AOL Faces Criticism Over Changes to 401(k)
It should have been a glorious week for AOL chief executive Tim Armstrong. His company’s quarterly earnings, announced Thursday, were the best in a decade. “Olympian,” he declared.
Instead, he angered employees, insulted parents with sick babies and shined a light on a practice seeping its way into corporate America that threatens to rob workers of thousands of dollars in 401(k) savings.
The strange turn of events began Tuesday, when employees began learning that AOL was switching its 401(k) match to an annual lump sum, rather than distributing the money throughout the year with every paycheck as it had done before. Only employees who remain at the company through Dec. 31 are eligible, meaning that anyone who leaves mid-year won’t see any of the pay.
A number of companies, including Deutsche Bank and IBM, have been cutting their retirement benefits this way, saving millions of dollars just as more Americans are relying primarily on their 401(k)s because traditional pensions are being phased out.
The changes undercut a central virtue of the 401(k) system, which in theory should make it easier for employees to switch companies and take their savings with them. Instead, with people changing jobs more frequently during the course of their careers, the loss in matches can add up to thousands of dollars each time a worker switches employers. “Over a longer time horizon, you’re missing out on a huge percentage of all the appreciation if your money is not in the market,” said Mike Alfred, chief executive of BrightScope, which independently rates the quality of 401(k) plans.
Many at AOL did not know about the company’s new 401(k) policy until it was reported by The Washington Post last week. At first, after The Washington Post report, Armstrong blamed the change on the new health care law during an interview with CNBC. Then, on a conference call with employees, he added another reason: two workers had “distressed babies” in 2012, each costing the company $1 million. “Those are the things that add up into our benefits cost,” said Armstrong, according to an account of the call. “So when we had the final decision about what benefits to cut because of the increased health care costs, we made the decision, and I made the decision, to basically change the 401(k) plan.”
The remarks enraged employees and set off a heavy dose of criticism online. The tech blog Valleywag created a chart showing Armstrong’s salary ($12 million in 2012) as measured in “distressed babies.”
An AOL spokesman said the firm does not comment on internal matters.
Retirement experts say that the cut in benefits not only hurts those who leave the company mid-year but also those who stay put, since they lose the compounding benefits of having more money put into their accounts throughout the year.
Deutsche Bank will pay out matches in 2015 for U.S. employees who are still at the company Dec. 31, according to an internal document obtained by The Washington Post.
“We remain committed to continuing to invest in our employees’ retirement and have maintained our 401(k) match,” Deutsche Bank spokeswoman Mayura Hooper said. “With that said, in a rising cost environment, these types of changes are necessary for businesses to stay competitive.”
Companies such as Charles Schwab, Costco and Advocate Health Care, the largest health system in Illinois, handle 401(k) matches in similar ways.
IBM made its change in late 2012, setting off speculation that other companies would follow. The company’s action also spurred a stern letter from U.S. Sens. Patrick Leahy, D-Vt., and Bernie Sanders, I-Vt., who asked IBM to reconsider its decision and reinstate the 401(k) matches with every paycheck. IBM’s senior vice president of human resources wrote back, defending the change by saying that it “helps us maintain business competitiveness in an uncertain economic environment, while allowing us to invest billions of dollars in employee compensation and benefits programs each year.”
For employees who face the change, the difference can be dramatic, especially during a year such as 2013, when the S&P 500-stock index soared nearly 30 percent. Of course, in a down year, it would have done them a favor.
But employees are typically saving during the course of decades. And Alfred, the head of BrightScope, said that in any given year, much of the market’s appreciation can take place in just a few days. With the wrong timing on an investment, an employee can miss out on thousands of dollars of appreciation.
This is why getting a lump-sum match flies in the face of standard investing advice that savers should be making regular investments throughout the year, a practice known as “dollar-cost averaging.” The idea is that smaller investments timed every few weeks or months — whether the market is up or down — end up producing better results than throwing a bigger sum of money in once.
Companies making the change are in the minority, according to Aon Hewitt, which consults on human resources and surveys companies regularly about its 401(k) practices.
The vast majority, 86 percent, contribute a match with every paycheck, according to Aon Hewitt’s most recent report. Only 8 percent do an annual lump sum, in line with past years.
On Friday, AOL’s stock rose slightly after dipping nearly 1 percent the day before. Armstrong, meanwhile, was quiet. There was no word on why a company with about 4,000 employees would not be able to absorb the expenses of two employees with abnormally high medical bills.