Why Do Companies Switch 401k Providers?
Switching 401k providers is often not a top priority for small businesses. For many plan sponsors, the process can feel daunting and time-consuming. A lack of familiarity with the retirement plan industry and limited information on available options frequently leave plan sponsors relying on financial advisors to help them navigate the decision. Despite these challenges, companies commonly switch 401k providers for three primary reasons: cost, service, and fund selection.
Cost: Understanding the True Savings
Cost is a significant driver for companies considering a change in 401k providers. However, plan sponsors are sometimes misled into believing they are saving money when switching providers. For instance, a new provider might promote lower-cost funds to attract clients, but those same funds may have been available through the existing provider. The perceived cost savings, in such cases, may result from differences in fund management fees rather than the service provider’s costs.
It’s crucial to evaluate the full picture of costs when considering a switch. While lower fund management fees can reduce overall expenses, service fees and administrative costs often vary widely between providers. Some providers may charge indirect or hidden fees that aren’t immediately apparent. To avoid surprises, plan sponsors should request a detailed breakdown of all costs from both their current provider and any prospective providers.
Additionally, most 401k providers offer a self-directed brokerage account option, which allows participants access to a wide range of investment funds. This flexibility can make a significant difference in cost and investment options for participants. Plan sponsors should evaluate whether their current provider offers such features and compare them to alternatives before deciding to switch.
Service: Flexibility and Responsiveness Matter
Poor service is a common pain point in the 401k industry. While no provider is perfect, some stand out for offering better flexibility and support. For example, Guideline is highly competitive on cost, but its service options come with limitations. Contributions can only be made as percentages, not dollar amounts, which can be a drawback for some businesses. Additionally, Guideline’s fund lineup is limited to 40 options, and they do not offer a self-directed brokerage account option.
When evaluating service quality, plan sponsors should consider their specific needs and ensure that the provider offers features and support that align with their business goals. Flexibility in contribution options and fund selection can make a significant difference in the overall plan experience. Some providers also stand out for their customer service, offering dedicated account managers or responsive support teams. This level of attention can be particularly valuable for small businesses that lack in-house retirement plan expertise.
It’s also important to consider the ease of managing the plan. Providers that offer intuitive platforms, easy-to-use tools, and clear reporting can save time and reduce frustration for plan sponsors. A provider that simplifies compliance and administration tasks can make a significant difference, especially for small businesses with limited resources.
Advisor Relationships: The Overlooked Factor
In some cases, companies are satisfied with their 401k recordkeeper and administrator but are unhappy with their financial advisor. Common complaints include unresponsiveness or a lack of proactive communication over the years. Many plan sponsors are also unaware of what their advisor is being paid, and it rarely occurs to them to negotiate a fee reduction or eliminate the advisor’s fees altogether.
Fortunately, addressing advisor-related issues doesn’t require switching providers. Plan sponsors can request a change directly with the recordkeeper. This process typically involves signing a form and sharing a notice with plan participants. By making these adjustments, businesses can maintain their current provider while improving their overall experience and potentially reducing costs.
Advisors play a key role in helping plan sponsors optimize their 401k plans, so it’s essential to work with someone who is proactive and engaged. A good advisor should provide regular updates, suggest plan improvements, and be readily available to answer questions. If this isn’t happening, it’s worth exploring other options to ensure that the plan is being managed effectively.
Why Timing Matters
Timing is another factor to consider when switching 401k providers. Plan sponsors may be hesitant to make a change because they fear disrupting their employees’ retirement savings. However, with careful planning, the transition can be seamless. Most providers offer support during the transition process, helping businesses ensure that contributions, loans, and distributions continue without interruption.
It’s also worth noting that periodic reviews of 401k plans are essential to ensure they remain competitive. Over time, a provider that was initially a good fit may no longer meet the company’s needs due to changes in the business, workforce, or industry. Regularly assessing the plan’s performance and comparing it to other options can help plan sponsors identify when it’s time to make a change.
Making an Informed Decision
Switching 401k providers is a major decision that requires careful consideration of costs, service quality, and advisor relationships. To ensure a successful transition, plan sponsors should:
Conduct a comprehensive cost analysis that includes service fees and fund expenses.
Evaluate the provider’s service offerings to ensure they meet the needs of the business and employees.
Review and reassess their relationship with their financial advisor to determine whether changes are needed.
By taking a thoughtful approach, companies can make informed decisions that benefit both the business and its employees. While the process may seem overwhelming, the long-term advantages of finding the right 401k provider can lead to better retirement outcomes for participants and a smoother experience for plan sponsors. Ultimately, the goal is to create a plan that aligns with the company’s objectives while providing employees with the best possible tools to secure their financial future.