Know When It’s Time to Switch Your Retirement Plan Service Provider

Evaluate Your 401(k) Service Provider With These Questions

A reminder to employers: As a 401(k) plan sponsor, you have a fiduciary duty to thoroughly review your retirement plan provider. Not taking the time to carefully review and make any changes can be a costly mistake. You may want to avoid switching providers due to the change management required, but the implications of staying with the wrong 401(k) service provider are far greater.

So, how do you know when it may be time to switch your service provider, rather than just make tweaks to your plan? Here are three key signs that it may be time to pull the plug.

1. Your Retirement Service Provider Is Not Proactive About Compliance

Tax savings are often a primary driver for offering a retirement plan. However, your plan can lose its tax-qualified status and fiduciaries can become liable for potentially significant penalties if your service provider falls short on compliance.

Your record keeper must proactively monitor and review your plan for compliance with changing regulations. Further, they should prepare amendments when needed and without additional charge. Is your service provider only getting involved after an issue has already arisen? Are they merely alerting you to regulatory changes and leaving you to deal with the amendments? If either of these scenarios applies to you, then you need to find a better service provider.

2. Your Retirement Service Provider Does Not Have Adequate Data Security Protections

Consider the sensitive data your service provider has on your employees. Now think about what can happen if that data gets into the wrong hands. A data breach can put your employees’ personal information at risk, create strained relationships with your workforce, and expose company fiduciaries to liability.

It’s important to understand how your 401(k) service provider protects your employees’ information and what it will do when something goes wrong. Most importantly, your provider should have:

• Independently tested and verified security protocols in place.
• Encryption for employee data.
• Ability to report data security breaches to you within 24 hours.
• Sufficient cyber coverage for your company.
• Agility to restore employee data and accounts with minimal downtime and disruption.

Your provider should be able to prove to you that they are poised to protect your data and react appropriately when a compromise occurs. In this volatile job market, employees need access to their accounts 24/7. As such, your retirement plan provider must be able to rectify interrupted access promptly.

3. Your 401(k) Service Provider’s Fees Are Unreasonable

There has been an explosion of class actions over excessive fees in retirement plans.

The case of Cunningham v. Cornell University saw the Supreme Court rule that plan sponsors and fiduciaries had failed to review service agreements for excessive fees. The case has been slighted to invite further litigation by lowering the bar for excessive fee claims to proceed. As such, it’s more important than ever for employers to question the fees charged by their retirement plan service providers.

You do not need to select the least expensive provider, but you must ensure the fees are reasonable for the services provided. When evaluating your retirement plan service provider, look out for the following fee details.

Disguised Fees

Some fees are disguised by being included with mutual fund expenses , sometimes in the proprietary funds offered by your record keeper’s affiliates, and are then kicked back to the record keeper. Make sure your provider has disclosed all such conflicts of interest.

Additional Fees

Beware of services that cost extra. Some providers will charge sponsors for essential things such as compliance activities and plan document reviews.

Fees That Don’t Compare Well With Other Providers

You cannot know for certain whether a service provider’s fees are reasonable until you shop around. You can do that by getting proposals from other providers or benchmarking their fees. Advisors can also help their sponsor clients understand what they’re getting and the reasonableness of the charges.

If you determine that the fees are excessive, you have no choice but to get them reduced. If your provider refuses, you must terminate them to avoid violating your fiduciary duties.

When Change Is Necessary, Benefits Outweigh the Risks

Changing your retirement plan service provider isn’t an easy process. However, regardless of the work required, plan sponsors must act in accordance with their fiduciary duties to plan participants.

While you may be tempted to avoid making the jump to another service provider, the implications of staying with the wrong 401(k) service provider are far greater.

We think you’ll also like:

1. 4 Steps All Companies Should Take to Protect Themselves from a 401(k) Lawsuit 
2. Retirement Account Fees Can Cost You Plenty
3. Should Your Business Use an ESOP?

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Protecting Your Employee Assets: Human Resources Management & The Life Cycle Of The Employment Relationship / Show Them the Money: Wage & Hour Compliance
2. Protecting Your Employee Assets: Human / Resources Management & The Life Cycle Of The Employment Relationship An Ounce of Prevention: Policies, Procedures and Proactivity
3. Cyber Security & Data Privacy

This article was originally published on July 18, 2019 and updated on January 23, 2024. This article was most recently updated by the Financial Poise Editors.]

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