Megan McArdle does a fine job of defending AOL CEO Tim Armstrong but I fell obliged to nitpick this point about the restructured employer match to the 401(k) program:
For those who haven’t been following along at home, a recap: Last week, AOL Inc. announced that it was changing the way it handled its 401(k) match. Instead of putting the matching money in as workers put in their contributions, it would award the account-match dollars in a lump sum at the end of the year. Moreover, if you left the company during the year, you’d lose all of your matched funds.
What he said about the effects of changing the 401(k) match isn’t exactly true, however -- it’s not just people who leave the company who will pay. All the AOL workers who contribute to a 401(k) will miss out on gains they might have made over the course of the year, had AOL stuck with its old program. In a boom year, that could add up to thousands of dollars.
Well, yes, in a boom year it would be financially advantageous to have invested money during the year rather than at year-end. On the other hand, in a down year, such as 2008, the year-end lump sum structure would have saved equity investors some money relative to investing during the year. On the third hand, the stock market has more up years than down years.
And - last hand - I have grave doubts about that "add up to thousands of dollars" claim. Let's consider a highly motivated AOL professional earning $200,000 per year. Per this site, they would have been eligible for a maximum match of 3%, or $6,000:
The company, which owns TechCrunch and, it goes without saying, employs me, matches 50 percent of up to 6 percent of our pre-tax income (or a 3 percent maximum match, for the non math-majors).
So let's take 2013 as a "boom year", with the S&P 500 up roughly 30%. A lump sum invested at the start of the year would grow by $1,800. That is nearly $2,000, so I suppose "thousands" could apply.
But of course, that is not the relevant comparison. I let the OCD take over and dredged up the monthly close of SPY, , an ETF which tracks the S&P 500. An investment of $500/month at each month end from Feb 1 to Jan 2, 2014 would have represented a total investment of $6,000 and an ending value in Jan 2014 of $6,398.43. A $400 return on $6,000 is lot less than 30%; 6.7%, actually.
Now obviously there are possible paths for the market to take that would lead to equal monthly investments showing net growth of 30% by year end. For example, it would be helpful if the market would swoon in Janauary, crater over the summer and then rally heroically late in the year.
However, my guess is that there are not many AOLers earning $200,000 a year and not many examples of a year where the S&P showed that kind of behavior. So this hypothetical loss of "thousands" to some AOL employees sounds like a tremendous longshot.
I should add that Ms. McArdle is hardly alone; here is another account:
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 that had to wait to get their matching contribution on the last day of the year missed out on huge gains.
"Huge" gains? A 6.7% averaged 2013 return for an employee getting a max match on $50,000 per year would have been $100. If you think that is huge, wait'll you see what I've... oh, never mind.