Financial Poise
Two retirees hold hands as they consider retirement service providers.

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

Evaluate Your 401(k) Service Provider with These Questions

The new year is a great time to take stock of your company offerings, and for plan sponsors, that should include a thorough review of your retirement plan provider. With fiduciary duty on the line, not taking the time to carefully review and make any changes can be a costly mistake. But how do you know when it may be time to pull the plug and switch your service provider, rather than just make tweaks to your plan? Here are some things to keep an eye out for.

While some plan sponsors may want to avoid change due to the change management associated with switching providers, the implications of staying with the wrong 401(k) service provider are far greater.

Your Retirement Service Provider is Not Proactive About Compliance

Tax savings are often a main driver for offering a retirement plan, but 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.

Ask yourself the following questions:

  • Is your record keeper proactively monitoring your plan and complying with legal and regulatory requirements?
  • Or does it only get involved after an issue arises, which can be years later and typically more time consuming and costly to correct?
  • Do they charge extra to keep your plan compliant?
  • Does your provider review your plan documents for compliance with changing regulations and prepare any necessary amendments? Or do they alert you to regulatory changes and leave the rest in your hands?

Your Retirement Service Provider Does Not Have Adequate Data Security Protections

Think about the kind of data your service provider has on your employees, and then 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 know 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 information security protocols in place that have been independently tested and verified by outside experts. In particular, your provider should encrypt all of your employees’ data and store it securely at all times.
  • Stand behind its procedures by agreeing to pay for and handle instances when data becomes compromised.
  • Be willing to report any data security incidents to you within 24 hours.
  • Have cyber coverage to make sure your company is protected and that the amount of coverage is sufficient.
  • Always be able to restore employees’ data and accounts with minimal or no downtime and disruption. Especially in the current volatile market, your employees should be able to access their accounts 24/7.

Your 401(k) Service Provider’s Fees are Unreasonable

It is critical to dig into the details of your record keeper’s fees, especially in light of the numerous class actions where plan sponsors and fiduciaries are being sued for operating a plan with allegedly excessive fees. You do not need to select the least expensive provider, but you do need to make sure the fees are reasonable for the services provided. When evaluating your retirement plan service provider, look out for:

  • Fees that are disguised by being included with mutual fund expenses – sometimes in the proprietary funds offered by your record keeper’s affiliates – that are then kicked back to the record keeper. Make sure your provider has disclosed all such conflicts of interest.
  • Services that cost extra, since some providers will charge sponsors for things such as compliance activities and plan document reviews.
  • Fees that are reasonable in comparison with others. However, you cannot know for sure whether a service provider’s fees are reasonable until you ask and shop around. You can do that by getting proposals from other providers or benchmarking their fees.

If you determine that your retirement plan service provider’s fees are excessive, you have no choice but to get them reduced, and if your provider refuses, you must terminate them in order to avoid violating your fiduciary duties.

Advisors have a golden opportunity to help sponsor clients to understand what they’re getting and the reasonableness of the charges. While some plan sponsors may want to avoid change due to the change management associated with switching providers, the implications of staying with the wrong 401(k) service provider are far greater.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: ESOPs – 101, Data Privacy Compliance and Employee Benefit Law for the Non-Expert.]

About Allison Brecher

Allison Brecher is general counsel at Vestwell, a fintech startup innovating the retirement plan market. She brings over 15 years of legal and regulatory experience to Vestwell, having handled high profile and complex litigation involving employee benefits, ERISA, regulatory matters, data privacy, and electronic discovery. Previously, Allison was Senior Assistant General Counsel and Director of…

Read Full Bio »   •   View all articles by Allison Brecher »

follow me on:

Article Comments