Did International Business Machines start something when it announced late last year that it was switching from payroll-to-payroll company matches for its 401(k) program to a one-time, year-end match? The company is considered a bellwether when it comes to employee benefit trends, so others – including small and mid-sized companies – are expected to at least examine the merits of such a change.

Citing the need to maintain business competitiveness, IBM made the switch to save money and provide an incentive for employees to remain with the company. Under IBM’s new policy, the percentage of the match will not change, but plan participants receiving the annual match must be employed as of Dec. 15 of each year, and it will be deposited on the last business day of the year. Hence the term “last-day rules,” which are implemented by about 9% of 401(k) plan sponsors, according to Aon Hewitt.

Small and mid-sized companies can certainly look into the cost savings of not matching at payroll time. There might be cash-flow advantages to making the switch, but it’s not mere conventional wisdom that suggests it’s to an employer’s advantage to have its employees participate in its 401(k) plan, and the company match is a key reason that employees participate.

According to data from Pensions & Investments, a money management publication, IBM contributed $875 million to its employees’ 401(k) plan for the 12 months ended Sept. 30, 2012, while employees contributed $1.2 billion. IBM stands to save some money by changing its eligibility requirements, but due to the company’s sheer size – the Fortune 500 company has more than 430,000 employees worldwide – the extent to which it forfeits employer contributions to departing employees is much higher than that for most organizations.

But does “Big Blue” run the risk of making its workforce blue? And do those who follow suit run the same risk? IB contacted industry experts for some thought leadership on the pros and cons from the employee and the employer side.

Retain and save

Even though one purported justification for last-day rules is retention, and opinions on employee impact are mixed, the biggest risk of such a change comes in both recruitment and retention, especially with the intense competition for quality labor.

Some have speculated that IBM’s new policy could make year-end staff purges more likely, negatively affecting employee morale, but what are the potential downsides for employers? Do they risk alienation or is the impact on employees negligible?

Patrick Georgia, health and benefits leader for Aon Risk Solutions, said the organizational benefits of better managing costs and retaining employees probably outweigh the potential recruiting downsides because the timing of a 401(k) match is not high on the list of most prospective employees. That’s especially true of workers who place greater emphasis on work-life balance.

“If you think about the recruiting process, employees make a decision on an organization based on culture and other factors,” he said. “I could be wrong, but whether the match is paycheck-to-paycheck or one time at year’s end, that would be well down the list in terms of what you would base your decision on.”

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There is certainly some risk of alienation, however, particularly with employees who are savvy investors. If an employee believes that an eligibility requirement may give an employer the room not to honor its commitment to that benefit, then he or she may call into question the authenticity of that employer-employee relationship, reasoned Charlie Judy, chief human relations officer for Baker Tilly Virchow Krause.

“Do I think that impact is significant? That’s really hard to answer,” Judy said. “Retention, after all, is not based on some program. Rather, it is based on an outcome of a whole lot of programs, benefits, experiences, and everyday interactions that employees have with each other and with the organization.”

Glenn Miller, managing partner of Wegner CPAs, acknowledged that IBM stands to save tens if not hundreds of millions of dollars in annual contributions. But with today’s low interest rates making it impossible to capture significant interest earnings, and small employers limited in the investment income they can earn even in today’s booming stock market, it might not be worth the risk of employee alienation. “I learned a long time ago that as employers, we should continually try to enhance benefits and not look for ways to make them less attractive,” Miller said.

Despite the controversial nature of the IBM decision, which was panned in some circles as a retrenchment in benefits, there are pluses for the employee who receives a lump sum employer contribution at year’s end. It’s possible the employee will recognize and place a bit more significance on the benefit because one larger lump sum might be more psychologically impactful to employees than smaller bi-monthly matches.

“When it’s buried every two weeks and it’s a few dollars here and there, employees can lose sight of what might well be a substantive part of their compensation package,” Judy said. “If this level of recognition leads to higher participation in a qualified retirement plan, that is in fact a benefit to our employees.”

