AOL, Inc. (NYSE:AOL) is changing employee benefits, matching 401k investments in a single lump sum payment instead of matching contributions each pay period, citing rising costs from Obamacare as the main cause.
“Do we pass the $7.1 million of Obamacare costs to our employees or do we try to eat as much of that as possible and cut other benefits?” said AOL, Inc. (NYSE:AOL) CEO Tim Armstrong an NPR report. Armstrong also mentioned two distressed pregnancies that cost the company $2 million when he announced the change to employee benefits, reports Justin Bachman for Bloomberg Businessweek.
Employees who leave before Dec 31 miss out entirely
AOL, Inc. (NYSE:AOL) saves money under the new plan in two ways. Employees who leave before the end of the year won’t get the lump sum payment (giving AOL a perverse incentive to think about layoffs every year in December), and the company can use that cash for other purposes in the meantime.
Aside from losing part of the 401k contribution from their final year at AOL, Inc. (NYSE:AOL), employees will also lose out because they can’t invest money throughout the year. Smaller, regular investments are supposed to reduce volatility (a somewhat dubious claim), but more importantly employees will miss out on about six months’ worth of returns on average. If the policy had been in effect since last year, AOL employees would have received their 2013 lump sum matching payments sometime in January 2014, missing out on the rally but just in time for the decline.
While it’s important to keep benefits from getting out of control, it does seem strange for a company that just had its first good year in a decade to annoy its workers and make it harder to recruit new talent.
Lump sums could become the norm
Washington Post reporter Jia Lynn Yang noticed this a few days ago, though the story didn’t catch on until Armstrong discussed the changes, pointing out that International Business Machines Corp. (NYSE:IBM) made a similar change in 2012. If lump sum payments become the norm then employees will routinely lose matching 401k payments every time they switch jobs, creating a strong incentive to quit in January (assuming lump sum payments roughly match up) and costing months’ or years’ worth of benefits over a career.