Go beyond a basic 401(k)

Go beyond a basic 401(k)

Give your employees more than just a 401(k), join the movement.

5 min read

Switching 401(k) Providers: 7 Points to Consider

David Ramirez
December 20, 2023
Switching 401(k) Providers: 7 Points to Consider
Table of contents

Providing a competitive retirement plan is essential for recruiting and keeping top talent. In order to help their employees save for the future, many small firms offer 401(k) plans. But if your company’s 401(k) is underperforming or if your employees are unhappy with your current plan, you may want to look into making a change.

It can be a big step for a small business to switch 401(k) providers. In this post, we’ll talk about key considerations when switching 401(k) providers.

7 Points to Consider Before Switching 401(k) Providers

1. Costs

The choice to switch 401(k) plans is often influenced by financial considerations. There are a lot of hidden fees that 401(k) providers charge both employers and employees. Fees that are only reflected in your investment returns, such as 12b-1 and other fund fees, can add up quickly on top of investment, administrative, and service fees. Are you unaware of what these are? Most of the employees who pay them are also unfamiliar with them.

Fees associated with 401(k) plans can be confusing, so we’ll break them down into three categories:

Plan administration fees

A 401(k) plan’s sponsor often foots the bill for administrative fees, including those for design, documentation, monitoring, auditing, compliance, support, legal, and trustee services.

Investment fees

Plan participants generally foot the bill for investment fees, which are calculated as a percentage of assets under management. There are two types of investment fees:

  • Fund fees, often known as “expense ratios,” are levied by the funds or investments themselves.
  • Advisory fees cover the creation of the portfolio and its ongoing maintenance.

Individual service fees

Individual fees for each ancillary service, such as a 401(k) loan, may be charged to participants who elect to use such options.

Such fees, along with other one-time charges associated with changes and cancellations, need to be included in the fee disclosure documentation provided by a plan’s provider.

Costs vary widely from one organization to the next, and not only because of differences in plan size. Due to economies of scale and greater buying power, larger plans can offer lower fees. Finding reliable resources for comparisons can be challenging, but the 401k Book of Averages is one such source; you only need to pay a small fee to access their information.

2. Plan design

Changing 401(k) service providers doesn’t mean you have to open a new account. If you did, it would keep you from opening a new 401(k) for a full calendar year. However, switching providers does make it possible to add a safe harbor matching provision. Features like auto-enrollment and auto-escalation may be free of charge.

You should also think about whether you want your new provider to have the same level of fiduciary responsibility as your current one, whether you want them to take on more responsibility, or whether you want to take on more responsibility yourself.

Note that providers can serve as investment advisor (ERISA 3(21)) or investment manager (ERISA 3(38)) fiduciaries. Or, they may not be fiduciaries at all.

ERISA Section 3(16) administration services may be provided by the plan provider, or they may not be. To find out which responsibilities you have as a plan administrator and which ones they have as a provider, examine your plan agreement.

3. Level of support

The essence of support is whether you and your team perceive the calming and consistent presence of a trusted partner, or if you feel abandoned and on your own.

Since the plan sponsor and the plan participants are equally important, it makes sense to get feedback from your employees. How straightforward is the service’s user interface? How simple was it for your employees to get started after creating an account? What did they learn? When the majority of your employees participate, it shows that the plan is well-supported.

Similar concerns are raised by plan sponsors throughout a plan’s implementation and maintenance. Most critically, a sponsor’s support should improve auditing and compliance processes. For instance:

  • Do you have accurate and up-to-date documents for review and approval?
  • Is the guidance you get on compliance clear and helpful?
  • Is a whole audit package made available, and does the plan provider collaborate well with your auditor?

4. Investment choices

Your current provider’s investment approach should first be evaluated for its appropriateness for your workforce. How will they help your team with financial planning?

Only a small number of target date funds and mutual funds might be offered by a given provider. It’s possible that this may not work out so well. Target date funds are a rigid, one-size-fits-all solution to the problem of 401(k) investors failing to adjust their level of risk as retirement approaches.

5. Investment performance

A decrease in one’s 401(k) balance is bad news for everyone. Although there will always be swings in the market, wise planning and investing decisions should lead to long-term returns comparable to benchmarks. When comparing the investment results of one provider’s retirement plan to those of its competitors, if the former company frequently falls behind, this can be a reason to switch 401(k) providers.

6. Plan participation rates

The level of involvement of the participants is a factor to consider. Do participants sign up for your provider’s plan? After all, the point of a 401(k) is to help people be ready for when they eventually retire. If just a small percentage of individuals are chipping in, it may be best to put your company’s funds into other benefits. On the other hand, by automatically enrolling employees, you can increase participation in and benefits from your plan.

