Questions Arise on Annual 401(k) Matches

According to a statement from Secretary of the Commonwealth William F. Galvin, a letter has been 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. It also seeks the disclosure information provided to plan participants about the potential risks associated with the change.

The statement notes that AOL shifted from a per-pay period distribution of the employer contribution to a year-end distribution, but in response to a negative reaction from its employees the Internet company reversed its position (see “AOL Changes Mind About 401(k) Match Change”). “At a time when most Americans have much of their retirement savings in these 401(k) plans, it is crucial that they are made aware of the risks involved when a company shifts to a year-end distribution,” Secretary Galvin says.

The letter to the 401(k) pension providers indicates “other companies such as Deutsche Bank, IBM, and Charles Schwab have shifted their employees’ benefits by paying matches in an annual lump sum.” The statement points out that while companies save money by making a lump-sum match contribution payment into 401(k) accounts at the end of the year, employees miss out on gains that could have accrues to their account during the year. Employees who leave during the year get no matching funds for that year, and the year-end employer contribution could go into investments during a declining market.

Fidelity Investments, one of the firms sent the letter from the Massachusetts Securities Division, offered this statement to PLANADVISER: “Fidelity provides 401(k) recordkeeping and other employee benefits services to more than 20,000 companies. A very small number of these companies—primarily large employers—have moved in the direction of annual lump sum matching contributions. In general, we are not seeing a big shift away from the more traditional method of matching employee contributions per pay period.”

Following IBM’s decision last year to move to an annual employer contribution, Jeanne Thompson, Fidelity’s vice president of thought leadership, told PLANADVISER this was not a widespread trend. An analysis of 14,000 plans showed that, in the small plan market, more than 20% use an annual contribution, but in the jumbo market, 3.3% did so in 2010, and in 2013 only 5.4% did (see “Employer Match Changes Not Widespread Reaction”).

The letter asks providers to send the information to Galvin’s office by March 10.