Switching 401(k) providers: A quick guide for small businesses

You want your small business to be an employer of choice so you offered the best possible 401(k) your company could find. While the plan may have been a great fit at first, you’re realizing it may not offer the highest value to your business or your employees year after year. From changing fee structures to poor financial performance to new 401(k) products on the market, there are several reasons you may be reevaluating your provider. 

Sound familiar? If you’re looking to make a change, here are some tips that can help you evaluate your current provider and put a new plan in place if you do decide to switch providers.

Benchmark your current 401(k) 

The first step is to compare your plan to others of the same size and type, in a practice called 401(k) benchmarking. 401(k) benchmarking offers a useful framework to evaluate your provider. It also helps plan fiduciaries prove they follow a prudent process when evaluating fees charged to the plan and reduces fiduciary liability. 

Benchmarking demonstrates that you’re getting the best services for reasonable fees, offering a competitive plan, and achieving the objectives of your participants’ financial goals. Ideally, you should benchmark your 401(k) annually, looking at the following components of your plan.

Fees

As the former chairman of the Securities Exchange Commission said, “Perhaps no other issue…has as much direct impact on investors’ returns than the level of fund fees. While fund performance is unpredictable, the impact of fees is not.” Understanding a provider’s fees is an area where it’s worth your time to dig into the details. At the very least, administrative, investment, and transaction fees should track with other plans of similar size—but there are several other things to pay attention to as you compare fees. 

Plans for smaller businesses have traditionally been generally less cost-efficient because they lack the economies of scale of those at larger businesses. If your business has expanded and you haven’t seen a reduction in fees, it may be a red flag. Your fee disclosure documents should have all the information you need to make this determination as well as benchmarking comparisons. 

When comparing fees, pay attention to the ones you’re covering as the employer versus the fees your plan participants (employees) are payingand make sure you’re comparing apples to apples when looking at each. For example, the customer support, recordkeeping, and legal service fees that roll up into administrative costs may be paid entirely by you or passed to employees as flat fees or as a percentage of the assets in the plan (which makes plan sponsors, as plan fiduciaries, responsible for monitoring these fees).

Make sure you’re looking at the total cost of each category of fees, as well as total expenditures across the board for both the employer and employees. To help you analyze this further, check out Is your company’s 401(k) too expensive?

When it comes to the fees employees pay, transaction fees for one-offs such as loans and hardship withdrawals may comprise a large percentage, as opposed to lower recurring fees. While it may seem reasonable to pass on moderate to high fees associated with relatively low-frequency transactions to keep employer costs down, consider that there are plans that charge zero transaction fees.

Related articles: 

• How much does a 401(k) plan cost employers?

• Is your company’s 401(k) too expensive?

• Plan participants: Are your 401(k) fees too high?

Performance

When examining whether a 401(k) plan—including your assigned fiduciaries—is the right fit for your business, it’s important to be aware of its design and investment strategy. For example, Human Interest has an investment philosophy that uses the expense ratio and expected long-term returns as a predictor of performance. The goal of any retirement plan is to provide adequate retirement income, so if a plan isn’t growing, that also warrants more scrutiny.

Level of service

It’s important to assess the level of administrative work and time going into managing your company’s 401(k). Is the provider proactive and communicative? Do they provide support for compliance issues? Can you trust the accuracy of their data and punctuality around deadlines and pay periods? Also consider whether your needs are being met when it comes to IRS reporting and nondiscrimination testing. Did they explain that you need an ERISA bond? Form 5500s? Is the provider in good standing with regulatory agencies? Do they serve as a fiduciary?

How to switch 401(k) providers

Switching your 401(k) provider is a big decision that requires careful planning and execution. However, a reputable provider should proactively manage most of the transfer process for you. Below, we outline a three-step process that should provide you with a general understanding.

1. Assess your needs

If you determine that your current provider isn’t meeting your needs, switching will require your plan to undergo a deconversion, a process in which the new provider takes over the plan. It’s important to distinguish between deconversion and termination because the latter triggers IRS “successor plan” rules that would bar your company from establishing a new plan for one year.

Unlike larger businesses, smaller companies may not need a formal RFP process to find the best 401(k) plan. However, you should still ensure your process involves proper vetting of providers. During demos, sales meetings, and conversations with potential providers, gather the following information you need to make an informed decision, including:

• Fiduciary responsibilities

• Investments

• Service

• Participant access

• Cybersecurity

• Fees

2. Move to the new provider

Once you choose a new provider, a deconversion can take between 60-90 days. It should only take a few hours to gather information your new provider needs to initiate a deconversion. Generally, plan sponsors must sign formal transfer paperwork to initiate the switch with their prior provider. During this process, you will often receive details on handling transfer fees and other items that impact liquidation of assets. From there, your new provider should handle most processes including asset transfer, document preparation, and participant enrollment.

Toward the end of the deconversion process, the old provider will initiate a blackout period, generally starting 5-10 business days before the scheduled liquidation date, to ensure all records are correct and investments are liquidated before they’re transferred. The plan sponsor is responsible for distributing a blackout notice to any eligible participants and participants with a balance in the plan informing them that the Plan will be changing recordkeepers.

All contributions should be submitted to your prior provider until you begin remitting to your new provider. This may align with the blackout period set. 

3. Manage the transition

It’s important to stay compliant with ERISA while transitioning from one 401(k) provider to another. The blackout period is a good time to formally transfer nondiscrimination testing and Form 5500 preparation to your new provider, as your provider at the end of the year will generally be responsible for these items. If you deconvert your 401(k) plan in the middle of the calendar year, don’t be surprised if your new provider asks for some additional items from you or the old provider to complete ERISA compliance documentation. While they generally won’t communicate directly with the old provider, they should let you know what they need from them.

Following the receipt of the conversion assets, the plan administrator is responsible for providing the allocation information from the prior recordkeeper (in circumstances where it is not provided to the new recordkeeper directly). If there’s any information required to allocate the monies received that the prior recordkeeper cannot provide, the client is responsible for providing this information to their new recordkeeper (such as missing census information)

Know your options when comparing 401(k) providers

While it can take some time to find new providers and then review what their plan offers, it’s important to take the process seriously—you have a fiduciary responsibility to your plan participants, and skipping steps can cause serious problems later. Although you’re responsible for this due diligence, the right provider can ease the burden while lowering your costs and providing superior service to you and your employees. 

Want to make the switch today? Or, are you interested in a free benchmark from Human Interest? Click here to get started.