(USA TODAY) - A year-end lump sum 401(k) match from your employer has a nice ring to it - unless you change jobs earlier in the year.
Employees that exit a company before year-end could lose out on the cherished corporate match, a key pillar of 401(k) savings plans now that the old-school corporate pension plan is going the way of the dinosaur.
This week, AOL became the latest high-profile company to shift to lump-sum, year-end 401(k) matching. The Internet company said it was ending the more traditional practice of making matching contributions with each paycheck during the year, a strategy that allowed employees to invest regularly via dollar-cost averaging.
But on Saturday, AOL CEO Tim Armstrong emailed employees announcing that the company was reversing its decision and would restore its original per-pay-period contribution, according to several reports.
Armstrong had told CNBC the year-end strategy was to offset higher costs related to the Affordable Care Act. But on Saturday night, Armstrong emailed employees with an apology, The Washington Post reports.
"The leadership team and I listened to your feedback over the last week," wrote Armstrong in his e-mail to the company, the paper reports. "We heard you on this topic. And as we discussed the matter over several days, with management and employees, we have decided to change the policy back to a per-pay-period matching contribution."
The fear is that more companies are going to switch to a year-end lump sum 401(k) match, which can add up to thousands of dollars in lost retirement savings for employees.
It's no small change for the workforce if it catches on given that 75% of Americans get the bulk of their retirement savings from 401(k) investments.
The practice is perfectly legal but not widespread yet. Just 9% of companies pay out 401(k) matches in lump sums once a year and require workers to work a certain number of hours or be employed on Dec. 31, according to Deloitte. IBM went to a similar plan in December in a cost-saving measure, creating a backlash among workers and prompting criticism from a few members of the Senate.
Here are a few ways it can shrink workers's nest eggs:
1. You leave, you lose. In short, it makes 401(k) balances less portable, which hurts job hoppers. To get the match, AOL says you have to still be employed at the company on Dec. 31. The downside: Employees who leave the company for another job during the year don't get the match.
"Let's say you leave AOL on Nov. 30, that means you have worked 11 of 12 months but you will get zero in matching contributions, which is not really fair," says Anthony Sabino, a business and law professor at St. John's University.
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.
3. The market is heading south. Investors might have the misfortune of investing the lump sum when stock prices are moving downward, such as at the start of a market dip, says Andy Busch, editor of The Busch Update.
"If you try to invest it all at once, you run into market-timing issues," he says, adding that a big investment in stocks at the start of the year would have added up to losses as stocks began selling off early in 2014.