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AOL Reverses 401(k) Policy After Blowback

Like boomers (and all workers, for that matter) don't have enough to worry about when it comes to saving enough for retirement. Now actions by AOL's Tim Armstrong may be setting a dangerous example for other companies to follow.

First, the chief executive of AOL told employees Thursday he was changing the company's 401(k) match to a year-end lump sum contribution rather than contributions throughout the year. Leave before Dec. 31, 2014 (voluntarily or involuntarily), and you lose out on a year's worth of contributions and appreciation, unless you're retiring. On Saturday, after an uproar over the change in policy - and some insensitive comments that pretty much blamed the 401(k) change on the company's rising health care costs stemming from two employees' circumstances - Armstrong reversed the 401(k) year-end contribution policy. He said AOL will keep making its bimonthly per-pay-period contributions.

Nancy Hwa, a spokeswoman for the Pension Rights Center in Washington, says the AOL announcement "is a bad example and sets a bad precedent" for other companies considering such moves.

(Armstrong blamed the pared-down employee retirement benefits on the high medical costs involving two "distressed babies" of employees.  Deanna Fei, the mother of one of those babies and the wife of an AOL employee, was livid. She wrote on  Slate  that Armstrong "exposed the most searing experience of our lives for an absurd justification for corporate cost-cutting.")  

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When companies switch to matching contributions annually to save money and boost their bottom line, like IBM did in December 2012, employees stand to lose out in a big way - even those who stay on through the end of the year.

Consider the bull market in 2013, for example. The broad market posted its biggest gains since the 1990s, according to USA Today. But if a 401(k) annual contribution policy like the one AOL initially announced had been in place, employees would have lost out on some of those earnings because employers wouldn't have matched contributions until December.

"It's very inefficient to go into the market at the end of the year. The dollar-cost-averaging effect is a lot safer over the course of the year. You buy into the market when it's up and when it's dipping, so you get an average pricing," leveling out risk and return, says Lee Rosenberg, president of American Investment Planners in Jericho, N.Y. "In 2013, if you bought in at the end of the year, it's very late so you would've missed out on a rising market all year."

"To wait and get a lump sum matching contribution at the end of the year ... denies people the opportunity to save," Rosenberg says.

It's a particularly bad deal for older workers who are closing in on retirement and have less time to build up savings.

"It's cheating folks who are saving for retirement out of the contributions and earnings they would've gotten had the contributions been going in all along like they're generally supposed to," says Deborah Chalfie, a senior legislative representative at AARP. "It becomes an issue the closer you get to retirement because you're closer to the time when you'll be needing those benefits. And if you leave before the end of the year, you've lost a whole year's worth of employer contributions. You need those assets to build up as much as possible. Very few people have traditional pensions anymore" to fall back on.

Following an outcry from AOL employees, Armstrong reversed the 401(k) policy and changed it back to the per-pay-period matching contribution. He also apologized for publicly citing the medical problems of the two employees' families, and the related high costs, as a reason for altering the 401(k) program.

Companies often use 401(k) matching contributions as a perk to attract and retain employees. Some companies stopped or cut back on these matching contributions during the recession and weak recovery. In stronger economic times, however, such changes may be viewed as especially troublesome by employees.

"It's an effective way to destroy all the layers of trust between employees and management," says Nathan Gendelman, president of the Family Firm, a personal finance advisory firm in Bethesda, Md.

If there's at least one lesson to be learned in all of this, it's that workers must rely on themselves to save enough for their future, says Stuart Ritter, a senior financial planner at T. Rowe Price in Baltimore.

"You must make sure that 15 percent of your salary is put away every year. It can be in an IRA or 401(k).  If your employer matches 3 percent, you need to be putting in 12 percent," Ritter says. "Each one has to take responsibility for himself to save for retirement. That is what has the biggest impact on our success and it's within our control."

Photo: hidesy/iStock

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