Learn from AOL’s 401(k) Missteps

Lessons aplenty on how not to execute and communicate benefit changes

By Joanne Sammer March 3, 2014

It was the benefits change heard ’round the world.

When AOL Inc. CEO Tim Armstrong announced that the company would switch from matching employee 401(k) contributions each pay period to providing a lump-sum match at the end of each year, the way he framed the announcement could not have been worse.

Instead of explaining the change to employees in terms of how and why it would occur, Armstrong went into too much detail about the rising cost of health care.

“Two things that happened in 2012,” Armstrong said, according to a transcript obtained by Capital New York. “We had two AOL-ers that had distressed babies that were born that we paid a million dollars each to make sure those babies were OK in general. And those are the things that add up into our benefits cost. 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.”

Within a week the ensuing negative publicity caused AOL to reverse its decision and stick with its year-round 401(k) matching contributions.

So what can other employers learn from AOL’s experience? Plenty.

“AOL broke a couple of rules,” said Jennifer Benz, president of Benz Communications in San Francisco. AOL should have put employees first when communicating the change to the 401(k) plan. Instead, Armstrong focused on the business’s financials and the rising cost of health benefits. “The company needed to talk about changes from the perspective of the average employee, not the company,” Benz noted. “Putting company needs above employee needs is always a disaster.”

And the CEO’s pointing out specific individuals’ medical situations also has raised eyebrows. In fact, many observers have questioned why Armstrong had access to that personal information in the first place and whether that violated privacy laws.

To clarify, the Health Insurance Portability and Accountability Act (HIPAA) allows insurers or third-party health benefit administrators to report aggregate claims data to employers, which can be useful for tailoring health and wellness benefits to address the needs of the employee population.

There is no evidence Armstrong knew which employees were responsible for the high cost of the preterm "distressed babies" he referred to until one of the mothers identified herself in an article she postedon 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."

Nevertheless, “There is no excuse for using identifiable personal information about specific employee situations to justify a change in the 401(k) policy,” said Michael Claes, executive vice president of Nicholas Consulting LLC in New York. “It is clear he was trying to share his pain at making a painful decision, but in doing so he seemed to try to get credit for what an employer is obliged to do when it provides benefits and health coverage to employees.”

Finding the Right Message

It is unclear whether AOL’s experience will discourage other 401(k) plan sponsors from moving to a year-end match. But employers are much more likely to think twice about how to execute and communicate the change to plan participants. The following are among the takeaways for companies mulling over a switch:

  • Develop clear messaging about the change. “While there are not a lot of employers that do the year-end match, a good strategy is to put the focus on rewarding employees who make a commitment to staying with the company for the entire plan year,” said Christine Worthen, of counsel at law firm Broad and Cassel in Fort Lauderdale, Fla. “Waiting until year-end would mean that the employee who remained employed for the entire year would get the match, while the employee who left midyear would not.”
    Others agree that a year-end match doesn’t have to be a problem. “Employees who are not planning on leaving the company won’t have an issue with a change like this if it is explained correctly,” said Susan Hosage, SPHR, an HR consultant based in Scranton, Pa.
  • Communicate early—and often. “Conversations with participants about a possible change should start very early on in the decision-making process and continue throughout the due diligence,” advised Deborah Castellani, a principal at OTB Strategic Consulting Inc. in Austin, Texas “Also, with such a major change, the communication and education should be done in smaller groups that would give more opportunity for participants to ask questions and voice opinions.”
  • Drive home the need to manage costs as a key message,but communicate it carefully. Even though benefits are a critical part of any effort to attract and retain talented employees, businesses need to stay competitive and manage costs. “Every company is evaluating approaches to benefit expenses with the escalating cost of health care,” Hosage observed. “Since margins for most products and services are not increasing at the same rate, these additional expenditures are coming directly from the company's bottom line.”
    However, employers that need to cut costs should consider whether a change to a year-end match would be better received than other alternatives, such as a cut to the match itself. “Employees might see a match cut as a pay cut,” said Worthen. “Plans also need participation to satisfy nondiscrimination rules, so a lower match may mean participation is less attractive for lower-paid employees.”

Worthen's recommendation: employers should focus on developing “a carefully crafted communication plan that links the change to a desire to reward longer-term employees, rather than reducing the match.”

Spotlight on Year-End Matches

Even with these efforts, there is no guarantee that the change will go smoothly. Certain companies, notably IBM, have successfully transitioned to year-end 401(k) matches with comparatively little fanfare, but others might draw more attention than they would like.

For one thing, as a result of the AOL situation, year-end 401(k) matches could be held up to more scrutiny. The brouhaha, for instance, led a number of prominent publications, including The New York Times, to run articles on such matches that highlighted their negative impact on retirement savings for employees who change jobs every few years. The Massachusetts Securities Division even launched an inquiry calling on 401(k) plan administrators to report how many companies have shifted to a lump-sum matching contribution at year-end, when the move was made, and what workers were told about the potential consequences, Bloomberg Businessweek reports.

Yet when all is said and done the switch probably “won't save much in terms of benefits costs,” predicted Simon Moore, chief investment officer at FutureAdvisor, a wealth-management firm based in San Francisco. And that limited cost savings must be weighed against the detriment to employees’ savings.

“Individuals are better off investing small amounts over time, rather than investing a large amount all at once,” Moore noted. “The former approach allows the individual to take advantage of dollar-cost averaging to even out the highs and lows of the market over time. By contrast, investing money as a lump sum creates a timing risk if the market takes a downward turn shortly afterward.”

Finally, for high earners, an end-of-year match has one tangible upside: It eliminates the risk of losing out on per-paycheck matching contributions if they max out their allowable 401(k) contribution before the end of the year (the salary-deferral limit for 2014 is $17,500 plus another $5,500 for those 50 and older). But don't expect that argument to win the hearts of your average Jane and Joe Worker.

Joanne Sammer is a New Jersey-based business and financial writer.

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