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AOL’s Armstrong apologizes as 401(k) gaffe stirs workers’ outcry

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(Bloomberg) — It was another rough week for Tim Armstrong and AOL Inc.’s HR department.

AOL’s chief executive officer had to backtrack on a 401(k) policy change, after his comments defending the idea fueled an employee outcry. Armstrong last week said AOL needed the retirement-plan tweak to help offset health-care costs, such as two employee pregnancies that resulted in “distressed babies” with more than $1 million each in medical expenses. Over the weekend, he reversed the 401(k) decision in a memo to employees.

“We heard you on this topic,” Armstrong, 43, said in the memo. “I made a mistake and I apologize for my comments.”

The mea culpa was Armstrong’s second in about six months for a public controversy. In August, he sent a memo to workers saying he was wrong for firing a creative director in front of a room full of employees, as well as a thousand others who were listening on a conference call. The CEO’s comments in the latest situation prompted the mother of one of the infants to criticize Armstrong in an essay she wrote for

“The hardest thing to bear has been the whiff of judgment in Armstrong’s statement, as if we selfishly gobbled up an obscenely large slice of the collective health care pie,” Deanna Fei wrote for the news and analysis Web site. “We experienced exactly the kind of unforeseeable, unpreventable medical crisis that any health plan is supposed to cover. Isn’t that the whole point of health insurance?”

A spokeswoman for New York-based AOL declined to comment beyond Armstrong’s memo.

PPACA to blame?

The uproar overshadowed AOL’s fourth-quarter earnings results, which were released Feb. 6 and exceeded analysts’ sales and profit estimates. In Armstrong’s memo, he said the performance “validated our strategy and the work we have done on it.”

Under the announced 401(k) change, AOL planned to match employees’ retirement contributions in one annual lump sum, instead of incrementally at each pay period. While the level would have stayed the same at up to 3 percent of annual pay, the switch would have meant workers who depart AOL before the payout would forfeit the matching money. Employees also wouldn’t have been able to benefit from investing the contributions over the course of the year.

After announcing the policy last week, Armstrong appeared on the CNBC cable network, where he blamed President Barack Obama’s health-care law for forcing cutbacks. Obamacare added $7.1 million in expenses for AOL, he said. Other companies — including United Parcel Services Inc., the fourth-largest employer in the U.S. — also have cited the law for cuts.

‘Distressed’ babies

In a meeting with employees, Armstrong said the health-care expenses of two workers in 2012 played a role in his decision on which benefits to cut, Capital New York reported last week. The two employees had “distressed babies that were born,” costing AOL $1 million each, he said, indicating that he’d rather give priority to health care over retirement among the company’s benefits.

In his memo over the weekend, Armstrong said he shouldn’t have discussed specific health-care examples at a meeting with employees.

Fei, the mother of one of the infants, wrote on that her daughter weighed 1 pound 9 ounces when born by emergency cesarean section in October 2012, just five months into an otherwise routine pregnancy. The girl spent three months in a neonatal intensive-care unit.

Even now that her daughter is home and healthy, Fei wrote that she can’t take the girl’s presence for granted. “All of which made the implication from Armstrong that the saving of her life was an extravagant option, an oversize burden on the company bottom line, feel like a cruel violation, no less brutal for the ludicrousness of his contention,” wrote Fei, a novelist whose husband is an editor at AOL.

HR gaffe

AOL’s human-resources gaffes have been a distraction from Armstrong’s broader goal: transforming a dial-up online service provider into an advertising-driven Web publisher. While the acquisition of the Huffington Post and TechCrunch sites have helped fuel ad sales, his effort to create a nationwide local-news service faltered. AOL agreed last month to sell the majority of that endeavor, called Patch, to Hale Global, an investment firm that specializes in distressed businesses.

AOL competitor Yahoo! Inc. weathered its own HR controversy last year after CEO Marissa Mayer scaled back work-from-home benefits. Activist groups and workforce consultants criticized the move, saying it would make it harder to attract the best employees and keep them productive. Richard Branson, the billionaire founder of Virgin Group Ltd., weighed in on the issue, calling the change a “backwards step.”

Mayer stuck with the new policy, saying it has been well received internally and helped the company develop products more quickly. Innovative new features are being created because workers from different disciplines collaborate closely, she said at a conference in May.

“That only happens when people come together,” Mayer said.

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