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401(k) Conversion It's as Easy as Riding a Bike

April 1, 1997
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Related Topics: Retirement/Pensions, Finance/Taxes, Featured Article
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In late 1995, Atlanta-based Vinings Industries was divested from a manufacturing group owned by a British firm. As a consequence, the manufacturer of specialty chemicals for the pulp and paper and water-treatment industries had to reconfigure its benefits and establish a new 401(k) plan to replace the one sponsored by the previous owner.

"There's a big learning process involved in putting in a new plan," says Debbie Parkes, human resources manager for Vinings Industries. "I didn't have these responsibilities before, and I had to add them to my role."

Parkes is right. If you decide to go with a new provider of office supplies or long-distance telephone service, it's a simple matter of closing your account with the old provider and starting to do business with the new one. Changing 401(k) providers, however, isn't quite that straightforward. It involves more than HR simply selecting a provider that might give one's employees more or better services at a better price. The conversion process is cumbersome, requiring transfers of data from one record keeper to another, reconciliation of individual employee accounts and effective communication with employees to let them know what's happening during the process—which can last up to six months. What really happens when you change 401(k) plan providers? Here are some HR benefits issues to be aware of before making that move.

Why change vendors?
Changing 401(k) providers is a grueling venture, so be clear about your reasons before you take the plunge. Vinings Industries didn't have an option. Its old plan was going away, and the company needed a new one. Other companies change 401(k) providers for other reasons. And in today's competitive 401(k) industry, it's a buyers' market. "[Company benefits specialists] are reviewing their plans at least every four years and looking at investments even more frequently," says Maureen Phillips, managing director of Putnam Investments' 401(k) Group. "Among large plans, about 95 percent of new business is takeover business"—an existing plan converting to a new provider, rather than the start-up of a new plan.

The 401(k) industry has evolved dramatically in the last 10 years. Features that once were unusual, such as daily valuation, now are considered standard. If your provider hasn't kept up with this evolution, that may be one reason to change. Two other common reasons to convert are to broaden the investment selection and to obtain a higher level of support in employee education and communication. Cost comes into play, too, but it's usually lower down on the list of reasons. "What we find is that employers getting into a 401(k) plan for the first time usually are price buyers," says Jane Stalnaker, director of implementation for Fidelity Investments in Covington, Kentucky. Then [after the plan has been in place awhile,] they start looking at the service component. That's when they start thinking about making a change, she says.

"Companies aren't always dissatisfied with their current providers," adds Mary Corbett, director of special projects for Moosic, Pennsylvania-based Prudential Retirement Services. "The desire to enhance services to participants is the most common reason to change. Or perhaps their current 401(k) plan isn't packaged to be user-friendly to participants."

That was the case for Sales Mark, a merchandising wholesaler based in Little Rock, Arkansas. "We had a local plan administrator and were relying on quarter-end and month-end valuations," says senior accountant Kathy Meadows. "We decided we wanted daily valuation and other features."

Think ahead.
Assume that you've considered the options and have decided to change providers. Before selecting the new provider, HR needs to determine what employees want in the new plan. Now is the time to add the features that will bring the plan up-to-date. Be clear about what the company wants before beginning discussions with a new provider. Select carefully, because the company won't want to go through this process again any time soon. "We were looking for a leader in record-keeping services and fund management," says Vinings Industries' Parkes. "We wanted a provider with good, solid experience in retirement planning." Having these criteria in mind helped Vinings Industries make its selection. The key here is to think through what your company's needs are before making your selection.

Be prepared for the task.
When you change plan providers, expect lots of things to happen simultaneously. Moreover, a lot of people will be involved and there will be many decisions to make. Some of the activities that occur during a plan conversion include the following:

  • Participant records will move from one record keeper to another. Those records will include all the different kinds of contributions that were permitted under the former plan: pretax, after-tax and employer matching contributions.
  • Account balances will move from the former plan's funds or custodians to the new ones.
  • Plan options and investments may change.
  • Loan balances must be accounted for and transferred to the new record keeper.
  • Guaranteed investment contracts (GICs) may be maturing and their balances transferred.

Participants must be kept informed about what's going on. Plan participants, of course, are among those who will be involved in the conversion process. They also must be re-enrolled so they can indicate to which funds they want their contributions allocated under the new plan. Others involved in the conversion process include current and future record keepers and company management representatives.

Before selecting the new provider, human resources needs to determine what employees want in the new plan.

