Monday, February 10, 2014

AOL Reacts to Media and Employee Pressure

AOL had made a decision to follow in what many were calling the IBM mold. Rather than providing matching contributions in its 401(k) plan on a payroll period basis, it had decided to make single matching contributions after the end of the plan year. Therefore, employees who left during the year would not receive matching contributions.

The media were up in arms. Employees were up in arms. AOL gave in and is returning to its former policy of matching on a payroll period by payroll period basis.

And, this is big news!?

What really got to me about the media coverage was the spin that they managed to put on it. Employees could be losing out on the massive run-up on the matching contributions. Not said was that those balances could lose money as well. It's not fair that employees who leave during the year won't get matching contributions. What makes this fair or unfair? If you know the rules up front and you are evaluating leaving during the year, this should be one of your considerations.

How bad is it really? I'm going to oversimplify my example so that the math doesn't strain my brain. Suppose Employee Z has wages of $100,000 per year and a company matches 50 cents on the dollar on the first 6% of pay contributed. This is not an unusual design. Further suppose (and this is not quite right) that matching contributions are usually made on average exactly halfway through the year. Also assume that under the IBM design that matching contributions are made on the January 1 after the end of the year. Finally, assume that balances earn, on average, 10% returns (I want that investment adviser).

Suppose Z does not leave the company during the year. Then the difference during that year is is approximately 5% of $3,000. In other words, under the more traditional design, Z will have an account balance that is $150 larger. Yes, there are the effects of compounding, but this is really not as big a deal as the media made it out to be.

Surely, AOL has already determined how much money it plans to spend on its employees. if it spends more on the 401(k) plan, rest assured it will spend less somewhere else. It all comes out in the wash. But, it sure does make for an exciting story when a bunch of reporters, many of who think the plan is called a 401 [without the (k)], get a hold of it.

Really, it isn't.

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