Avoid these myths when considering changing 401(k) providers
posted by Nathan Fisher February 5, 2018
Among employers who offer a 401(k) plan, there’s an opinion I’ve heard that you’d really rather avoid switching 401(k) providers, which involves a change of a plan’s investment platform, recordkeeper, or third party administrator. I’ll often see an employer struggle with the decision to look into making a switch. Maybe they think their retirement plan might have high fees, poor investment choices, or low levels of service for employer or employees, but they’ve heard that changing providers is so difficult that the rewards might not be worth the effort.
But what if I told you that by putting in 10 hours of work now, your plan could have an extra $10 million in 30 years without necessarily causing an increase in plan fees? What if a 401(k) vendor switch, while requiring some work to accomplish, isn’t really that difficult to do compared to the potential benefit it could bring? Whenever I do talk to employers about their reasons for avoiding a provider change, it’s easy to quickly see those reasons for what they are: myths. If we bust those myths, I believe we’ll find that a provider change isn’t something to avoid, but occasionally a smart move for a 401(k) plan administrator to make.
Myth #1: Switching 401(k) Providers Takes Too Long
Some 401(k) administrators avoid changes because they think the process will take too much time. In my experience, however, after you decide to make a change, you can expect about one hour of work per week over the course of two months to see a conversion through to the end—with the right help. That’s not nothing, but it’s also not so much work that it will completely disrupt anyone’s schedule for an ongoing period of time.
Myth #2: The Benefit of Switching 401(k) Providers Isn’t Worth the Work
Let’s go back to that scenario from the opening of this article—you have a plan whose recordkeeper is offering high fees, low service, and poor investment options. These conditions can have an adverse effect on a retirement plan’s ability to perform and grow wealth for people participating in it. In fact, we’ve been tracking what happens when someone changes from a high-cost, low-service recordkeeper to our full-service model, where we offer more employee support and education. Consistently, month to month, we find that post-change participation rates go up by about 20% and deferral rates go up by about 3%. In my experience, there is seldom a need to increase total plan costs in order to fund increased services required to achieve these results. Generally, by cutting out unnecessarily expensive investments, an employer can create the budget needed to fund this kind of service.
Take, then, the example of a hypothetical retirement plan with $5 million in assets and 100 employees. The plan has a 50% participation rate and an average 5% deferral rate. If this plan’s administrator goes through the 10 hours of work for a conversion and sees the same impact we’ve seen in our data, their participation rate will improve to 70% and deferrals to 8%. From this change alone, after 10 years, the plan should have grown an extra $1.5 million or more. After 20 years, it should grow an extra $5 million, and after 30 years, the difference should be an extra $10 million or more! This is a tremendous benefit to the plan and everyone participating in it.
Considering Your Fiduciary Responsibility
Under the Employee Retirement Income Security Act of 1974, employers managing a 401(k) plan have a fiduciary responsibility to employees and anyone else participating in a retirement plan, which means they are obligated to make reasonable decisions in the participants’ best interest. When employees put their retirement savings into a 401(k) plan, they trust that the plan will be handled responsibly and that money will be given every opportunity to grow and fund their retirement. When you consider a situation like the one I just described, where 10 hours of work could lead to millions of extra dollars in participants’ retirement accounts without significantly increasing fees, it’s not just a good decision to make; it’s the right decision from a fiduciary standpoint.
Especially when your current providers are underperforming and an analysis reveals that your plan participants could be getting more from your providers without increasing cost, the work involved with switching 401(k) providers is well worth the potential benefit. Consider how a full-service platform—one with plenty of education and resources like group sessions and one-on-one meetings for your employees—might improve your plan’s participation and deferral rates, and give the idea of a change a fair shake. You might be glad you did.