(Updates with Fidelity and BlackRock in eighth paragraph.)
Feb. 24 (Bloomberg) -- The Massachusetts Securities Division is calling on 401(k) plan administrators to report how many companies have shifted to a lump-sum matching contribution once a year, a change that can undermine worker savings.
The unit sent a letter to the 25 largest providers of 401(k) plans, requesting the number of employers who pay distributions at year-end, when the move was made from more frequent payroll periods and what workers are told about the potential consequences, the division said in a statement today.
“Employers are seeing the opportunities they have to take advantage of the flexibility in the system to short-change participants,” William F. Galvin, Massachusetts secretary of the commonwealth and chief securities regulator, said in an interview. “If employers can get away with making changes that help their bottom line and no one is going to complain about it, they’re going to do it.”
Companies across industries are squeezing 401(k) contributions by holding back on the amount and timing of their matching funds, making it harder for U.S. workers to save for retirement, Bloomberg News reported on Feb. 14. AOL Inc. called attention to the practice earlier this month when Chief Executive Officer Tim Armstrong announced plans to make payments in one sum at the end of year, citing spiraling health-care costs including money spent on care for babies. The move touched off a controversy, Armstrong apologized and the company reversed its decision.
Galvin said that AOL’s maneuvering and news reports including Bloomberg’s showing that the practice was more widespread influenced the division’s decision to open the inquiry.
Companies save money by making lump-sum payments into 401(k) accounts at the end of the year or after, according to the Massachusetts statement. Employees miss out on gains on matching contributions that could accrue during the year and employer contributions may go into a declining market. Workers may also lose out if they leave the company before Dec. 31.
The Standard & Poor’s 500 Index of stocks gained 30 percent in 2013. Equities declined 3.6 percent in January, when some employers who delay their matching contributions, such as JPMorgan Chase & Co., made their payment to workers. International Business Machines Corp. and Charles Schwab Corp. are among companies making annual payments, according to the statement.
The Securities Division requested that 401(k) providers submit the requested information by March 10, according to the statement. Firms that were sent a request include Boston-based Fidelity Investments, the largest administrator of 401(k) accounts; Vanguard Group Inc.; BlackRock Inc.; and T. Rowe Price Group Inc., according to the Securities Division.
Vanguard declined to comment because it hasn’t received the letter, according to Linda Wolohan, a spokeswoman for the Valley Forge, Pennsylvania-based company. Fidelity spokeswoman Eileen O’Connor and Brian Beades, a spokesman for New York-based BlackRock, also declined to comment. Baltimore-based T. Rowe Price didn’t immediately have a response, said spokesman Bill Benintende.
Galvin said the inquiry probably won’t result in legislative changes because of “dysfunction” in the federal government. He said he’s hoping the documentation will help workers have an impact on policies at their current jobs and raise the issue when employers try to make new hires.
“If you make it competitive when they’re looking for employees, it will give employees the power of the marketplace,” Galvin said.
--With assistance from Carol Hymowitz in New York. Editors: Sree Vidya Bhaktavatsalam, Pierre Paulden, Josh Friedman