Retirement: Trimming the match on 401(k)s

“Beware the end-of-year 401(k) match,” said Ron Lieber in The New York Times. AOL sowed outrage this month when its chief executive announced that the company would stop matching employees’ retirement contributions every pay period, and instead pay out one annual lump sum at the end of the year. While the company eventually reversed the change, “everyone who saves in a 401(k) or similar plan needs to take a close look at what AOL was trying to do.” So-called last-day rules are not uncommon among banks, where “employees tend not to walk out under their own power until they’ve gotten their year-end bonus.” But now switching to year-end contributions is “on the menu of cost-saving changes that many employers consider each year.” That’s bad news for most workers, for whom such a change could shortchange retirement savings by more than $40,000 over 40 years of employment.

Companies are “squeezing their workers’ retirement savings” in other ways, too, said Carol Hymowitz and Margaret Collins in Bloomberg.com. Some “have been scaling back company matches and setting lower limits for the maximum annual payment they’ll make to a 401(k) account.” Even small changes can have big impacts: “A difference of three percentage points on a match can add up to hundreds of thousands of dollars lost for employees over the course of their careers.” Companies such as Hewlett-Packard, Whole Foods, and JPMorgan blame “bottom-line considerations and marketplace competition” when they cut their matches, and say they offer other benefits—such as better health-care plans, vacation policies, bonuses, and stock options—to make up for paltry retirement contributions. But retirement cutbacks “are adding to employees’ financial anxieties at a time when incomes are stagnant and even those earning low-six-figure incomes aren’t accumulating enough retirement savings.”

Thankfully, the perfidious year-end match is not “a growing trend,” said Ken Sweet in the Associated Press. According to a 2013 survey by AON Hewitt, only eight out of every 100 large U.S. companies do it, and “that level hasn’t changed” since IBM announced its adoption of annual matches in late 2012. Experts worried that its switch would cause employers to adopt year-end matches en masse, but “so far, the predictions haven’t come true.” Now, thanks to AOL’s debacle, “any cutback is going to face resistance.” Companies that might have been tempted are realizing that the change would “come at a loss to worker productivity, morale, and damage to recruiting.”

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