Kristen D’Andrea, The Daily Record Newswire
AOL’s attempt earlier this year to make matching contributions to its employees’ 401(k) plans in one annual lump sum sparked plenty of employee backlash.
Although AOL ultimately reversed the change, several major companies – including IBM and JPMorgan Chase – pay their matching funds once a year, rather than through regular payroll checks. And as evidenced by AOL, more companies are considering this cost-saving measure.
Matching employees’ contributions to their 401(k)s is one of the benefits companies may include when putting together a compensation package. In a traditional 401(k) plan, employers aren’t required to make a matching contribution. If they do, however, they’re given latitude to tailor the plans to fit their needs, despite many federal regulations related to the administration of employer-provided retirement accounts.
According to human resources consultant Aon Hewitt, 85 percent of companies still pay employees’ matching funds at each pay period. Yet, as companies are increasingly looking to lower their expenses and increase profits, the adoption of these so-called last-day rules may become more prevalent.
“This is truly an effective tool used in year-end tax planning” by many of Grassi & Co.’s private-sector clients, said Carmine Minieri, partner at the accounting firm with offices in Jericho and Manhattan.
If employers choose to make a matching contribution, they have until the due date of their corporate tax return in order for it to be deductible in the year in which it was declared, Minieri said. For instance, for the fiscal year ending Dec. 31, 2014, companies have until March 15, 2015 to make their matching contribution, in order for it to be deductible in 2014.
Additionally, “it can be an effective cash management tool when done at year’s end,” Minieri said.
Joe Perry, partner-in-charge of tax and business services at Marcum in Melville, agreed.
“Some companies get cash-strapped during the year,” he said. “Instead of borrowing money to make sure they’re funding [employees’ 401(k) matches], they might be able to afford to pay more at the end of the year.”
While most employees will agree an end-of-year match is better than no match at all, many are concerned about what they’ll lose if their employer ultimately makes the switch.
Financial services firm Vanguard recently compared the difference to an employee’s 401(k) when the employer match (50 percent of the employee’s contribution, up to 6 percent of the employee’s salary) was received regularly every two weeks vs. annually. Assuming the employee, with a starting salary of $40,000 who contributed 10 percent of it to a retirement account, changed jobs seven times over a 40-year career – and, therefore, didn’t receive an employer match for seven years – the difference was calculated at $47,661.
Beyond the dollar amount, the greater concern is the effect of a last-day policy on employee morale, according to Charles Massimo, CEO of CJM Wealth Management in Deer Park.
“There really is no benefit to employees,” he said.
In addition to losing their ability to take advantage of dollar cost average – smoothing over the market’s volatility by making continuous, equal contributions to their 401(k) throughout the year – employees may be deterred from making any contribution at all.
“It’s so difficult to get people to participate in a 401(k) plan, even when there’s a match,” Massimo said.
Switching to an annual, lump-sum matching contribution may deter lower earners from contributing, which would only hurt the overall plan, he added.
As AOL Chief Executive Tim Armstrong learned the hard way, employees’ reactions can be harsh.
“A company needs to weigh the economic benefit against the potential erosion of employee relations,” Minieri said.
Long-term employees, however, don’t have as much reason for concern. And people who change jobs frequently may not be affected as much either, Perry said. Most plans require a vesting period before an employee is even eligible to receive the company’s matching funds.
If an employer does decide to switch to last-day rules, employees can try to counter the effects of the change by making a one-time investment into a cash fund and then allocating the money out monthly, Perry said. If, for instance, an employer had been making a $100 monthly contribution, which was then switched to $1,200 annually, the employee could invest the $1,200 in cash and, the following year, move $100 into his or her normal allocation each month.
Another option, Perry said, is for affected employees to change their investment strategy to allow for the one-shot, lump-sum addition. Rather than allocating the money to more volatile stocks, employees may want to put it in bonds or life strategies, he said.
It remains to be seen whether cash-strapped companies faced with sustainability issues consider making the switch.
