March 12, 2014
Joseph Perry, Partner-in-Charge, Tax & Business Services, Quoted in Long Island Business News Article, "Firms Consider Changes in 401(k) Matching."
By Kristen D'Andrea
AOL’s recent attempt 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.
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.
“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.
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.
Still, whenever a large sum is being invested at one time, individuals run the risk of being a bigger winner or loser, Perry said.
It remains to be seen whether cash-strapped companies faced with sustainability issues consider making the switch.
“If the alternative is to keep the same percentage [contribution], and [making the match annually] allows them to continue with it, that’s a good thing,” Perry said. “Conversely, if a company is just doing it to keep more money in their own pockets, I can see why employees would be upset.”
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