What Your Employees Need to Do When You Switch 401(k) Providers

As a retirement plan sponsor, you have many responsibilities; ensuring your plan remains in compliance with all IRS regulations, performing ongoing maintenance of the plan, and perhaps most importantly, acting as a fiduciary to the plan—meaning you hold the requirement to act in the best interest of plan participants. This is an overwhelming amount of responsibility, especially if you aren’t sure your current 401(k) provider is the best fit for your company’s individual needs and goals.

Luckily, just as business owners may choose to change the software program their company uses if it doesn’t function the way they need it to or an exciting new option appears on the market, plan sponsors also have the ability to re-evaluate their 401(k) plan provider and determine if a different provider may fit better in your fringe benefits package.

In fact, plan sponsors should review their 401(k) offering annually and decide if their current provider offers what they’re looking for in terms of plan design, investment options, service, and support. After evaluating your current provider, you may choose to replace the provider with a new one for a variety of reasons:

• High fees for the service provided
• Fiduciary support—specifically as it relates to fiduciary protection and access to a 3(38) investment manager and/or investment fiduciary
• Unsatisfactory support for the participants and/or plan sponsor
• Poor investment performance

Communicating a 401(k) provider change with employees

If you’ve decided after an in-depth analysis that it may be in your best interest to take a different route and change plan providers, there are a variety of things both you and the plan participants will need to do. To start, you should be open and honest with your employees about what motivated you to make the change, why you chose the provider and plan lineup that you did, and how it may affect them as participants. They’ll want to feel assured that their retirement outcomes are secure and that you have their back as the plan sponsor, and displaying transparency by keeping them in the loop will show your employees that you really have their best interest at heart.

You generally aren’t required to carry over the exact same plan design you utilized with your old provider, so it’s important to communicate any differences in the plan with your employees prior to the switch.

In addition, you also have specific responsibilities when it comes to communicating the change in the plan to the plan participants.

When you make a change to your 401(k) plan, you are legally obligated as the plan sponsor to provide the participants with a blackout notice, which is designed to inform participants of the period of time they will have restricted access to their account, restrictions limiting their ability to direct or diversify their plan account while the provider change is ongoing, and who to contact should they want more information.

You should also provide participants with fund information, including lists of the funds that were available with the old plan and will be available with the new plan, fund expense information, and historical rates of return. Issuing this information to employees upfront will help alleviate some of the stress they may feel about the change and how it could affect their retirement savings.

There are also a few things employees will have to proactively do or monitor after you change providers to safeguard their retirement goals.

Three things your employees should be aware of when switching 401(k) providers

Plan design changes

You generally aren’t required to carry over the exact same plan design you utilized with your old provider, so it’s important to communicate any differences in the plan with your employees prior to the switch. If matching contributions are changing, make sure participants first, know about the change and second, understand how a changing employer match can affect their overall retirement savings.

Depending on plan design, employees may also be automatically enrolled in the plan and put into a default contribution rate, which potentially could be lower than what they were contributing while enrolled in the old plan. Encourage participants to actively log into their account with the new provider and adjust contribution levels if necessary. Remind participants that they should be checking out their 401(k) account on at least an annual basis thereafter to evaluate their savings, their contribution levels, their fund portfolios, and the overall performance/health of their plan.

Account changes

Along the same lines, plan participants can and should review their account statement from the new provider as soon as they can. They’ll want to be aware of their investment lineup (Were they successfully mapped into an investment lineup similar to the lineup in the previous plan, or were they put into a risk-based portfolio or target date fund?), contribution levels, and current account balance. Participants may also want to review the annual fee disclosure notice to learn about the investment cost/expense ratios and the fees that are being charged to their account.

Blackout dates

When plan sponsors change their 401(k) provider, their plan will go through a blackout period when participants are not able to log into their account, make any investment changes, or request any other investment transactions. Your employees need to be aware of when the blackout begins and ends as well as other key dates, like the last date they can make contribution changes or request rollovers or loan payments—since they won’t be able to make these changes or requests during the blackout period.

Hand out informational documents to participants that include these key dates and be sure to remind them as each important date approaches so they don’t forget that any changes to their account need to be made prior to the start of the blackout period.

Although changing retirement plan providers may seem like a daunting task, finding a provider that offers the support, features, and investment options you’re looking for will be worth the effort. And if your employees know about and understand the transition from the start, are aware of the specific details that could affect their retirement savings, and know what to look for when the new plan becomes active, you’re on your way to a smooth, seamless transition.