A low participation rate could indicate that your workers are dissatisfied or apathetic about your present 401(k) plan. Employee opinion polls could shed some light on why some staff aren’t buying into the idea. You could also use questionnaires to learn more about your employees’ 401(k) needs and expectations. If your current provider isn’t meeting people’s needs, you may either need to have them make adjustments or hunt for a new provider that will.

7. Payroll integrations

Integrating payroll reduces the number of opportunities for human mistakes in the 401(k) administration process. If your 401(k) is integrated with your payroll software, you won’t have to keep track of employee payments in a separate system. Your 401(k) data will arrive at your service provider faster and with fewer computational mistakes thanks to interconnected procedures. The administrative load of running a 401(k) plan can be lightened by using a provider that offers recordkeeping services that are integrated with payroll systems and provides the reports necessary to help you carry out your fiduciary duties.

8 Steps to Switch 401(k) Providers

Contrary to popular belief, changing 401(k) providers doesn’t require ending your existing plan and establishing a new one. Due to “successor plan” regulations imposed by the IRS, this actually cannot happen. Instead, your new service provider will become responsible for managing your existing policy. Within the 401(k) sector, this action is known as a “conversion.”

The conversion time might range from 60 to 90 days, depending on the two providers. There are typically five stages involved in making the transition; however, this can vary depending on your current service provider.

1. Notify your current provider

So, let’s say you’ve done the legwork and recorded your findings; you’ve decided to make a change. So, now what? Learning the ins and outs of plan replacement can help you set realistic goals and keep everyone on the same page.

To verify and reconcile all data and guarantee an accurate and timely transfer of plan assets, switching providers typically requires at least 90 days of coordination and testing between the two providers.

Following the selection of a successor provider and the signing of a service agreement, you should:

  • Let your existing service provider know. They might use the term “deconversion” to describe what subsequently transpires.
  • Set a date to begin using the new plan and a timeframe for transferring assets.

2. Review your current plan with the new provider

The new service provider will review your existing plan with you. Plan design modifications may be discussed at this time. Make sure you bring up any problems you’ve had with the existing plan design and any changes at the company (such as anticipated growth or layoffs) that might affect the plan.

3. Inform employees about the change

Inform employees of the switch (and include any necessary legal notifications) and provide instructions on how to create an account with the new service provider.

4. Transfer assets to the new provider

The term “asset transfer” is often used in the financial industry to describe the movement of assets from one place to another. The previous 401(k) provider will transfer all data, including participant balances, loan details, and paperwork, to the new provider at this point. When you decide to switch providers and let both companies know, they’ll coordinate the transfer of your data.

Here’s a sad but important fact about the whole process: Your former 401(k) plan administrator may charge you offboarding fees. But keep in mind that you might be able to recoup your costs with lower fees and higher profits in the long run.

5. Set up investments

Discretionary investing responsibility and all choices about fund selection and monitoring will fall to your new provider if they’re a 3(38) investment fiduciary.

If your new provider isn’t a 3(38) investment fiduciary, you’ll have to choose the funds from a list your provider gives you. (Consult an investment advisor if you’re not comfortable choosing funds). Finally, review and approve the plan.

6. Enroll employees

When changing 401(k) providers, it’s important to educate employees on the changes and answer any questions they might have prior to enrolling. You should provide clear and accessible information on how to invest and make contributions.

Make it easy for your employees to sign up by giving them access to helpful digital resources. In addition, you may want to arrange private sessions for in-depth coaching. Maintain open lines of communication with your staff to guarantee a smooth financial transfer to the new service.

7. Provide written notice of the blackout period

Contributions, withdrawals, and loan requests can often occur whenever a plan participant sees fit. But when you’re in the midst of a 401(k) provider changeover, that type of activity could muddle the administrative details necessary for a smooth transition. In order to prevent workers from draining their retirement funds during the transfer, a “blackout” period is used.

The IRS mandates that firms provide plan participants at least a 30-day written notice of blackout periods that extend more than two months.

During the blackout period, employees will be unable to make changes to their contributions, investments, transfers, loans, or payouts. This period can last anywhere from two to four weeks, depending on the previous provider. Until the former provider liquidates accounts and transfers the funds to the new provider, the money in participants’ accounts will remain invested. The funds are then reinvested under the replacement plan. Any open loans that employees currently have with the previous lender are likewise transferred to the new lender.

8. Account for ongoing compliance requirements

Remember that you have ongoing responsibilities for tasks like Form 5500 filing and nondiscrimination testing. If you transition to a new provider in the middle of the year, it’s easy to forget about these responsibilities. For instance, your new 401(k) provider will require access to documents predating the start of your relationship in order to complete your Form 5500 (which is due in July of the year after the one you’re filing for).

