What to expect when you make the switch
Obstacles to navigate
If your company's 401(k) plan is managed by an insurance, mutual fund, or payroll firm, it's likely that the associated fees are higher than necessary. As a business owner, you have the ability to reduce these costs, although this may necessitate changing your 401(k) provider. Undertaking this change might seem overwhelming if you haven't done it before.
However, an experienced new 401(k) provider will typically manage the transition process, handling the majority of the work. Your involvement should be minimal, potentially requiring only a few hours of your time. Here's an overview of what to expect and crucial mistakes to avoid.
However, an experienced new 401(k) provider will typically manage the transition process, handling the majority of the work. Your involvement should be minimal, potentially requiring only a few hours of your time. Here's an overview of what to expect and crucial mistakes to avoid.
The Transition Process
A common misconception is that switching 401(k) providers involves terminating the existing plan and establishing a completely new one. Due to IRS "successor plan" regulations, this isn't the case. Instead, your new provider will assume the administrative responsibilities of your current plan. Within the 401(k) industry, this is commonly referred to as a "conversion." During a plan conversion, four primary steps are involved:
A common misconception is that switching 401(k) providers involves terminating the existing plan and establishing a completely new one. Due to IRS "successor plan" regulations, this isn't the case. Instead, your new provider will assume the administrative responsibilities of your current plan. Within the 401(k) industry, this is commonly referred to as a "conversion." During a plan conversion, four primary steps are involved:
- Asset transfer: Moving the plan's funds from the current provider to the new one.
- Document preparation: Creating a new plan document to govern the plan's operation. Generally, the terms of this new document will mirror the existing one, unless you wish to implement changes.
- Investment selection: Choosing the investment options that will be available for plan participants.
- Participant enrollment: Enabling plan participants to make new salary deferral and investment choices.
These steps typically take between 60 and 90 days to complete, although this timeframe can vary depending on the outgoing provider's required lead time. Your role throughout this entire process should be relatively brief, mainly focused on providing the necessary initial information to your new provider.
The plan conversion process usually begins with the signing of a service agreement with your new provider, as summarized below.
Managing Annual ERISA Compliance During the Switch
When changing 401(k) providers, the most efficient approach is generally to continue directing all plan contributions to your current provider until the plan's "blackout" period commences. This timing provides a clear point for transferring annual ERISA compliance responsibilities – primarily nondiscrimination testing and Form 5500 preparation – to your new provider. Typically, the provider holding the plan assets at the end of the year is responsible for completing that year's ERISA compliance.
If a switch occurs mid-year, your new provider will require specific information from your previous provider to fulfill the annual ERISA compliance requirements after the year concludes. They will inform you of their needs, but you may need to obtain this information yourself, as some outgoing providers don't communicate directly with new providers.
Understanding Applicable Fees
You should anticipate incurring one-time fees when switching 401(k) providers. Specifically, a termination fee from your current provider and an establishment fee from your new provider. While new providers sometimes waive their establishment fee, it's important to understand the reason why. It's often the case that they charge high ongoing administrative fees that will quickly negate any initial savings.
Most, if not all, 401(k) providers require advance notice before you can terminate their services. In my experience, 90 days is a common requirement. During this notice period, you will still be responsible for paying their administrative fees. To minimize final fees, it's advisable to send written termination notice to your outgoing provider as soon as you engage a new one. Your new provider will likely have a template for this notice.
All applicable fees should be clearly outlined in each provider's service agreement. Generally, these fees can be paid from the plan's assets.
Avoiding Common Mistakes
Potential problems can easily arise during a 401(k) provider transition if you're unaware of what to watch out for. Here are some typical issues and how to prevent them:
The plan conversion process usually begins with the signing of a service agreement with your new provider, as summarized below.
Managing Annual ERISA Compliance During the Switch
When changing 401(k) providers, the most efficient approach is generally to continue directing all plan contributions to your current provider until the plan's "blackout" period commences. This timing provides a clear point for transferring annual ERISA compliance responsibilities – primarily nondiscrimination testing and Form 5500 preparation – to your new provider. Typically, the provider holding the plan assets at the end of the year is responsible for completing that year's ERISA compliance.
