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What’s Involved in Switching 401(k) Providers?

One topic readers frequently ask about — especially since the Frontline documentary earlier this year — is how to get their employer to switch to a less expensive retirement plan provider. While I’ve shared some thoughts on how to campaign for changes, I’m at a loss with regard to questions about the process itself, having never been involved with it.

Fortunately, Linda Wolohan of Vanguard’s PR team was able to gather and share some information on the matter. (My questions are in bold and italics, and her replies are in normal font.)

When switching to a new 401(k) provider, what does the step-by-step process look like?

Here are the steps at a high level:

The plan sponsor needs to finalize the investment lineup, determining the core lineup (which typically can be index funds or target-date funds) as well as any additional investment options.

Working with Vanguard, the plan sponsor decides on the plan design — what kind of services (i.e., loans, withdrawals) will be offered, restrictions, etc. This may entail changes to the Plan Document, which dictates how the recordkeeping platform is going to be set up from a transactional and workflow perspective.

The focus then moves to ongoing administrative practices.

  • All necessary legal documents to administer the plan and indicate who is authorized to act on the plan are created and executed.
  • Payroll processing is a large component of this. The files that will be transmitted back and forth from the plan sponsor to Vanguard will be programmed and thoroughly tested.
  • Decisions are made on how to best communicate to participants on the upcoming change, their options in the new plan, etc. Communications must also satisfy all regulatory notification requirements.
  • The transfer method for participant assets is determined. Assets can be transferred in-kind or mapped to similar funds. Or sponsors can use what is called the re-enrollment process, which puts all or certain participants into certain default funds to ensure their portfolio is more appropriately diversified. Participants can opt out of all of these choices, of course.

Once the above decisions are made, the plan sponsor’s responsibilities decrease and most of the work is between Vanguard, the prior recordkeeper, and the payroll vendor, if applicable. The prior recordkeeper will provide participant data for Vanguard to review for accuracy and completeness. Vanguard will complete a mock conversion in our test region prior to the actual conversion. This helps ensure there are no surprises or missing data that could prolong the blackout period for the actual live conversion.

During the blackout period, all transactions are restricted at the prior recordkeeper. The assets are transferred on the communicated date. When the assets and final participant records are received by Vanguard, we will reconcile the assets and load the necessary data to lift the blackout and allow participants to access their accounts.

Payroll contributions are then sent directly to Vanguard and the plan will be up and running. At that point the conversion is complete.

How long (in terms of months, rather than hours of work) does the process typically take?

The average conversion takes between 3-6 months depending on client size and complexity. Certain regulatory notification requirements factor into this timeframe. For example, in order to allow for the transfer of the assets, a short blackout period occurs, during which time participants temporarily lose access to their retirement accounts. Plan sponsors/administrators are required to provide written notice — called a Sarbanes Oxley notice — of this to participants. The Sarbanes Oxley notice has to be provided at least 30 days, but not more than 60 days, in advance of the start of the blackout period.

How can I quickly/easily get an estimate of how much money the company (and/or plan participants) will save?

We can’t really give precise estimates because each plan varies in terms of the funds and services it offers, so costs will vary. But [according to] a study from the Investment Company Institute on 401k fees:

“The median defined contribution plan participant is in a plan with an all-in fee of 0.78 percent of assets, based on plans included in the study. Across all participants, the all-in fee ranged from 0.28 percent of assets (the 10th percentile participant) to 1.38 percent of assets (the 90th percentile participant). Larger plans tended to have lower all-in fees.”

[In contrast] with our Retirement Plan Service, the all-in fee for a hypothetical plan with $5 million in assets, 100 participants and an investment lineup of Vanguard index and active funds would be 0.30% of plan assets (actual pricing will depend on a plan’s investment options, demographics, and ancillary services).

Vanguard’s low fund expense ratios are the primary driver of the service’s low all-in costs: Vanguard’s average annual fund expense ratio is 0.19%, compared with the industry average of 1.11%. This cost difference means that investors keep more of what they earn.

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