Then there are the decisions HR needs to make. Will the specific provisions of your 401(k) plan be revised? Where will plan assets reside during the conversion—in a money market fund or in the new provider's funds that are most like the old investment options? How will data be supplied by the old record keeper? HR also will need a communication strategy and a projected time line for the conversion. Be prepared for the process to take up to six months. "Make sure you have a provider with experienced people on the conversion/ implementation team," cautions Sales Mark's Meadows. "We needed [the expertise of the provider's staff] to help us set the schedule. I never would have guessed how much time it takes to do some of these things."

Create a communication strategy.
One of the first parties to communicate with is the old provider—the one that's losing the business. "Companies used to let their old providers know at the last minute they were leaving," says Corbett. "But they should be timely informed. Usually, the outgoing provider will respond professionally. In fact, outgoing record keepers usually are cooperative because it pays them to be. One day, the shoe may be on the other foot, and they'll be the ones asking for data. But the most important people who need to be kept informed are your plan participants. A sound communication strategy can ease the transition, increase employee enthusiasm for the plan and boost participation and contribution rates. How will you communicate the changes in your 401(k) plan to the participants? This issue should be addressed in the initial planning stages of the conversion. Prudential suggests beginning with a detailed letter to participants well in advance of the actual conversion, spelling out why the plan is being changed and what employees can expect.

The letter also serves as the first notice of the dreaded blackout period. This is the period between the date of the final valuation of accounts by the prior record keeper and the date the plan goes live with the new record keeper, typically ranging from six to 10 weeks in duration. During that time, records and assets are transferred, reconciled and set up on the new record keeper's system. The only account activity that can take place during the blackout period is the receipt of regular payroll contributions and direct rollovers. All other activity (loans, hardship withdrawals, exchanges between funds, requests for distributions) is suspended.

Participants should be given adequate notice of the blackout period so it comes as no surprise and creates no financial hardship. Following the introductory letter, Prudential suggests a pre-enrollment communication campaign tailored to the needs of the specific company, followed by enrollment meetings at which participants make their investment selections under the new plan.

Handled properly, this process can serve to stimulate interest in the 401(k) plan and encourage employees to participate in and/or increase their contributions to the plan. "Communicate, communicate, communicate," says Corbett. "That's the only way to prevent the conversion process from becoming a nightmare."

Anticipate some problems.
Good planning and good communication can ensure a smooth transition, but the potential for problems always exists. Sometimes the challenge is built into the process because converting plans can be like converting apples to oranges. For example, the old plan may be unbundled, valued quarterly and contain company stock of more than one class. If the company is converting to a bundled provider offering a specific set of investment options and daily valuation, the transition may take some time.

Phillips advises HR to keep these factors in mind:

  • If the old plan provided for participant loans, and if loan records haven't been reconciled by the prior record keeper, it can take time to bring those records up to date.
  • A company that has grown by acquisition may replace several existing plans with a single, consolidated plan. The change will impact both record keeping and communication.
  • Special problems also arise if the old plan contains company stock of more than one class (such as common and preferred stock) or stock of a privately held company.
  • A company with several divisions or locations may work with more than one payroll vendor. The new provider will need to coordinate with each of those payroll vendors to ensure timely receipt of information, especially if the plan is going to be valued daily.
  • Many 401(k) plans offer a stable-value alternative in the form of guaranteed investment contracts that are subject to a maturity date and aren't easily liquidated or daily valued.
  • Although the company may convert to a bundled plan, it may still want to retain a popular investment alternative that was available under the old plan.
  • If your company has unionized employees, there may be a collective bargaining agreement with a date certain for implementation of the conversion. If so, the new provider needs to know that as soon as possible.

In addition, differences in operating systems may make it difficult for the new provider to receive usable data from the old provider and necessitate several additional testing and trial data transmission steps. "Plan sponsors often don't understand the complexity of the conversion process until they get into it," Phillips says. "It can be difficult to manage everyone's expectations."

Some problems are self-imposed. Sales Mark, for example, gave employees an extended period of time to move their money out of the old plan's stock funds and into the new funds. "We wanted to give employees every opportunity to make the switch without losing money," says Meadows.

And there are surprises. "We were surprised to learn that our former provider didn't have information we needed about hardship withdrawals," says Meadows. Phillips adds that some problems are carried over from the administrator that preceded the old plan's current administrator, further complicating the process of reconciling records. "There are always glitches," adds Parkes. But with planning, glitches can be kept to a minimum.

Workforce, April 1997, Vol. 76, No. 4, pp. 64-70.

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