Plan sponsors seriously disadvantage themselves and their plan participants by announcing the migration of their plan from one record-keeper to a new record-keeper before all the conditions for a smooth transition have been fulfilled.
There are record-keepers that know this and take full advantage of it. Usually, the plan sponsor is so happy to have “completed” its RFP process that it treats the selection of a record-keeper as the end of the migration process – rather than its beginning. Unfortunately, once the identity of the new record-keeper has been announced to the employees and participants, the employer (plan sponsor) is committed and has begun to box itself in from a contract negotiating standpoint.
We recently helped a client that took an all-too-common “shoot then aim” approach to choosing a new record-keeper. A sophisticated municipal 457(b) plan with thousands of participants and hundreds of millions of dollars in plan assets, they had chosen and announced a new record-keeper before fully negotiating and understanding the new deal.
Under the circumstances, we did the best we could to negotiate the best arrangement, but the new record-keeper was keenly aware of the situation, so it was very hard to obtain the contractual and fee concessions that one might obtain before a deal is signed. In another record-keeper conversion for a large special district, the change and anticipated conversion date were announced to participants prior to the resolution of all conversion issues. Due to the lack of planning, the actual conversion date had to be postponed and negotiations with both the old and the new record-keepers continued up to the last minute.
Careful Planning Provides Protection
Both of these cases – and dozens like them – are easily avoided.
Choosing to change your plan record-keeper requires careful deliberation and planning to protect both plan sponsor and participants. Before announcing the migration of the plan to a new record-keeper, be sure all the conditions for a smooth transition have been fulfilled. We’ll show you how.
Don’t rely on the new record-keeper to protect the plan. As a plan sponsor it is tempting to relax after a tough RFP process, but the selection of a record-keeper is really the beginning of the plan migration process. Once the identity of the new record-keeper has been announced to the employees and participants, the sponsor is committed and has much less negotiating power. As the transition date approaches, the plan sponsor and retirement committee or fiduciaries are forced to either concede or compromise.
Here are some common issues that are often not nailed down as part of the selection process:
- Compensation. What is the exact amount the record-keeper is being paid and on what basis? Some record-keepers win business with an apparently low fee (in terms of basis points). These low fees often come with an “understanding” that the record-keeper’s stable value fund (and/or other of the record-keeper’s proprietary funds) will be offered as part of the new investment lineup. If a stable value fund will be part of the mix, the provider’s related annuity contract must be reviewed and accepted. Unless you can identify all of the types of revenue that the new record-keeper will receive in connection with your plan, you won’t know if it’s fair and proper for all of your participants. Fully analyzing, negotiating and documenting all fees and revenues is an essential pre-condition to announcing a new provider.
- The Administrative Services Agreement (ASA). The terms and conditions of the ASA are critical. Most ASAs are prepared by the record-keeper’s attorneys and designed to protect the record-keeper and its affiliates. Carefully examine, negotiate and document these “hot spots” in most ASAs:
- Choice of law
- Venue for resolving disputes
- Whether there will be mandatory arbitration/mediation
- Limitations of the provider’s liability
- Indemnification
- Non-solicitation of participants
The overall scope of contracted services needs to be carefully analyzed and understood by the parties. Oftentimes, providers will refer to an “administration manual,” which they will use to record-keep the plan. Because this document will become the go-to reference for the record-keeper’s staff (not the actual plan documents), it is critical for the plan sponsor to carefully review and edit this document.
