Compliance February 25, 2014

Questions Arise on Annual 401(k) Matches

The Massachusetts Securities Division is looking into how many 401(k) plan sponsors have moved to paying deferral matching contributions annually.
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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.

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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.

Data & Research February 25, 2014

Retirees Worried About Ongoing Benefits

Unprotected pensions, loss of retiree health care benefits and reduced Social Security payments worry retirees.
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More than half (51.3%) of retirees rank the security of their pensions and retirement savings as the most important issue they face, according to results of an online survey conducted by ProtectSeniors.Org, in conjunction with former Chairman of the Richmond Federal Reserve Bank and former White House Employee Retirement Income Security Act (ERISA) adviser, Dr. Thomas J. Mackell, Jr. Another 9.9% are concerned about the adequacy of their pension or retirement savings to meet their future needs.

Nearly one-third (30%) of retirees polled say they are concerned their defined pension benefits could be transferred to an insurance annuity, resulting in loss of ERISA and Pension Benefit Guaranty Corporation (PBGC) protections. Nearly four-in-ten (37.9%) say their pensions have already been transferred to an insurance company and converted to an annuity.

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Respondents were almost unanimous (98.1%) in their support of legislation that would protect retirees whose defined benefit pensions have or could be sold off by their former employers in a transaction referred to as pension de-risking, resulting in the loss of ERISA protections.

“As major U.S. corporations continue to try to dump their pension and health care obligations on insurers who will convert those defined benefits into annuities, retirees have become justifiably fearful about the prospect of negative impacts on their economic security,” said Mackell. “As the survey results show, these fears are becoming of greater concern to retirees and they want action taken to protect their interests and security.”

The survey also found 83.2% of respondents say they fear losing the supplemental health care benefits provided by their former employers. Nearly 11% have already lost those benefits; 24.3% say the supplemental health care benefits previously provided by their former employers have already been switched over into a health care exchange plan. About one-third of retirees view the loss of retiree health care benefits as the most important issue they face.

Nearly 60% of respondents say they want larger increases in their Social Security cost-of-living adjustments (COLAs). When asked how they would use the extra money:

  • 55.7% say to pay for medical care;
  • 30.5% say for shopping or dining;
  • 30.2% would save it;
  • 29.7% say they would pay off debt;
  • 27.2% would help family members; and
  • 7.3% say they would pay for living essentials.

“The fact that over 55% would use a Social Security increase to meet health care needs and almost 30% to pay off debt is a troubling signal,” said Mackell.

To keep Social Security solvent, a total of 73.1% of respondents favored a variety of eligibility rule changes, either separately or in combination. The survey found 33% believe senior citizens who receive more than $150,000 a year in retirement income should NOT be eligible to collect Social Security; 26.8% advocate raising the minimum Social Security retirement age to 67 from 62; and 12.9% favor a combination that includes raising the age minimum, cutting off seniors who receive more than $150,000 a year in retirement income, and implementing the Chained Consumer Price Index (CPI) to calculate annual COLAs.

Only 3.1% of respondents favor use of the Chained CPI, which assumes that as prices for one product rise consumers will choose a less-expensive alternative. Approximately one-in-four respondents (23.8%) do not support any of the changes to Social Security eligibility rules the other respondents favored.

The survey poll was conducted online from December 5 to 20, 2013 and received 1,111 responses, including retirees from Verizon and General Motors, where pension de-risking transactions have previously occurred. The survey can be found at www.protectseniors.org.

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