You may have heard about the flap caused a couple of weeks ago when the head of the online service provider AOL proposed that his company change the way it contributes to employees' 401(k)s. Rather than match each employee's contribution in each paycheck, AOL proposed waiting until the end of the year to make a lump-sum contribution.
That might seem like a minor accounting change, but thanks to the power of compounding, it makes a significant difference. Vanguard ran a study supposing that a person put 10 percent of his salary into a 401(k) with a 50 percent employer match, and a 4 percent return above inflation. After a 40-year career, this employee would have $595,272 with a standard every-paycheck match, but just $547,611 with the year-end match.
That's a difference of nearly $50,000. Fortunately for 401(k) savers, very few companies have switched to the once-a-year match. According to the Plan Council Sponsor of America, only 17 percent of companies offering 401(k)s run them that way.
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