Five Things You Need to Know When Switching Recordkeepers

By Nevin E. Adams, JD / Chief of Content Officer for the American Retirement Association


Thank you for your interest in Five Things You Need to Know When Switching Recordkeepers, the latest blog from PenChecks Trust®.

As part of our ongoing commitment to publishing thought leadership materials for our industry, the information in this blog can help you successfully navigate the issues involved in changing plan recordkeepers whether those changes are planned or unexpected.

Five Things You Need to Know When Switching Recordkeepers

by | Nov 3, 2022

Did you know that industry estimates indicate that approximately 10% of retirement plans change recordkeepers every year? The COVID-19 pandemic may have reduced that number temporarily. But as most workplaces return to normal and consolidation in the recordkeeping space continues to accelerate, the likelihood of a recordkeeper change – whether voluntary or involuntary – has also risen.

There are few things more disruptive to the peace or clarity of a 401(k) plan than a switch in recordkeepers, even when the change is instigated by a regular, thoughtful, focused evaluation of the alternatives. Or even when that change is the product of a desperate quest driven by a truly awful service relationship.

But it is perhaps especially disruptive when the change is thrust on the plan by forces outside of its control or instigation – and for the thousands of plans that have recently or are in the process of a change in recordkeepers due to industry consolidation. Let’s face it. Change—even for the better—is frequently disruptive to the human psyche. Most of us tend to drift into comfortable “ruts” of pattern, or perhaps habit, places where we know what to expect and, roughly anyway, when to expect it. And, at least in my experience, the more frazzled your existence, the more one pines for these oases of quiet and relative clarity.

Some changes are less impactful than others on the plan’s daily administration, of course. Changes that trigger a mass departure of key staff can be upsetting, and those that necessitate moving to a new processing platform even more so. Change that requires communication to participants is anathema to most plan sponsors. On the other hand, recordkeeper changes that result in additional resources, better capabilities, a clearer focus, and a stronger commitment to “the business” are not as rare as one might fear.

But a change in recordkeepers – regardless of the motivating forces behind the move – is one of those “choices” that plan fiduciaries are expected under ERISA to evaluate as a prudent expert. And so, regardless of whether the change appears to be good, bad, or inconsequential on its face, you should know five key points.

1. How much your plan pays in fees. And to whom. And for what.

The essence of a recordkeeper/service evaluation is the determination that the services provided – and the fees paid for those services – are reasonable. You can’t know if the fees are reasonable without knowing the services they support. But this analysis also involves a determination that the services provided are appropriate. That starts with enumerating the services you received prior to the move and checking those against the one(s) your new arrangement provides.

2. What revenue-sharing is (and where it goes).

At a high level, revenue-sharing is just the redistribution of fees paid from one provider to another. It can be a relatively straightforward matter of compensating a sub-contractor, though in retirement plans it’s generally 12(b)1 marketing/distribution fees collected by a mutual fund company and “shared” with the recordkeeper that is actually doing the “distribution.” There is a general trend away from such practices. But if they are in place, you need to know how much, to whom, and how they’re paid.

3. How your investment menu might change.

Changes in recordkeepers don’t always involve shifts in the investment menu offered to participants, though they can and often do. Even if they haven’t – and if you have reviewed them recently – the change in recordkeepers can be a good opportunity to reconsider/affirm your investment options to make sure they are prudent and still meet the needs of your workforce and the objectives of your benefit program.
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4. Consider bringing on current non-participants.

While a growing number of plans have embraced automatic enrollment, many haven’t, and among those who have, most have thus far been inclined to apply it only to those hired after the adoption date. There are reasons for that, but in many cases it seems to be little more than a concern about disrupting the status quo for workers who previously failed to fill out a form and begin participating in the plan. If you’re going through the disruptions attendant with any change in plan providers, it can also be a good time to give those non-participating workers another shot as well – automatic reenrollment.

5. Document your review/decision(s).

Whatever process you are using to evaluate your plan (this doesn’t require a recordkeeper change), the goals and objectives should be written down, as should the conclusions drawn from the exercise. You might get there with a simple committee review, or perhaps something more formal – like a request for proposal (particularly if you have the time to do so ahead of the move). Indeed, odds are a formal benchmarking process or RFP will produce documentation of those conclusions/considerations as a natural outcome. But if it doesn’t, you should make the effort to make sure it does.

A change of recordkeepers inevitably brings with it additional work, greater time commitments, and what sometimes feels like an incessant series of questions about things to which you never previously gave much thought. Moreover, you’ll have to think about how to communicate this change to your participants — and deal with the inevitable flurry of questions from them about how to do things to which they may not previously have given much thought. Regardless, a change in recordkeepers is a good opportunity to reconsider your plan’s design and operations – and one that, as a prudent plan fiduciary – you’re expected to.

The best way to handle a recordkeeper change is to meet it head-on. Scrutinize your plan fees and revenue sharing. Explore how plan investments might change. Consider offering non-participants an opportunity to join the plan. Carefully document your review and any decisions you make. In the long run it may well benefit your plan and its participants.

About the Author

Nevin E. Adams, JD, is Chief Content Officer for the American Retirement Association, a non-profit organization dedicated to educating retirement plan and benefits professionals and creating a framework of policy to enable every working American to have a comfortable retirement. He has extensive experience in senior management at large financial services organizations and as a writer, editor and thought leader in the retirement plan industry.

The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust©, its subsidiaries or affiliates.


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