It’s common practice when switching 401(k) providers to continue making contributions to the previous provider until the start of the blackout period. This is the best time to switch your yearly ERISA compliance over to your new provider (i.e., nondiscrimination testing and Form 5500 preparation). In most cases, ERISA compliance for a given calendar year will be handled by the service provider that holds your plan assets on December 31.

Benefits of changing 401(k) providers

There are benefits for both businesses and employees when they switch 401(k) providers. Increased savings from lower plan fees, better returns on investments, and more people participating in the plan all add up to better financial results. It’s a win-win for everyone, since better results make it easier to attract and retain the best employees. Let’s take a closer look at some of these benefits:

Lower plan costs

Switching 401(k) providers can help save money for retirees by reducing the expenses of the plan. Employee contributions are able to go further because of fewer costs like administrative fees and investment charges. This has the potential to greatly enhance the performance of retirement accounts over time. Reduced plan expenses are more evidence that the company is serious about giving its workers competitive retirement benefits that won’t break the bank.

Better investment options

Employees can diversify their portfolios and increase their returns by switching 401(k) providers if they’re offered better investment alternatives. A switch to a different service provider could offer access to more investment alternatives, such as low-cost index funds, actively managed funds with proven performance histories, and even cryptocurrency.

Investors can tailor their portfolios to meet their unique needs and risk comfort levels. Employees’ prospects of long-term financial success can be improved by access to a wider range of assets that are specifically suited to them.

Greater plan participation

Changing 401(k) service providers can increase participation in a plan by introducing new tools and fostering better lines of communication. Workers may find it easier to access and manage their accounts with a new provider because of the availability of user-friendly internet tools and mobile apps.

Employers can increase employee participation via improved educational materials and individualized counseling during the enrollment period. A higher participation rate in the plan will lead to better retirement savings results for a greater proportion of the workforce.

Recruit and retain top talent

Having the option to switch 401(k) providers and offer a competitive retirement plan may be a game-changer when it comes to attracting and retaining top talent. An employer’s dedication to its workers’ long-term financial stability is often shown by the provision of competitive retirement benefits, including reduced costs, better investment alternatives, and increased plan participation. This sends a message about the company’s culture, and it can lure candidates who desire lucrative benefits packages, as well as help retain them

Ready to Make the Switch?

As you can see from the aforementioned procedures, changing 401(k) plan providers is no easy task. It’s a fact that not all service providers make things simple, but that doesn’t mean there aren’t some that do. When shopping for a new provider, look for those that simplify transition procedures for new sponsors in a variety of ways:

  • Look for providers that make all of your financial choices as a 3(38) fiduciary. This will be a load off your mind when it comes to looking out for the welfare of your staff.
  • Consider setting up accounts for qualified workers and contributors, sparing them the trouble of having to do this themselves.
  • In some cases, the onboarding process can be monitored via an employer’s control panel.

We hope you found the above information helpful in terms of evaluating your existing 401(k) plan, regardless of whether you decide to make a change.

Go beyond a basic 401(k)
Give your employees more than just a 401(k), join the movement.
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About Author -
David Ramirez

David Ramirez, CFA, is a recognized 401(k) expert with over 20 years of experience in 401(k), ERISA, cash balance plans, and ESOPs. A UC Berkeley graduate, he played a pivotal role at Financial Engines, a 401(k) advisory firm founded by Nobel Laureate William Sharpe, Ph.D., where he was a portfolio manager who helped manage over $50B in 401(k) assets.  His clients included some of the largest Fortune 500 companies and state governments.

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This material has been prepared for informational and educational purposes only and should not be construed as a recommendation by ForUsAll, Inc., its affiliates or employees (collectively, “ForUsAll”)  to activate a cryptocurrency window or invest in crypto.  Investing in crypto can be risky and investors must be able to afford to lose their entire investment.  You should consult with your own advisers before activating a cryptocurrency window or investing in crypto.  ForUsAll does not provide legal, tax, or accounting advice. Please refer to your Plan's fee disclosure for more details.© 2023 ForUsAll, Inc. All rights reserved.
1 Schwab 2022 401(k) Participant Study - Gen Z/Millenial Focus, October 2022.
2 As of 12/31/2022. Employees include both current employees and terminated participants with a balance.
3 "Morgan Stanley At Work: The Value of a Financial Advisor" Morgan Stanley, March 2022.
4 Sarah Britton was a client when she provided this testimonial through an independent third party review website. She received no compensation for her remarks. There are no known conflicts of interest in the provision of her comments related to the services provided.