I recently assisted a CFO-For-Hire client with the transition of their 401k plan to a new record keeper. The process was much more lengthy then expected, and I thought I’d share my experience.

The client has a 401k plan with less than 10 employees utilizing an Alliance service between Paychex and Legg Mason. The client likes this delivery model as it offers the convenience and cost savings of combined payroll, workers compensation,  and 401k record keeping, while also having access to 3rd party investment experts. An unbundled service is too costly for small business, and the idea of a bundled service puts too much faith in one party.

The client had a number of complaints with the current keeper which lead to the transition. This included limited fund options, poor fund performance, high fees (including fees on other services such as payroll and worker’s compensation insurance), a mishandling of account funds during the Lehman Brothers fall out (some investments went “unaccounted for” for a period of time), and poor website interface. So with these issues in mind, ADP was chosen by the client to take over.

Key points

Documents with the new keeper were signed, and the ball is rolling. The new keeper handles all contact with the prior keeper, and coordinates the transition. ADP has a team specifically for these conversions. At this point the Company has a number of decisions to make, and their involvement is crucial. A couple of important points:

• There is a fee to leave the current keeper, in this case $1,500.
• You are at the complete mercy of the current keeper as to the timeline of the conversion. They have to prepare plan documents for transfer and wire funds, and are not in a rush to do this (and give up fees). Our conversion process took approximately 5 months start to finish.
• Now is a good time to update your Adoption Agreement, as this can be done without charge by the new keeper. Attributes such as matching amounts, eligibility requirements, and loan options, can all be updated.
• Clean out old employees. Legacy plans often show participants that have long since left the company. For those without balances, these can be deleted. Participants with balances under $5,000 can be forced into IRA’s, and participants with larger balances should be contacted about rolling over their funds.
• The new keeper will have different investments options with their Partner. You will have the option to transfer investments to similar funds (called matching), or transfer all balances to cash.
• Upon receipt of the plan by the new keeper, a 30 day blackout period begins. No adjustments to accounts can be made while the plan is being set up, and no new participants can be enrolled.
• During the blackout period the new keeper will review plan compliance, update the Adoption Agreement for any changes, and request any needed missing information (birthday’s, addresses, etc.)
• The new service has an employee portal, so employees can manage their 401k accounts. This is convenient (and safer?) for the employer, as employees can adjust contribution rates, loan money, take distributions, access statements, etc. at their discretion.

Bottom line is the conversion took longer than expected. Our black out date kept getting pushed back as Paychex delayed the conversion, and the employees were kind of bewildered. This delay, along with the cost of management and consultant time, should be factored into a decision to convert.