If you like your company’s 401(k) match, you can keep it.
The Associated Press
Despite a scare that AOL gave its employees recently, corporate America isn’t scaling back 401(k) programs, surveys and employee benefit experts say.
CEO Tim Armstrong announced at AOL last week that instead of contributing to an employee’s retirement each paycheck, the company would give a lump sum payment at the end of the year, a move that could lower costs but potentially hurt employees’ savings.
The backlash was immediate, forcing Armstrong to backtrack within days.
IBM also generated headlines in late 2012 when it announced changing its 401(k) to an annual match, making it the largest company to use such a program. Some experts argued that a switch by IBM, one of the largest employers in the U.S., with more than 430,000 employees, could cause a shift in how employers handled retirement plans.
So far, the predictions haven’t come true.
“Overwhelmingly, businesses have told us that ‘we are unlikely to do this,’ ” said Rob Austin, director of retirement research at AON-Hewitt, a large global human resources consulting firm.
A survey last year by the firm found only eight out of every 100 large U.S. companies wait until the end of the year to make contributions, a level that hasn’t changed in two years.
The 401(k) remains one of the most popular employee benefit programs in the country. Nine out of 10 midsize to large companies offer a plan for employees. It’s also the primary way employees save for retirement, as company pensions and profit-sharing agreements have fallen by the wayside in the last 30 years.
AOL would have been the first large company since IBM to switch to this type of match program, and the publicity was highly negative.
Switching from a per-paycheck match to an annual match hurts employees a few ways. For one, it punishes employees who leave a company before the end of the year. Also, the employee’s 401(k) funds wouldn’t fully benefit from any stock market gains or dividend income during the year.
Let’s say an employer contributed $1,000 to an employee’s 401(k) last year. If the contributions were made monthly throughout the year and invested in an index fund that tracks the S&P 500, by the end of the year the value of that contribution would have grown to $1,245 because of increases in the index and income from dividends.
Under AOL’s proposed plan, the same employee would have received a lump sum payment of $1,000 at the end of the year.
The vast majority of companies that use an annual lump sum match are banks. At banks, the bulk of an employee’s salary often comes from a year-end bonus. Without it, any match would be much smaller.
The other side to the argument is that employees who do stay at the company year after year would be unaffected by a switch to an annual match. Also, if the stock market had a year like it did in 2008, when it fell 40 percent, the employer’s match would have been spared that decline.
“The reality is that the 401(k) is not being accessed for 20, 30, 40 years, so an annual match would smooth out over that course of time,” said Bruce Elliott, manager of compensation and benefits for the Society for Human Resource Management. “It’s the employees’ leaving the organization that are taking a hit, and it especially hurts employees who are laid off.”
Because so many employers now use a 401(k), any cutback is going to face resistance, Austin and other experts say.
The most popular employer match used to be 50 cents for every dollar an employee would put into a 401(k), up to 6 percent of an employee’s annual salary. For example, if an employee put $1,000 into his 401(k) each year, the employer would contribute $500 — making the total retirement contribution $1,500.
It’s now more common that employers will match dollar for dollar on contributions. A third of companies surveyed by AON used a dollar-for-dollar match now versus 20 percent of companies that use a 50-cents-to-a-dollar match.