A Gaffe With Impact: An AOL CEO’s 401(k) Saga Leaves a Mark

It was a column destined to leave a sting. And it did.

The words of author Deanna Fei—the mother of a young daughter whose complicated birth became the center of a controversy over benefits at AOL last week—did much to leave the pressure on, even after CEO Tim Armstrong apologized and reversed a policy change on the way the company does 401(k) matching.

That’s because when Armstrong was looking for an argument to explain why the policy change was put into place, Armstrong blamed the birth of Fei’s daughter, along with another child, for it.

“Two things that happened in 2012,” Armstrong was widely quoted as telling AOL staff during a companywide conference call,  which was also included in Fei’s piece in Slate  (opens in a new tab). “We had two AOL-ers that had distressed babies that were born that we paid a million dollars each to make sure those babies were OK in general. And those are the things that add up into our benefits cost. So when we had the final decision about what benefits to cut because of the increased healthcare costs, we made the decision, and I made the decision, to basically change the 401(k) plan.”

Fei, whose husband works for AOL, wrote, “I take issue with how he reduced my daughter to a ‘distressed baby’ who cost the company too much money. How he blamed the saving of her 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.”

Despite the later policy change and apology, this has led many to suggest that Armstrong, who is no stranger to negative press, could be fired—and some to note that he might have violated federal health privacy laws  (opens in a new tab).

401(k) A-OK?

But, gaffe or no gaffe, the situation raises a serious issue about the nature of benefits and whether a business-world trend to change how 401(k) matches are distributed will catch on.

The trend, in which employers match 401(k) contributions on a yearly basis rather than a per-paycheck basis, first drew attention in 2012 after tech giant IBM made the change. Other companies, including Charles Schwab, have since followed suit  (opens in a new tab).

In a 2012 article on the topic from the Society for Human Resource Management  (opens in a new tab), author Stephen Miller notes the pros and cons for organizations that choose to use this style of matching: It discourages employees from leaving a company mid-year so as to keep their contribution, but also negatively affects the same employees, as it may hurt morale due to the decline in benefits.

Speaking to USA Today  (opens in a new tab), Planned Financial Services President and CEO Frank Fantozzi said that the missing out on a year of market fluctuations could be a huge downside for many employees.

“[A]s 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.”

It’s too early to tell if the trend will catch on further. However, the 2012 edition of Deloitte’s Annual 401(k) Benchmarking Survey  (opens in a new tab) [PDF] notes it is a fairly uncommon at this juncture. Roughly 83 percent of respondents said they offered per-period matching; just 9 percent used a lump-sum system that required employees to be employed on the last day of the calendar year.

The Challenges of Healthcare

But as Quartz notes, the situation is a complicated one for organizations  (opens in a new tab) worried about increasing healthcare costs.

“While not every medical problem is as critical or expensive as a sick infant (and singling out specific employees is extra gauche) companies are facing a trade-off between their employees’ health and their profits,” the site’s Tim Fernholz writes  (opens in a new tab). “Since the law mandates the former and their jobs the latter, they’re going to find other ways to cut—probably, though, not in the executive compensation account.”

Where do you lean on the complexities of employee benefits? Let us know your take in the comments.

(TechCrunch/Flickr)