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AOL is leading the way to make 401(k)s worse for everyone

(Photo by Andrew Harrer/Bloomberg)

In our imperfect 401(k) system, there's one critical perk that many employees appreciate and count on: companies matching some part of their retirement savings every paycheck.

So when IBM changed its 401(k) system in 2012 to hand out employee matches in one lump sum at the end of the year, there was an uproar. Those who left the company before Dec. 15 would not see any matched dollars unless they were retiring. And employees would also miss out on all the compounding throughout the year from the contributions.

Retirement experts warned that with IBM setting the example, other companies would follow suit.

Sure enough, this year another major firm is making the change: AOL.

The tweak was subtle, buried in the company's summary of its 2014 benefits, and it's arguably even worse than the IBM change. 

In order to receive the company match, the employee must be "active" on Dec. 31, 2014. In addition, the contribution will be allocated as a "one time lump sum after the end of the Plan Year."

In other words, employees will have to stay through the end of the year to get the match, and then the contribution won't even come during 2014. In a year like last year, where the stock market was roaring, the difference for an employee who left in December could amount to thousands of dollars in pay and added savings.

An AOL spokesperson declined to comment for this story.

The onetime lump sum is particularly troubling because one of the advantages to the 401(k) is that it's better suited than traditional pensions to a world in which workers change jobs multiple times. People can pick up their savings from one company and easily switch to another.

But if more companies switch to matching contributions annually, the system punishes those who change employers mid-year. With every job change  over time, the loss of a few months' contributions can amount to years.

"It’s another way that the average employee is losing out in the modern system, which is unfortunate," said Mike Alfred, chief executive of BrightScope, a San Diego-based firm that independently rates corporate retirement plans.

Of course, for employers, it's a way of saving millions of dollars and encouraging employees to stay through the end of the year.

So far, AOL appears to be the only big company following IBM.

After IBM's announcement, Aon Hewitt, which consults on human resources, surveyed companies to see if they would follow. Largely, with AOL as an exception, firms have stayed put with matching throughout the year. The vast majority, 86 percent, contribute a match with every paycheck, according to Aon Hewitt. Only eight percent do an annual lump sum, in line with past years.

But  Brooks Herman, head of data and research at BrightScope, said it's probably too soon to tell whether annual matches will become a broader trend.  "If we want to look at the movement to index funds, ETFs, target date funds, all these trends in the marketplace," he said, "they take years to trickle down."