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Why Should Your Business Switch Its 401(k) Provider?

Learn why switching retirement providers to better meet the needs of your business and its employees may be a daunting, but ultimately beneficial, experience.
switch 401(k) provider

Most employers offer some type of retirement benefit, and even small businesses provide a 401(k) for employees to assist with long-term savings. A well-constructed 401(k) plan makes sense for many reasons, including tax advantages, employee familiarity, and a wide array of savings options. Switching 401(k) providers to better meet the needs of your small business and its employees may be daunting to contemplate. Nevertheless, if your company's 401(k) is turning in lackluster performance, or employees seem dissatisfied with the current offering, it may be time to consider switching 401(k) management.

7 reasons your company would want to switch retirement providers

Switching 401(k) management is frequently a cost-benefit decision. If you're unhappy with your current plan and the employees are not utilizing the benefit as much as intended, it may make sense to see what else is available in the marketplace. Even if you decide to stick with the same plan, understanding your options can help you negotiate the terms and fees of your current service provider agreement.

1. Your business's current retirement plan isn't flexible.

Many business owners choose a traditional 401(k) because it's the only option their current service provider has offered, or because it's the most common type of account, making it seem more familiar. If your current service provider doesn't offer multiple investment options, or they haven't clearly defined those options, you may want to consider switching 401(k) providers. Plans and features like a safe harbor 401(k), owner-only 401(k), 401(k) SIMPLE plans, and profit sharing are all proven options, albeit less well known than a traditional 401(k). The more flexible your retirement programs, the easier it may become to attract and retain talented employees who value retirement savings.

2. You've noticed poor performance of your investments.

No one is happy when their 401(k) balance declines. Sure, market fluctuations occur, but well-diversified plans and wise investment choices should generate long-term returns in line with the benchmark. If you're comparing your company's retirement plan performance to competitors' options and noticing that your investment returns are consistently below average, it might be time to ask yourself, "Can I change my 401(k) provider to achieve better overall performance?"

3. You take on too much fiduciary responsibility.

Does your current 401(k) provider offer services to help with the fiduciary responsibility for your plan? Investment selection and management is a hot topic. You may hear terms like "DOL fiduciary rule," "3(38)," or "3(21)" — all of which are tied to ensuring that investment decisions are made with the best interests of the participants in mind. Many providers offer fiduciary support services to help you and reduce your liability, either through their own advisors or through a third party. If your provider doesn't, you may want to consider switching 401(k) providers.

4. Your retirement plan fees don't match the value.

The costs of a 401(k) plan can vary widely among service providers. As an employer, you should make time each year to review the fee structure of your plan and decide whether it still makes sense, given your employee utilization. If your fees seem higher than other plans, don't hesitate to question what value you're receiving in return. In some cases, switching 401(k) management may help you bring fees down. With a lower-cost plan, you could be saving your employees money in the long run, which would help them meet their retirement goals.

5. Your business's 401(k) benefits can't integrate with your payroll.

Payroll integration eliminates some of the manual processes that may cause 401(k) errors. If your 401(k) is connected to your payroll system, you avoid the need for separate tracking of employee contributions. The linked processes also eliminate computational errors and speed up the delivery of 401(k) information to your service provider. A good retirement services provider should include record keeping services that are integrated with payroll systems to help reduce the administrative burden of maintaining a 401(k) plan and generate the reports needed to help you meet fiduciary obligations.

6. Your retirement provider doesn't have adequate data security.

With so much of an employee's information stored online, retirement plan data security is of the utmost importance. If your current retirement plan hasn't supplied adequate documentation of their data security measures, you may want to reevaluate your provider. At the minimum, employers will want to make sure that service providers have a plan in place to store and protect participants' data and that there are procedures to follow in the event of unauthorized access. The Society of Human Resource Management (SHRM) recommends that cyber security provisions be addressed within your service provider agreement and revisited on a regular basis.

7. Your employees are participating at a low rate.

Low utilization is a sign that your employees are unhappy with, or indifferent toward, the current 401(k) plan. Employee satisfaction surveys can help reveal why employees aren't participating in the plan. You may also use surveys to find out what employees want or expect from a 401(k). Once you determine what you need, you can then go back to your current provider and request changes — or look for another provider that will better meet employees' expectations.

Retirement plan switching can be beneficial for your business

Switching 401(k) providers can offer benefits for both the business and employees. The right plan will result in added interest in retirement benefits, while enhanced performance will create additional value for your dollars spent. When you're interviewing potential retirement plan providers, make sure to ask how they will support you and ease the transition to a new plan. Switching to a provider that's a stronger fit for your organization can help you:

  1. Recruit better employees. A solid retirement plan with expanded investment options is a strong recruiting tool. New features like employee self-service can attract tech-savvy employees interested in long-term investing.
  2. Access more retirement plan options. Moving from a basic 401(k) to one with more choices allows for a better investment mix for a greater number of employees. If you're managing a multigenerational workforce, you're likely dealing with a wide range of risk preference profiles and investment time horizons that must be met within your retirement plan framework. Individuals in Generation Z may be looking for investments that build over decades, while baby boomers could want options to preserve their current wealth. New plan designs incorporating a Roth 401(k) or employee stock purchase options can also be added.
  3. Match your business culture. If you're a mobile, tech-heavy company, using a service provider that lacks a self-service app or a user-friendly interface won't be a good match. Choose a provider that can work with you to design a plan that employees are excited about and will fit in with your company culture.
  4. Create greater transparency. Including your employees in the process of selecting a new service provider and setting up a new plan can increase overall plan satisfaction. Rather than offer a plan that's been around for ages, taking the time to evaluate this important benefit and gather employee input will signal to your staff that you have their best interests at heart. They will also gain a greater understanding of how a 401(k) works and what it can offer.
  5. Reduce costs. A new provider can offer more streamlined processes at a reduced cost compared to what you're paying now to administer a 401(k) plan.

What do you need to tell employees when you switch 401(k) service providers?

When switching 401(k) providers, it's important to communicate with employees throughout the process. Employees must be given time to prepare for the switch and educate themselves on new investment options. Your current and new service providers should be familiar with the transition process and be able to provide the necessary communications and a suggested timeline. Consider including the following in your communication plan:

  • In-person meetings or livestream education sessions where employees are given an overview of the switch and an opportunity to ask questions.
  • Pamphlets with an eye-catching design announcing the switch and deadlines for employee changes.
  • Emailed updates throughout the process.
  • A list of frequently asked questions on the 401(k) plan website or HR dashboard.
  • A slide presentation furnished by the new service provider discussing the new plan and how they will assist with transferring assets.

Evaluate your plan's fee structure and the amount of support you're receiving from your current provider. With the evolution of new 401(k) features and updated technology offered by other providers, you may conclude that you've simply outgrown your current plan. If you decide to make a switch, keep in mind that it doesn't have to be a challenging experience.

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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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