Aggravation Everywhere When You Go from Here to There

I had a client one time say that the process of changing from one 401(k) provider to another was more painful than birth. Since this client happened to be a male, I wonder how he could make that comparison, but that’s beside the point. The point is that changing your provider can be a long, cumbersome process—more so than most people realize. 

One reason for this is that you have two business competitors involved in making a conversion work. The provider that is losing a 401(k) plan is not that anxious to let go of the assets. In addition, that provider has just lost a client, and the priority given to that lost client drops precipitously right after the client tells the provider they are leaving. It is not at all uncommon for the former provider to say that a conversion date is some weeks or months in the future, which can translate as “when I get around to it.” This can be exacerbated if the former provider has products that take some time to be liquidated (note here to plan sponsors: you should know whether there are restrictions on transferring your plan assets elsewhere; if you don’t know, you should find out). 

Another item that delays conversions and increases paperwork is the Sarbanes-Oxley (SOX) law that was passed in the wake of the Enron debacle. SOX says that a participant has to get a 30-day advance warning if he’ll be unable to access his account for more than three days. And that notice has to say when that blackout period will start, and when it will end.  That has the effect of lengthening the blackout, because the providers on both ends want to give themselves leeway to meet the future dates that the participants have to be given. 

The conversion process itself takes some time. All assets at the former provider have to be liquidated and transferred to the new provider. That seems simple enough until you think about trailing dividends, uncashed checks, forfeiture accounts, receivables and payables of one sort or another, outstanding loans and loan payments, assets that aren’t readily tradable and so on. The former provider has to give the new provider an accounting of all of these things, and any and all differences have to be reconciled before the participants’ accounts can be put in place (but see the paragraph above about the former provider’s motivation to be cooperative and timely). 

In addition, the former provider must give enough data to the new provider to establish the accounts properly, such as loan amortization schedules and total deferrals to date. And the new provider needs to receive previous documents, government filings, test results, etc. Then both the client and the participants have to be educated on how all of this is going to work once the whole thing gets started. 

If all of this seems like a lot of work, you are right. In most shops, the cost of bringing on a client is so high that it takes 3-5 years before a provider starts to realize a net profit on a client. If it seems like it would take a while to make the conversion, you are also right. A 60-day timetable can be considered aggressive, given all of these hoops that have to be jumped through. A great irony here is that it can sour a relationship with a new provider when the process does take this long, even when the new provider does everything right. 

Update on a previous blog: Last December, I wrote that I expected some type of automatic retirement savings to be enacted this year, possibly with a 2011 or 2012 effective date. That’s still being considered by Congress, but I think the likelihood of it passing this year is becoming more remote as the healthcare debate drags on. Also, while the enactment is estimated to increase retirement savings by $100 billion per year, that would also translate into foregone tax revenue of $20 billion per year, which the feds can ill-afford to let go of anytime soon.

I had a client one time say that the process of changing from one 401(k) provider to another was more painful than birth.