Average averaging

The downside is that an employee misses out on the dollar cost averaging of a savings plan. As the markets go up and down, investors typically buy shares of stock at different prices; over time, the cost basis from buying shares at cheaper dollar amounts tends to be lowered, and investors have more shares to work on their behalf when the market turns positive.

When employers match on a payroll basis, it accelerates the funds into the program and helps with dollar cost averaging. “The fact that you are, in essence, beholden to a timing component in the market is not necessarily the strongest investment practice,” Judy said. “It makes sense for an employee to spread their contributions [self and employer] over time. While it can certainly work in their favor, the risk of it also working to their disadvantage is substantially heightened.”

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While dollar cost averaging helps serve as a buttress against market fluctuations, the ultimate impact also depends on the strength of the market when matches are made. If the market is down during the course of the year but rebounds at year’s end or in the new calendar year, a year-end match is more beneficial.

Good timing or bad, more employers are placing a compensatory emphasis on the performance of individual employees, Georgia noted. “If you look at the trends in the industry, not just ours but across industries, there is more compensation being tied to performance, which has a bigger upside for people but also a little bit of risk,” he said. “Most organizations would tell you that they are more comfortable that way and would like to build a culture around performance-based or success-based compensation.”

Flowing downstream?

Savings or no savings, Judy doesn’t view the move as a harbinger of things to come, especially in the small to mid-sized markets. “Cash-flow needs are organizationally dependent,” he noted. “If one finds the need for reserving more flexibility in how it uses its cash throughout the year, this approach might be compelling. I don’t think it’s compelling enough to all organizations, however, to constitute a trend.”

When it comes to employee benefits or any other form of tangible compensation, the value offered to employees is generally easy to calculate. On the other hand, it is far more challenging to calculate the value associated with the strong sense of connection and affiliation an organization builds with an employee. “It is that value that clearly distinguishes an organization as a great place to build a lasting and meaningful career,” Judy noted. “That’s far more powerful in the long run, in my opinion, than anything gained from short-term cash-flow preservation.

“If we hire the best people, if we keep them challenged, offer them lots of opportunity, and support them at every turn in their career, how we structure the eligibility requirements for our 401(k) matching contributions should be negligible.”

Miller’s advice for companies that feel compelled to change their benefit structure is to tread carefully; if change is needed, communicate with employees. “If it’s necessary to do that to maintain the sustainability of the company, then just have open and honest conversations with your staff on why you need to do that,” he counseled. “There are a lot of businesses that are really seasonable and they have cash-flow challenges, so I can see why an organization might want to consider changing the way it’s administering the 401(k) program, but you want to be careful and not do that until you have to.”

Calling All Counters

You can count financial services among the many industries that are fretting about future worker shortages these days. Blame it on the accounting-based corporate scandals of the 2000s or the role of finance and banking in the economic meltdown of 2008-09, but companies in this industry are staring at a daunting numbers game.

Roughly 132,000 state residents work in financial services – including banking, finance, and accounting – and the industry accounts for 10% of the state’s gross product. Yet it faces a workforce shortage, particularly in finance and accounting, because its projected workforce needs in 2020 will reach 152,460, a 15% increase over 2010.

The young people entering these careers tend to be very intelligent, hardworking, and creative, but there aren’t enough of them. With a good chunk (45%) of the industry’s total workforce over age 45, according to the U.S. Census Bureau, and with only about 4,700 students across the state graduating in 2011 with degrees in general business finance and insurance, there is a sense of urgency.

Financial services companies and associations have formed a consortium and are in the process of reviewing existing university and technical college programs to identify skill requirements; create a standardized, cross-sector curriculum; and evaluate youth apprenticeship programs. According to Mike Stoetzel, a partner at CliftonLarsonAllen, the industry is counting on the recruiting skills of high school counselors and college academic advisors to help students understand the potential for rewarding careers. Improving financial literacy education is also part of the strategy.

Stoetzel notes that a career in financial services is rewarding, even when the economy is struggling, but he says it’s up to the industry to get the word out. “Our biggest obstacle is perception,” he said. “There are no insurance executives, bankers, or accountants with a TV show or other media attraction that makes these careers look exciting. There are no video games or social networks that are broad-based attention attractions for us.”

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