Plan Operations: Keys to Switching Service Providers Painlessly
November 9, 2016 Benefit Plans

There are plenty of valid reasons for plan sponsors to switch service providers. For example, the performance of their investment provider may come into question, or they may be dissatisfied with the current record-keeper’s services or fees, or a custodian may leave or simply resign from handling the company’s business.

That said, changing service providers can be a complex undertaking. It’s a move that exposes plan fiduciaries to some degree of liability. Ultimately, the plan trustee is liable for any assets or earnings on those assets that are lost during the transition.

Keep First Things First

Any decision to switch plan service providers should be grounded in this fundamental question: Is it in the best interest of the plan? If it is, and you thoroughly document the thinking and processes that went into the decision, your actions should pass muster under ERISA. Additionally, it is important for fiduciaries to fully understand the financial impact to plan participants as a result of changing providers:

  • What additional administrative charges will arise?
  • Do the investment options with the current provider contain restrictions or come with hefty surrender charges if the funds are withdrawn?

These costs should be weighed against the benefits of changing providers in making the best decision possible.

The next step is to minimize the potential risks from the switch to both the plan and its participants. This entails ensuring that the changeover is monitored and performed properly. The plan sponsor should be complete “hands-on” during the transition and have a solid understanding of what happens at each step of the process. Here’s what to expect:

  • Once the decision is made to switch vendors, the new service provider should thoroughly review the plan documents. Here, a plan administrator can spend time with the vendor performing a line-by-line review of plan provisions.
  • The existing vendor then prepares the pertinent data for the new service provider — such as payroll data, plan balances and loan information for each participant. At the same time, the new service provider verifies that it is able to accept and accurately process the data at the changeover.
  • Next, employees should receive notice of the change. The employer and new provider communicate the reasons for the change and how it will affect participants. Details of the required blackout period are also explained. If the switch involves a change in investment providers, employees are told how their investments will be mapped to new investments.
  • New legal documents are then prepared to list the new provider.
  • The old provider initiates the blackout period, during which time participants may not make any changes to their accounts. Depending on the plan and the vendor, the blackout can be as short as overnight or as long as two months, although 10 days is fairly typical.
  • Participants’ new account data is forwarded to the record-keeper.
  • In the case of a change in investment providers, plan assets are sold and the proceeds transferred to the new provider. Final statements based on the liquidation balance are provided, and the new provider then maps investments to similar funds.
  • After the data is entered in the new provider’s computer system, the plan goes live and the blackout ends.

Understand What Could Go Wrong

Of course, a change in service providers opens up the potential for error. The most common changeover issues include:

  • Reconciliations aren’t completed (it may take several months for any differences to be noted, typically during the annual plan audit).
  • Transferred amounts aren’t mapped to the proper investments.
  •  Participant contributions or loan repayments aren’t remitted in a timely manner to the new vendor, resulting in a prohibited transaction under ERISA.
  • Minor changes to the plan provisions (if any) are not recognized by those handling the day-to-day operations at the plan sponsor and as a result, are not properly incorporated into the enrollment or payroll process.

To minimize the chance of operational errors, assign someone to monitor the transition from beginning to end. Your point person should be responsible for coordinating communication with vendors, participants, and plan management.

Involve Your Auditor

Because switching service providers can have a ripple effect throughout your plan, it’s a good idea to involve your auditor early in the process — especially prior to any transfer of assets. An experienced auditor can provide guidance on proper reconciliation procedures and work with both the established and successor vendors to properly certify the plan assets.

Note that fees for a plan audit may be higher during a plan year in which a change in service providers occurs. With good communication and coordination of efforts with your auditor, however, these fees can typically be managed.

Contact us if you are going through the process of changing vendors or planning for a future change.

About the Authors

James E. Merklin
James E. Merklin
Partner, Assurance and Advisory


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