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A Change of ‘Hearth’

Practice Management

There are few things more disruptive to the peace or clarity of a 401(k) plan than a switch in recordkeepers.

Let’s face it — change — even change 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.

That’s true, of course, even when the change is instigated by a regular, thoughtful, focused evaluation of the alternatives; and certainly when that change is the product of a desperate quest driven by a truly awful service relationship. But it is perhaps particularly 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.

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 — whether for good or ill — 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, plan fiduciaries can be expected to know:

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. It starts, of course, with knowing how much is being paid for those services. But you can’t know if those 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.  

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

At a high level, revenue-sharing is just the redistribution of fees paid to 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” of the funds. 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.

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. And 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 not only that they are prudent, but that they (still) meet the needs of your workforce, and the objectives of your benefit program.

And you might also want to:

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 in doing so 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 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.