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AOL’s Armstrong apologizes but is the threat to workers’ 401(k) plans real?

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AOL’s Armstrong apologizes but is the threat to workers’ 401(k) real?

Over the weekend, AOL Chief Executive Tim Armstrong reversed a recent change to his employees' 401(k) plans and apologized for comments he made to explain the initial move. Last week he attributed the change to higher health care expenses, naming Obamacare and two staffers' "distressed babies" as reasons for the company's higher costs.

His comments generated a firestorm of criticism in reaction, including an article in Slate from the mother of one of those "distressed babies."

Bigger picture, when it comes to the actual issue of retirement benefits and healthcare costs, Yahoo Finance Editor-in-Chief Aaron Task and I discuss whether employees should be concerned about companies making a move like Armstrong attempted to. AOL's (AOL) initial change was to give employees a lump-sum contribution to their 401(k) retirement accounts at the end of the year, rather than matching the contributions each pay period.

First, why would it matter? One reason could be fairness. In the case of AOL, USA Today reports an AOL employee still had to be at the company by Dec. 31 to get the match, so if a worker left the company before, he or she would get zero contribution from the company, even if that employee had worked most of the year.

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Are companies making this kind of change more broadly? While IBM (IBM) announced a similar plan in December as a cost-savings measure, more broadly, just 9% of companies pay out 401(k) matches in a yearly lump sum and require employess to work a certain number of hours or be employed on Dec. 31, according to Deloitte (as reported in USA Today).

In other words, this practice is not widespread.

What about the issue of health care costs impacting retirement benefits? When it comes to how companies look at retirement and health care benefits, benefits attorney Bill O'Malley tells The Wall Street Journal that while health care costs don't directly affect a company's spending on retirement benefits, companies do often consider them in tandem.

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So are healthcare costs putting increasing pressure on companies' compensation?

Well, according to the Bureau of Labor Statistics, the cost of health benefits to employers in the private sector as a percentage of employee compensation was 7.7% in the third quarter of 2013, and these costs have averaged 7.67% when you look at the figures quarterly over the last two-and-a-half years. In other words, they haven't changed much.

An editorial at CNN.com from Dylan Roby, director of Health Economics and Evaluation Research at UCLA, indicates that the Affordable Care Act does include fees for insurers and third-party administrators, and in 2014 a company like AOL may need to pay up to $63 per year per insured employee. However, in the past four years, the rate of national health care spending growth has slowed to less than 4% per year, which is half the growth rate of the previous four decades.

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And health care prices have been rising more slowly -- increasing at 1.4% in 2013, which was the slowest pace of health care inflation in half a century, the New York Times reports.

Finally, when it comes to companies on the hook for expensive health care costs, the WSJ reports that most large companies pay claims directly, but also purchase stop-loss insurance which is designed to pick up unexpected amounts over a certain annual per-patient or per-company figure.

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