How to change your 401(k) provider

LAST REVIEWED Apr 01 2022 9 MIN READ

By The Human Interest Team

You want your small business to be an employer of choice so you offered the best possible 401(k) your company could find. But 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 choice of a 401(k) 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. Benchmarking also helps plan fiduciaries prove they follow a prudent process when evaluating fees charged to the plan and reduces fiduciary liability. 

Interested in a free benchmark from Human Interest? Click here to get started. 

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 you start comparing fees, pay special attention to the ones you’re covering as the employer versus the fees your plan participants (employees) are paying, and 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.

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Performance

When examining if 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 Interest1 has an investment philosophy¹ that uses the expense ratio as a predictor of performance, as well as the long-term expected returns. 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?

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Switch your 401(k) provider

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. A reputable 401(k) provider should be able to proactively manage most of the process.

Unlike larger businesses, smaller companies may not need a formal RFP process to find the best 401(k) plan. But be sure that your process still involves the proper vetting of providers. During demos, sales meetings, and conversations with the potential providers, be sure that you’re gathering the important information you need to make an informed decision, including:

  • Fiduciary responsibilities

  • Investments

  • Service

  • Participant access

  • Cybersecurity

  • Fees

Once you choose a new provider, deconversion should take 60-90 days, with your efforts taking as little as a few hours at the outset to gather the information your new provider will need to initiate deconversion. From there, the new 401(k) provider should handle processes including asset transfer, document preparation, and participant enrollment. 

Toward the end of the process, the old provider will initiate a blackout period of about 10 business days to ensure all records are correct and investments are liquidated before they’re transferred. Up until the blackout period, all contributions should be sent to the old provider; once the blackout is complete, they should be sent to the new provider.

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.

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? Get started with a Human Interest 401(k).

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Sign up for an affordable and easy-to-manage 401(k).

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.

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Notes

1

Any reference to the advisory services refers to Human Interest Advisors, a subsidiary of Human Interest, Inc. Human Interest Advisors is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC. Built-in investment guidance is optional; participants can choose to manage their own funds.