If a switch occurs mid-year, your new provider will require specific information from your previous provider to fulfill the annual ERISA compliance requirements after the year concludes. They will inform you of their needs, but you may need to obtain this information yourself, as some outgoing providers don't communicate directly with new providers.
Understanding Applicable Fees
You should anticipate incurring one-time fees when switching 401(k) providers. Specifically, a termination fee from your current provider and an establishment fee from your new provider. While new providers sometimes waive their establishment fee, it's important to understand the reason why. It's often the case that they charge high ongoing administrative fees that will quickly negate any initial savings.
Most, if not all, 401(k) providers require advance notice before you can terminate their services. In my experience, 90 days is a common requirement. During this notice period, you will still be responsible for paying their administrative fees. To minimize final fees, it's advisable to send written termination notice to your outgoing provider as soon as you engage a new one. Your new provider will likely have a template for this notice.
All applicable fees should be clearly outlined in each provider's service agreement. Generally, these fees can be paid from the plan's assets.
Avoiding Common Mistakes
Potential problems can easily arise during a 401(k) provider transition if you're unaware of what to watch out for. Here are some typical issues and how to prevent them:
- Contribution Deposits: Continue sending plan contributions to your current provider until explicitly instructed otherwise. Employee salary deferrals and loan repayments have strict deposit deadlines. Failure to meet these deadlines requires funding lost earnings to participant accounts and reporting the issue to the government on Form 5500.
- Annual ERISA Compliance: Ensure coverage for both the previous and current plan years. If nondiscrimination testing and/or Form 5500 haven't been completed for the prior year, confirm which provider will handle it. Also, verify that your new provider will receive all necessary information from the previous provider to complete nondiscrimination testing and Form 5500 for the current year.
- Fees: Before selecting a new 401(k) provider, thoroughly understand all fees associated with the switch. Some providers, particularly insurance companies, may impose significant service termination fees. To protect the interests of plan participants, it's crucial to keep these fees as low as possible.
Don't hesitate – reduce your 401(k) fees!
Cost is a significant factor when you and your employees are saving for retirement. Therefore, you should consider replacing your 401(k) provider when their fees unnecessarily reduce the investment returns of plan participants.
Fortunately, the process of switching 401(k) providers is usually quite straightforward. Your new provider should guide you and manage the majority of the work. Generally, your primary task will be to provide them with the necessary information. This effort should only take a few hours – a worthwhile investment in making retirement more affordable for both you and your employees.
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LPL Enterprise Form CRS
Cortnie Beaver is a Financial Planner with, and offers securities and investment advisory services through LPL Enterprise (LPLE), a Registered Investment Advisor, Member FINRA/SIPC, and an affiliate of LPL Financial.
LPLE and LPL Financial are not affiliated with Skye Wealth Management.
The LPL Enterprise registered representative(s) associated with this website may discuss and/or transact business only with residents of the states in which they are properly registered or licensed. No offers may be made or accepted from any resident of any other state.
This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.
Skye Wealth Management does business in the following states:
Securities: DC, MD, PA, VA, WV Variable Life Insurance: DC, MD, PA, VA, WV
Mutual Funds: DC, MD, PA, VA, WV Fixed Annuities: DC, MD, PA, VA, WV
Life Insurance: DC, MD, PA, VA, WV Variable Annuities: DC, MD, PA, VA, WV
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.
www.finra.org
www.sipc.org
LPL Enterprise Form CRS
Cortnie Beaver is a Financial Planner with, and offers securities and investment advisory services through LPL Enterprise (LPLE), a Registered Investment Advisor, Member FINRA/SIPC, and an affiliate of LPL Financial.
LPLE and LPL Financial are not affiliated with Skye Wealth Management.
The LPL Enterprise registered representative(s) associated with this website may discuss and/or transact business only with residents of the states in which they are properly registered or licensed. No offers may be made or accepted from any resident of any other state.
This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.
Skye Wealth Management does business in the following states:
Securities: DC, MD, PA, VA, WV Variable Life Insurance: DC, MD, PA, VA, WV
Mutual Funds: DC, MD, PA, VA, WV Fixed Annuities: DC, MD, PA, VA, WV
Life Insurance: DC, MD, PA, VA, WV Variable Annuities: DC, MD, PA, VA, WV
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.