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IBM Adopts End-of-Year 401(k) Matching Payment
Change will reduce Big Blue's retirement costs, but could limit participants' investment returns

By Stephen Miller, CEBS  12/17/2012

Last updated on 2/10/2014 

Update:
After Uproar, AOL Reverses Year-End 401(k) Match

After being lambasted by employees and the media, AOL Inc. Chief Executive Tim Armstrong said on Feb. 8, 2014, the company would rescind a controversial change to its 401(k) plan and apologized for remarks used to explain the initial policy shift, the Wall Street Journal reported.

The company, following the lead of IBM (see below) and others, had recently announced it would give employees a lump-sum contribution to their 401(k) retirement accounts at year-end, rather than matching contributions each pay period. The year-end disbursement was available only to employees active on Dec. 31 and meant that those who left before then wouldn't get a matching contribution, the Journal reported.

Armstrong caused an uproar among employees and social media by saying that care for two staffers' "distressed babies" in 2012 had cost the company about $1 million each, and that higher heatlh care costs required the company to cut benefits elsewhere. On Feb. 9, the mother of one of the babies Armstrong referred to posted an article on the website Slate taking issue with "how (Armstrong) exposed the most searing experience of our lives...for no other purpose than an absurd justification for corporate cost-cutting." 

Since IBM's shift was announced in December 2012, other companies including Charles Schwab, Costco, Deutsche Bank and Advocate Health Care, the largest health system in Illinois, have begun handling 401(k) matches in similar ways, the Washington Post reported. While employees never like to see their benefits delayed or reduced, the change to year-end matching at these companies took place without major controversy—and without references to "distressed babies."

To learn more, see the SHRM Online article "Learn from AOL’s 401(k) Missteps."

The original story on IBM's adoption of a year-end match, announced in December 2012, appears below. IBM has retained its year-end match policy.

In a move to rein in retirement plan costs, IBM announced changes to its 401(k) defined contribution plan in December 2012. Starting in 2013, the company will no longer match employee contributions made via paycheck deferrals throughout the year. Instead, it will make a cumulative, end-of-year lump-sum matching payment into employees' 401(k) accounts, typically matching employee contributions up to 6 percent of pay. Plan participants who terminate employment before Dec. 15 will not qualify for the match unless they reached normal retirement age when leaving the firm.

"IBM is a $100 billion company with an enormous payroll and certainly huge 401(k) match. The float (earnings) on these dollars is enormous," said Ed Rataj, CCP, managing director of compensation consulting at CBIZ Human Capital Services, to SHRM Online. He noted that IBM will financially benefit from not paying a match to employees who leave during the year, and that "While this will be partially offset by prorating the match for new employees, with the size of IBM, there is a large benefit to the change."

Negative Impact on Savings Growth

Typically, employee morale and engagement drop when workplace benefits are perceived as being reduced or eliminated, and Rataj noted two ways that paying the match once a year could affect investment returns for employees' 401(k) accounts negatively. It could do so first by removing the employee’s access to market returns on match dollars throughout the year, so that "essentially, IBM gets the float at the expense of its employees' investment returns." Second, paying the match on an annual basis shifts investment funding with these dollars away from the principle of dollar-cost averaging throughout the year, "making future returns on the match amount dependent on whether the market happens to be high or low on Dec. 31 of a given year," Rataj said.

Turnover Impact Limited

On the other hand, while employees may gripe about the change, an end-of year cumulative "super match" might be viewed as an inducement for them to stay put—at least until year-end. Rataj, however, isn't so sure.

"From an HR perspective, I doubt that the change to the 401(k) would cause someone to rethink accepting another job offer," he said. "Most employees are looking for at least a 10 percent increase in pay to consider leaving their current employer; in many cases, they receive even more once they start looking. As a result, a year-end 401(k) matcheven IBM’s rich 6 percent matchis probably not a sufficient carrot to keep them from leaving. Additionally, in the event that it does change an employee’s behavior, it will impact timing alone and not the ultimate outcome. The employee will still leave, they may just wait a few months to do so."

Moreover, "with the skills that many IBM employees have, most would find it very easy to negotiate a 6 percent signing bonus to make up for foregoing the IBM match," Rataj noted.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related SHRM Articles:

Learn from AOL’s 401(k) Missteps, SHRM Online Benefits, March 2014

401(k) Match: 'Thresholds' Drive Participation More than Rates, SHRM Online Benefits, July 2012

Encourage Employees to Defer Adequate Pay to 401(k)s, SHRM Online Benefits Discipline, May 2012

Educate Employees on 401(k) Contribution Limits and Matches, SHRM Online Benefits Discipline, March 2012

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