Open up on 401(k) policies, state says

Secretary of State William Galvin.
Jessica Rinaldi /GLOBE STAFF/File
Secretary of State William Galvin.

Massachusetts Secretary of State William Galvin called on federal regulators to expand disclosure rules so that workers are warned if employers plan to change regular 401(k) matching contributions to yearly payouts.

Such a change can cost a worker tens of thousands of dollars in retirement savings.

The 401(k) account has become the primary way that workers finance retirement, but they have little control over changes to them, Galvin said. He came to the conclusion after launching an inquiry this past winter into how many companies have switched to year-end, lump-sum contributions, instead of disbursing the matches at regular pay periods or quarterly.


A recent analysis by the mutual fund company Vanguard found that a worker changing jobs seven times over a 40-year career would lose more than $50,000 if 401(k) matches were made with lump sums, because people leave their jobs in the middle of the year and can miss out on the employer’s end-of-year contribution.

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Employees have little opportunity to object to these types of changes, Galvin said. Under current guidelines, employers do not have to give employees advanced notice; they are required only to notify workers within 210 days after the end of the plan year that the change takes effect.

“It’s totally inadequate,” Galvin said.

Workers should be notified at least 30 days before, and the employer should explain the total cost of the change, the benefits, and risks, Galvin said. The information should be presented in easily understood language, Galvin recommended.

Massachusetts Senators Elizabeth Warren and Edward J. Markey sent a letter Thursday to the US Department of Labor, endorsing the recommendations.


“We cannot ask Americans to play the investment game without ensuring they have the full and up-to-date understanding of the ground rules,” the letter states. “Anything less would be unfair.”

In February, Galvin asked the country’s largest 401(k) plan administrators to provide the names of businesses that had changed their match practices. The request followed an attempt by AOL, the Internet portal and media company, to shift to end-of-the-year contributions from matches at each pay period as a way to save money. AOL’s decision caused an uproar among its workers, and the company scrapped the plan.

Less than half of the 28 retirement account administrators queried responded to Galvin’s request. Others said they did not keep track of a participating company’s practices or could not provide the information because it would violate confidentiality agreements with clients.

According to the data provided, 86 percent of companies still provide matching contribution with regular paycheck, while 8 percent do it annually.

Deirdre Fernandes can be reached at Follow her on Twitter @fernandesglobe.