Higher Costs ‘Villain’ Backfires On AOL CEO
It’s been a rough few days for AOL Chief Executive Tim Armstrong, and things could get worse.He’s ignited a firestorm of protests from employees and others about the company’s move to scale back its 401(k) contribution match, blaming it on the company’s health care costs associated with the births in 2012 of two “distressed babies” and the Affordable Care Act.
Last week in a town hall meeting with employees, Armstrong, 43, announced the company’s decision to change the company’s 401(k) contribution match to a lump sum at the end of each calendar year instead of paycheck to paycheck.
It meant that workers who left before Dec. 31 were out of luck on a matching contribution for the year. It also meant all workers could no longer invest their 401(k) match throughout the year, with the potential misfortune of investing a lump sum just as stock prices headed south.
MORE: AOL reverses position on year-end 401(k) match
Employees expressed outrage, and by Sunday, the company had reversed its change to the 401(k) contribution match, and Armstrong apologized for his remarks. But the mother of one of the babies wants a personal apology, and posted an article Sunday on Slate.com, “My Baby and AOL’s Bottom Line,” describing the health problems of her daughter born four months premature on Oct. 9, 2012.
Deanna Fei, whose husband works as an editor for AOL, wrote: “I take issue with how … he blamed the saving of (my daughter’s) life for his decision to scale back employee benefits. How he exposed the most searing experience of our lives, one that my husband and I still struggle to discuss with anyone but each other, for no other purpose than an absurd justification for corporate cost-cutting.”
Armstrong apologized in an e-mail to employees late Saturday. “On a personal note, I made a mistake, and I apologize for my comments last week at the town hall when I mentioned specific health care examples. … We want to be open and transparent about the choices we make and why we are making them.”
“This is commendable,” Fei wrote, “but the damage to my family had already done.”
Others inside and outside the company seem to agree. The incident was fodder for cable news talk shows throughout the weekend, Fei was interviewed Sunday on NBC’s Nightly News, and the outrage went viral on social media.
“I don’t get why AOL’s CEO Tim Armstrong still has his job today,” tweeted Robert Scoble, a start-up liaison officer at Rackspace Hosting in San Francisco.
“Is AOL CEO a caveman? Blaming employee pregnancies for money woes?” tweeted Eve Tahmincioglu, director of communications for the Families and Work Institute in New York.
AOL and Armstrong did not immediately respond to a request for comment. It’s not the first time Armstrong has apologized to employees. In August, the CEO said he was sorry after he fired an employee during a staff meeting.
The fear remains that other companies may switch to a year-end lump sum 401(k) match, which can add up to thousands of dollars in lost retirement savings for employees. IBM went to a similar plan in December in a cost-saving measure, creating a backlash among workers and prompting criticism from a few members of the Senate.
It’s no small change for the workforce if it catches on, considering 75% of Americans get the bulk of their retirement savings from 401(k) investments.
The practice is perfectly legal but not widespread yet. Just 9% of companies pay out 401(k) matches in lump sums once a year and require workers to work a certain number of hours or be employed on Dec. 31, according to Deloitte.
Here are a few ways it can shrink workers’s nest eggs:
1. You leave, you lose. In short, it makes 401(k) balances less portable, which hurts job hoppers. To get the match, AOL had said you have to still be employed at the company on Dec. 31. The downside: Employees who leave the company for another job during the year don’t get the match.
“Let’s say you leave (a company) on Nov. 30; that means you have worked 11 of 12 months but you will get zero in matching contributions, which is not really fair,” says Anthony Sabino, a business and law professor at St. John’s University.
2. You miss out on gains. “As a participant, I want the money as soon as possible,” says Frank Fantozzi, president and CEO of Planned Financial Services, a Cleveland-based firm that runs retirement plans for 50 companies, all of which deposit 401(k) matches with each paycheck.
“And as an investor,” adds Fantozzi, “I want to get the money in the market as soon as I can. Getting the money on Dec. 31 theoretically means you miss out on a year of earnings.”
In 2013, for example, when the Standard & Poor’s 500 stock index rose 30%, investors who had to wait to get their matching contributions on the last day of the year missed out on huge gains.
3. The market is heading south. Investors might have the misfortune of investing the lump sum when stock prices are moving downward, such as at the start of a market dip, says Andy Busch, editor of The Busch Update.
“If you try to invest it all at once, you run into market-timing issues,” he says, adding that a big investment in stocks at the start of the year would have added up to losses as stocks began selling off early in 2014.