Thinking of Changing 401(k) Providers? Here’s What You Should Know

If you’re considering changing 401(k) providers, be sure to spend some time assessing your current situation and prioritizing your criteria.

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Perhaps you’re unhappy with the amount or quality of support. Or you’re hearing too many complaints from your employees. Or your employees aren’t receiving the education and communications you had hoped for and engagement in the plan is low. Or you’ve learned you’re paying more than you should be (this is more common than you might think!). Or you're making other changes to your tech stack (payroll provider, etc). Or you’ve simply outgrown the provider you hired when all your organization needed was a bare-bones 401(k) plan.

Whatever the reason, it’s not unusual for companies to change their 401(k) provider from time to time. Changing providers does not mean that you are terminating your 401(k) plan (which has legal ramifications including not being able to establish another 401(k) plan for a year). When you change providers the plan itself stays intact, although it is not uncommon to make plan design changes at the same time.

Even if there is no specific pain point with your current provider, it’s good practice to periodically review your plan provider in light of the competition to be sure your plan is keeping up with industry best practices and that you and your employees are getting good value for your money.

Before you start your search

Before you undertake a search for a new provider, you should gather relevant materials on your current 401(k) plan and assess your current situation to help define which criteria are most important to you. It’s also a good time to read through your current agreement to see if it reveals information that you may not have been aware of.

Although some of the areas bleed into one another, be sure to consider:

  • Current Fees -- do you know how much you and your employees are paying all-in? 401(k) plan fees can be complicated and often include fees that are embedded within the fund expense ratios. Your fee disclosure documents, required to be provided to you, should give you the information you need to know and allow you to accurately identify all of the fees paid by you or the participants (charged against plan assets). Ongoing fees may include recordkeeping fees, audit fees, compliance fees, investment management fees, legal fees and fund fees. In addition, you’ll want to be sure you capture one-off fees such as amendment fees, termination fees and (for participants) individual service fees such as loan fees and QDRO fees.Fees can vary greatly, especially when it comes to the number of assets in a plan. Smaller plans often pay significantly more than larger plans simply because they lack economies of scale. If your plan has grown substantially and you have not seen a fee reduction, chances are you may be paying too much.  Fee comparisons can be hard to come by, but one source is the 401k Averages Book.
  • Fiduciary Responsibilities - be sure you know what level of fiduciary responsibility your current provider assumes and whether you want your new provider to have that same level of responsibility, take on more fiduciary responsibility, or whether you’re comfortable taking on more fiduciary responsibility yourself.With respect to investments, the provider may be an ERISA 3(21) fiduciary, who provides only investment recommendations; an ERISA 3(38) fiduciary, who provides dictionary investment management; or may not be a fiduciary at all. With respect to administration, the provider may or may not provide ERISA 3(16) services; however, there can be a wide range of functions that fall within that, so refer to your agreement to be sure you know exactly which services they are responsible for (and which be default fall to you as plan administrator).
  • Current Investments -- This may be dependent upon the level of investment fiduciary responsibility, but for starters, what is the investment philosophy of your current provider and does that approach align with the needs of your employee demographic. Remember that as a fiduciary, you have an obligation to operate the plan for the benefit of your employees, so this isn’t about what you or a handful of managers want from an investment perspective; it’s about what would serve the best interests of the majority of your employees.

You’ll want to be sure you know:

