme.

Much of what is contained in the statute is just good fiduciary governance. The goal: less red tape, better governance and oversight for nonprofits, with a focus on avoiding conflicts of interest and self-dealing.

The new law is the result of a unique collaboration the New York Attorney General’s office and stakeholders in the nonprofit world, according to Jason R. Lilien, Chair of the Nonprofit Organizations Practice at Zuckerman Spaeder LLP. Before joining the firm last October, Lilien was Bureau Chief of the New York State Attorney General’s Charities Bureau, overseeing more than 100,000 nonprofits. He led the efforts to draft the law.

The Bill is “balanced and implement-able but will require revision of nonprofit organizations’ governance policies and procedures,” Lilien said at a packed symposium hosted by Zimmerman Spaeder and EisnerAmper recently.

The scandals of the last several years really “impact the nonprofit sector,” Lilien noted. The revamped statute aims to “increase trust” in nonprofit governance. The Attorney General has “new powers, particularly in terms of self-dealing.”

Highlights of the new Law:

  • Threshold for independent financial audits was lifted from $250,000 in revenue to $500,000, effective July 1, 2014; to $750,000 in 2017 and $1 million in 2021, removing the cost of that burden from smaller organizations. That’s not to say smaller organizations should not have an independent audit, just that they are not required to by law. However, for a nonprofit that falls below the new threshold, having a regular financial audit could set it apart from small nonprofits that do not.
  • The new law strengthens the governance framework for independent Boards, related-party transactions, self-dealing and conflicts of interest. It also addresses independence for Board membership and leadership, and special tasks for and independence for the Audit Committee.
  • Board Chair will have to be independent – not the CEO, executive director or employee of the nonprofit.
  • Nonprofits must have a conflicts of interest policy covering definition of a conflict, procedures for disclosure to Board or Audit Committee, Recusal from deliberating and voting, and documentation of the existence and resolution of a conflict.
  • The Conflict of Interest policy must also prohibit attempts to influence deliberation and voting on a conflict and procedures for disclosing, addressing and documenting related party transactions, according to the briefing.
  • Board members must sign a Conflict of Interest disclosure statement prior to joining the Board and annually.
  • Boards will oversee related-party transactions, and must determine that a related party transaction is fair, reasonable and in the best interest of the organization. The Board must consider alternative transactions, and document the deliberations and basis for approval in their minutes. Related transactions must be approved by majority vote.

Audit committees with have new, explicit responsibilities, according to EisnerAmper’s Julie Floch, Partner-in-Charge of the firm’s Not-For-Profit Service Group. The “Audit committee is responsible for oversight for whistleblower and conflict of interest policies, if not overseen by another independent committee.”

“The audit committee should be only independent Board members,” Floch advises.
“Financial expertise is not mandated, but it’s a good idea to recruit or train that expertise,” she notes. We are asked all the time for places to find out more about this, she says. Floch suggests checking with the AICPA, ( www.aicpa.org ) which has published an audit committee tool kit, specific to nonprofits.

Nonprofits with annual revenues of over $1 million, and more than 20 employees, must now have a Whistlebower policy, according to Zuckerman Spaeder Partner Mitra Hormozi. The “policy must include provisions for reporting violation of law and corporate policies, and protection and confidentiality, and be administered by person reporting directly to board.” Volunteers must also be aware of the policy, and, Hormozi notes, “the Employee Handbook may not be adequate for this.” She recommends that Boards consider an anonymous tipping capability. While the policy “must protect the whistleblower, frivolous reports can be disciplined,” she adds. Record all whistleblower reports or tips, document action and results.

Many of the governance procedures outlined above under the statute are part the framework of best fiduciary practices for Stewards, as outlined in the Handbook, “Fiduciary Practices for Investment Stewards,” from fi360 and the Centre for Fiduciary Excellencewww.CEFEX.org.

Nonprofit boards can save money and time by certifying that their decision-making framework embraces a fiduciary standard of excellence. This provides donors or grantors confidence that their support is well placed. FiduciaryPath can help, assessing the practices for certification or assisting Boards in developing best practices.  –Kathleen M. McBride

Fiduciary Weekend Round Up 1.25.14

Fiduciary Weekend Round Up

Does SIFMA Seek to Protect Model Where Client Serves the Broker, Not Fiduciary Model Where Broker Protects the Client?

Fiduciary News’s exclusive interview with Kate McBride, by Chris Carosa



Wall Street’s Whipping Boy and a World Without a Fiduciary Standard

Fiduciary News’s Fiduciary Crystal Ball 2014 – with Fiduciary Ron Rhoades and more



Worth Reading: “Keynes’s Way to Wealth” by John Wasik

Many think of John Maynard Keynes as the father of macroeconomics. What may surprise is Keynes’s success as in investor for himself, family and friends, and institutions.



Nobel Laureate Robert Shiller talks with Kate McBride –Podcast Replay

Interviewed amidst the economic crisis, Prof. Shiller discusses Keynes’s “Animal Spirits” and more. His words and forecast hold up, with much still playing out.



Brokers as Fiduciaries?

This white paper by Andrew Clipper raises interesting challenges for fiduciaries and those who want to be.