The news that Empower Retirement would be buying the retirement plan business of Prudential Financial Inc. for $3.5 billion is the latest indication that consolidation in the retirement plan financial services industry is showing no signs of slowing down. As a result, employers that sponsor 401(k)s or similar plans may have fewer options among firms that provide record-keeping and other services.
Record keepers are financial services firms that execute participant trades, almost universally through online platforms these days. These firms typically work with a plan sponsor's designated fiduciaries, such as those serving on a retirement committee that selects and oversees plan investments, and they play an important role in creating and delivering communications to retirement plan participants.
Many firms that act as record keepers also can provide investment advice to plan participants.
Consolidation seems like bad news when an employer's current record keeper merges with or is acquired by another firm, which will be new and unfamiliar, and probably not of the employer's choosing.
"If an employer's existing [service] provider has been taken over by a larger provider, that employer was not part of that process and had no input into that change," noted Carol Buckmann, a partner with law firm Cohen & Buckmann in New York City. "The employer is not in control."
Potential good news is that consolidation could lead to record keeper relationships that generate more value for both employers and plan participants. The general goal of consolidation is greater economies of scale, after all, which could free up providers to enhance services and potentially lower plan fees.
Better services for lower fees, however, are by no means a given, so regularly shopping around to compare record keepers' services and fees is becoming a prudent part of sponsoring a retirement plan.
Time to Change Providers?
"Changing retirement plan providers is a gargantuan task that most employers don't go into lightly," said Wendy Carter, vice president and defined contribution director with HR consultancy Segal in Washington, D.C. "It is a big change that causes a lot of upheaval for staff and employees, so the process needs attention, understanding, commitment and a certain amount of rigor."
Considering the consolidating market for record keepers, one might wonder whether looking to move a retirement plan to a new service provider is worth the effort. "They may end up choosing a new provider and find out, six months later, that the new provider has been acquired, too," Buckmann said.
Yet, shopping around by soliciting requests for proposals (RFPs), for instance, can yield important intelligence regarding the state of pricing and the level of services being offered. For example, employers with defined contribution retirement plans, defined benefit pension plans and stock-compensation plans could find opportunities to save time and money by consolidating the administration of all of those plans with one provider.
A 2021 survey of 311 plan sponsors conducted by Principal Financial Services found that consolidating multiple plans under a single provider can improve efficiency and consistency of plan administration while also reducing the time the employer must spend on retirement plan administration. This is particularly true for employers whose retirement plans have unique plan design elements.
For example, the survey found that:
- Coordinating multiple plans through a single point of contact can save three to seven hours per month in staff time depending on the type of plan involved.
- A single provider managing multiple 401(k) plans could save three hours per month or 36 hours per year of internal staff time spent working on these plans, often by removing the need to coordinate with multiple record keepers or sync data across multiple plans, while also reducing the staff time required to support nondiscrimination testing.
The survey found that plan participants may also find this type of arrangement to be more convenient, especially if the new arrangement allows participants to use a single telephone number, website or app to manage all of their accounts.
Eggs and Baskets
Financial service firms may be able to offer one-stop record keeping for other benefits as well, such as 529 college savings accounts, health savings accounts, emergency savings accounts and other types of benefits.
Employers, however, may weigh the convenience and possible savings on labor and fees against the risk of having all their benefit plan eggs in one basket, should they become unhappy with their service provider.
Saving the employer time and money is not the only reason to shop around for retirement plan services. Recent litigation involving retirement plan fees means employers need to demonstrate that they are taking steps to manage the fees participants pay while also increasing the services available to plan participants.
This process does not have to lead to a formal request for proposals. Instead, employers can begin with a request for information (RFI) to gather insight into where the market for retirement plan services stands. Depending on what employers find out during this process, this could end up being a simple benchmarking effort or a full-blown search for a new provider.
"This can also be a regular price check and an opportunity to see how the other half lives," Carter said. "You can benchmark your fees and services against what is now available in the market."
The key question is whether the fees of the current provider are reasonable given what that provider is offering relative to what the market is offering.
Data Security Issues
Employers can also expand the criteria they use to evaluate retirement plan providers. For example, taking into account the growing concerns about retirement plan account cybersecurity, employers can request detailed information about providers' efforts to safeguard participants' account assets and personal information and their policies for preventing ransomware and other cyberattacks that could put retirement plan data and assets at risk.
A related issues is service providers' use of participants' data to cross-sell investment products to participants who are rolling over assets from a 401(k) plan to an individual retirement account. The Department of Labor (DOL) "has been very concerned with the practice of cross-selling in the rollover context … and it seems that the DOL is expressing the same concerns in its plan audits," noted the Wagner Law Group in Washington, D.C.
"A plan sponsor can at least ensure that the service agreement doesn't give tacit approval to the service provider's use of participant data to cross-sell," Wagner Law advised. "The plan sponsor could go further and clarify in its service provider agreements that there should be no access to or use of participant data by the service provider except for the sole purpose of performing its plan-based duties under its service agreement."
Making a Change
If this process leads an employer to choose a new retirement plan service provider, the next step is to prepare for the changeover. For instance, participants may need to re-execute plan beneficiary forms for a new record keeper.
"It's important to ensure plenty of lead time for planning with a buffer to manage unanticipated delays or issues," said Anissa Kurtz, senior vice president of benefits at ExtensisHR in Woodbridge, N.J.
Kurtz recently completed her company's change to a new retirement plan record keeper. She recommended that employers audit retirement plans prior to transitioning to address any problems before the changeover.
Recoup Uncashed Checks from Former Record Keepers, DOL Advises
The Department of Labor is urging retirement plan sponsors to recoup amounts held by former record keepers from benefit checks left uncashed by participants, according to recent reports.
The DOL had issued a series of letters notifying retirement plan fiduciaries of the existence of small uncashed check balances and directed them "to coordinate with former record keepers to restore these amounts to the participants and beneficiaries who failed to cash distribution checks," wrote Matthew H. Hawes, a partner in the Pittsburgh office of law firm Morgan Lewis, and Emily M. Rickard, an associate in the firm's Philadelphia office.
"The DOL's new letter campaign appears to be the first time the DOL has focused on small benefit amounts that might have remained behind with a vendor following a transition to a new service provider," Hawes and Rickard wrote.
"In light of this new wave of DOL letters, plan fiduciaries should consider reviewing record keeping and service provider agreements as well as uncashed check procedures to confirm existing processes and practices for handling uncashed checks," they advised. "Moreover, plan fiduciaries may consider proactively reaching out to former record keepers, trustees, or paying agents—particularly if there have been recent changes in any of these relationships—to find out if there are any undelivered assets—even small amounts—that remained behind after the transition."
Joanne Sammer, a New Jersey-based business and financial writer, has written extensively on topics related to human resources and corporate governance.