  • What are your current investment options?
  • What kinds of vehicles are used (mutual funds? ETFs?)
  • Are funds passively (i.e., indexed) or actively managed?
  • Are funds reasonably-priced?
  • Is participant investment advice incorporated into the approach? For an additional fee? How personalized is the advice?
  • What is the default investment (used when participants fail to make an investment election and money is deposited into their account), and how personalized is it to each participant?
  • Do participants have investment flexibility?
  • Current Plan Design - what features (automatic enrollment, Safe Harbor, etc) about your current plan do you plan on retaining? Are there features you would like to add/change/remove when you change providers? Now may be a good time to consider these.
  • Current Service -- Although you and other team members may have opinions about the quality and level of service to you as a plan sponsor, be sure you also gather information about the level and quality of service your employees receive from your current provider.
  • Payroll Integration - whether or not your current 401(k) provider is integrated with your payroll provider, how smoothly have things been running? Is payroll integration something that is important in a new provider? Be sure you understand the different levels of payroll integration and which responsibilities you may retain.
  • Compliance and Audit Support - Are you getting the compliance and audit support that you need without any unpleasant surprises? Are documents provided for your review and approval accurate and timely? When you’ve needed to consult on compliance issues, do you receive clear and helpful answers to your questions? Does the provider deliver a comprehensive audit package to you if you need it and collaborate well with your auditor?
  • Participant Education - What kinds of educational resources are available to your employees not only when they first become eligible for the plan, but on an on-going basis as well? Does the platform help employees establish their retirement goal and track their progress toward it?
  • User Interface - How easy is the user interface and how well does it meet the needs of your employees? Is it easy for them to make changes, find information?
  • Financial Wellness - Does your provider help employees beyond the 401(k)? Does the platform allow them to sync outside accounts and track other financial goals?
  • Participant Engagement - Are your participants making good use of the plan, with a healthy majority of employees making contributions at healthy rates? If not, is it because of the plan design or is it more a function of the provider's tools, resources, and approach? For instance, is there enough guidance to help people make decisions or are employees left to their own devices to determine how much to save and which funds to use?

Although only larger companies are likely to undertake a full-blown Request for Proposal in the hunt to identify a new 401(k) plan, it’s a good idea to document and rank your criteria. In this way, you can be sure to cover all relevant topics with each provider under consideration and have a record of your decision-making process. The selection of a 401(k) provider is, after all, a fiduciary decision.

What to expect when changing providers

It may be helpful to understand the framework of the process involved with changing 401(k) providers so that you can manage expectations internally and create reasonable timelines. Typically, changing providers takes at least 90 days, with coordination and testing needed between both providers to reconcile all records and ensure accurate and timely transfer of plan assets, so you’ll want to plan accordingly.

Once you have identified your chosen successor provider and have executed the services agreement, the high-level steps involved include:

  • Notify your current provider of your decision (you may hear them refer to this as a “deconversion” process)
  • Establish timeline for asset transfer and go live date with new provider
  • Review your current plan document with the new provider
    • This will give you an opportunity to discuss any potential plan design changes. Be sure to raise any challenges you have faced with your current plan design as well as any organizational developments (planned expansion, layoffs, etc) that may impact your plan
  • Investment selection
    • If your new provider is a 3(38) investment fiduciary, you will likely have nothing to do here since the provider has discretionary investment responsibilities and will make all decisions with respect to fund selection and monitoring.
    • If your new provider is NOT a 3(38) investment fiduciary, then you will have the responsibility for selecting funds for your plan. The plan provider will likely have a menu of options for you to choose from. However, this is an important fiduciary responsibility, and if you (or others at your organization) do not feel qualified to make these decisions, then you should consider hiring an investment expert.
  • Review and approval of revised plan documents
  • Communicate change to employees (including required legal notices), with information on how to set up/access their account with the new provider
  • Blackout period
    • The blackout period usually takes about 10 days, giving the prior provider time to ensure all of the records are correct before funds are transferred. During this time, employees cannot make contributions, change investments, make transfers, or take loans or distributions. Plan assets will remain invested during the blackout period.
  • Transfer of assets and allocation of plan assets to participant accounts at new provider

FAQs for Changing Providers

What are the most common reasons that companies change 401(k) providers?

Common reasons to consider changing 401(k) providers include:

  • High fees
  • Low levels of customer support (for you as plan sponsor and/or your employees), including support with compliance and/or audits
  • Lack of employee guidance, advice, and education that lead to low levels of engagement and/or employee complaints
  • Poor investment performance
  • Lack of features

Although one factor may have been the catalyst for your organization to consider changing providers, do not let that overshadow a thorough and fair assessment of other elements that should be taken into account. Remember, choosing a 401(k) provider is a fiduciary act and should be clearly documented and carefully evaluated.

What happens during a 401(k) blackout period?

The blackout period usually takes about 10 days, giving the prior provider time to ensure all of the records are correct before funds are transferred. During this time, employees cannot make contributions, change investments, make transfers, or take loans or distributions. Plan assets will remain invested during the blackout period.

What happens to an employee 401(k) loan if my company changes providers?

The outstanding loan will be transferred from the old provider to the new provider. Remember, the plan remains intact, and the loan is from the plan, not the provider. Repayments are made to the employee’s account.