Mass. Regulator Argues for Better Disclosures of Match Changes

In the report, the office of the Secretary of the Commonwealth of Massachusetts William F. Galvin argues that under the existing Employee Retirement Income Security Act (ERISA) rules, employers are required to notify employees of any changes to the retirement plan, including changes to match contributions; however, current rules do not mandate that employees receive meaningful and timely disclosure of such changes. The report notes that current disclosure obligations only require the employer to inform the employee that a change occurred, not information about how that change might detrimentally impact her overall retirement plans.

The report also notes employers have up 210 days after the end of the plan year in which the change is made to make the disclosure. “Giving this material information to employees months after the change has occurred renders the disclosure totally ineffectual,” the letter says, adding that plan participants would benefit from more immediate and transparent disclosure of changes to 401(k) plans.

Earlier this year, Galvin announced a letter was sent to the 25 largest 401(k) plan providers seeking the number of plans they administer that have shifted to year-end lump-sum matches, the number of affected employees, and the date of the change (see “Regulator Questioning Move to Annual 401(k) Match”). It also sought the disclosure of information provided to plan participants about the potential risks associated with the change.

The report says 28 firms were sent a letter. Twelve of the firms contacted did provide 401(k) recordkeeping or plan administration services. Sixteen responded that while they provided other services, they did not provide recordkeeping or plan administration services. In addition, many firms challenged the jurisdiction of the MSD in connection with requesting information regarding its services as a recordkeeper to retirement plans. Other firms indicated that providing information and records would violate the confidentiality terms of the various agreements between the firm and its plan fiduciary clients and noted privacy concerns. Two firms would not provide information absent a subpoena.

As a result of the inquiry, the Massachusetts Securities Division (MSD) found with those firms that voluntarily responded, each claimed that it was not the 401(k) recordkeeper’s obligation to know about the content and implementation of any amendments to a 401(k) plan. Moreover, none of the firms stated that they had any fiduciary duties to independently develop or issue disclosures to employees in the 401(k) plan regarding risks related to the employers’ annual match of employee contributions. Further, most of the firms were not involved in communications to participants regarding changes to plan features.

“It became clear from the MSD’s survey that the only party who has a duty to disclose plan changes is the employer or plan sponsor,” the report says.

The report indicates that while the responses received provided limited data, what was established is that if there is a trend, it is moving from periodic match employer contributions to a year-end, lump-sum contribution.

“[P]rompt congressional and [Department of Labor] action is necessary to ensure that material changes to 401(k) plans, specifically the timing of match contributions, are required to be disclosed in a full, understandable, standardized disclosure (beyond mere notification to plan participants),” the report says. “Meaningful disclosure, at a minimum, should be mandated before more companies move to year-end match contribution and specifically provided prior to that change occurring.”

A copy of the report is here.