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Galvin opens inquiry into retirement accounts

Secretary of State William F. Galvin is examining year-end lump sum 401(k) payments.
Secretary of State William F. Galvin is examining year-end lump sum 401(k) payments.Jessica Rinaldi for The Globe/File

The state’s top securities regulator has opened an inquiry into 401(k) contribution practices that save employers money, but could over the long term shave tens of thousands of dollars from workers’ retirement accounts.

Massachusetts Secretary of State William F. Galvin on Monday asked the country’s largest 401(k) plan administrators to provide the names of businesses that make year-end, lump-sum contributions to retirement plans, instead of disbursing the matches at regular pay periods or quarterly.

Regular contributions can add to retirement nest eggs by providing matches even if workers leave companies mid-year, smoothing out the ups and downs of the stock market, and by taking advantage of market gains that occur over several months in a year. For example, lump-sum contributions made at the end of 2013 missed one of the strongest stock rallies in decades. The Dow Jones industrial average gained nearly 30 percent last year.


“This has very significant effects on employees,” Galvin said of employers’ practice of making single, end-of-year contributions to workers’ retirement savings.

Galvin’s inquiry comes a few weeks after AOL, the Internet portal and media company, tried to shift to end-of-the-year contributions from matches at each pay period, but abandoned the plan after an uproar among workers. Galvin and retirement specialists said maximizing contributions to 401(k)s and similar plans is particularly important since the vast majority of employers no longer provide traditional pensions.

Nearly 70 percent of workers hold retirement savings in 401(k)s, compared to 19 percent in an employer-provided pensions, according to Alicia Munnell, director of the Center for Retirement Research at Boston College. Americans already have too little socked away for retirement, she said, and can ill afford to lose any opportunity to boost those savings.

The average household approaching retirement in 2010 had just $120,000 saved in 401(k)s and similar accounts, she said. An analysis by the mutual fund company Vanguard for The New York Times 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. The reason: People may leave in the middle of the year, missing out on their former employer’s end of year contribution to their 401(k).


“It’s cheap and bad,” Munnell said. “I don’t understand what employers think employees are going to live on in retirement.”

The practice of making an end-of-year contribution appears to be limited. Only 8 percent of employers in 2013 provided an annual match, according to a study by Aon Hewitt, an Illinois consulting firm. A survey by Aon Hewitt the year before found that 22 percent of employers were hesitant to move to an annual match because of “concern over negative employee reaction.”

Among the companies that have adopted annual lump-sum contributions are Deutsche Bank, IBM, and Charles Schwab Corp. IBM made the switch in 2012, but still provides one of the most generous 401(k) plans, including offering free financial planning services. Lump- sum payments allow companies to hold onto the money throughout the year, earning interest.

Officials at IBM and Schwab could not be reached for comment Monday evening. Deutsche Bank declined to comment.

Galvin acknowledged that he does not have the power to require companies to make matching 401(k) contributions at each pay period. But, he said, bringing attention to the issue by finding out from mutual fund companies who does it should help employees make better decisions when negotiating their compensation packages.


Knowing whether the practice is growing can also help determine whether additional federal legislation is needed to protect employees, Galvin said.

Galvin has asked the country’s 25 largest 401(k) administrators how many employers have shifted to year-end matches recently, the number of workers affected, the date of the change, and any disclosure provided to employees about potential risks.

The information is due to Galvin’s office by March 10.

Boston-based Fidelity Investments, the nation’s largest provider of 401(k) plans, said it sees no indication that more companies are moving toward this approach.

Fidelity works with more than 20,000 companies and only a small number, primarily large employers, have moved to annual lump-sum matching contributions, said spokeswoman Eileen O’Connor.

“We are not seeing a big shift away from the more traditional method of matching employee contributions per pay period,” O’Connor said in a statement.

Deirdre Fernandes
can be reached at deirdre.fernandes@globe.com