Changing Custodians – Best Practices for 401k Plans

Plan sponsors change custodians of their 401k plans for various reasons.  Whatever the reason may be, there are numerous steps in the process to complete the transfer of plan assets and participant information, all of which should be carefully planned and timed.

Decide on the date of transfer upfront and consider choosing a date that does not correlate to the plan’s year-end.  For instance, if your 401k plan year-end is December 31, you may want to transfer the plan assets on October 31.   Plan sponsors and custodians tend to be busy on December 31.   In addition, there can be confusion as to which custodian holds the assets at year-end.  Questions can arise from this which leave the 401k plan sponsor trying to figure out the following scenario:  Did the transfer out of the prior custodian occur on December 31, but the transfer into the new custodian occur on January 1?  Is neither the prior nor new custodian taking responsibility for the assets as of December 31?  The point is: What may on the surface seem to be a clear transfer date, may not necessarily be so evident. 
Although you are ceasing your relationship with the predecessor custodian, remember not to burn bridges.  You’ll need assistance and cooperation from them throughout the transfer process and beyond.  Decisions will need to be made regarding how to transfer the investments.  Will the successor custodian accept the investments from the predecessor custodian or will they need to sell the investments?  Will the successor custodian map the investments to similar investments or will participants need to make a new allocation election?  In addition, who will be preparing and sending notices to the participants regarding the transfer and blackout dates? 

Once the transfer occurs, plan sponsors should ensure that the transfer in total and at the participant level was performed in a timely and accurate fashion.  This can be accomplished by confirming that the total assets transferred from the predecessor custodian agree to the total assets received by the successor custodian, with special attention to participant loan balances.  At the participant level, a selection of participants should be reviewed to ensure the participant account balance and allocations were also transferred accurately.  The plan’s 401k auditor typically will review the reconciliations as well.  This process sounds simple, and in most cases it is fairly straightforward; however, not incorporating control procedures may result in significant errors.

In addition to the transfer of assets, there is also a transfer of demographic data such as date of birth, date of hire, date of re-hire, deferral percentages and vesting information.   This information should also be reviewed for accuracy.  Plan sponsors access plan and participant information online.  Typically, once the relationship is terminated with the prior custodian, so is the online access.  That means years of historical data up to and including the transfer will no longer be available shortly after the transfer.  Care should be taken to obtain all necessary information before online access is terminated.  The trust statements provided each year that include all plan activity and participant activity should be secured through the date of the transfer from the predecessor custodian.  Additional suggested reports to obtain include deferral changes, allocation changes, plan assets and changes in plan assets, and distribution and loan details.  Plan sponsors will want to coordinate the transfer with their plan auditors so they can gather any pertinent information for the 401k audit while the information is still accessible.

Many plan sponsors have a prototype plan whereby they filled out an adoption agreement using a basic plan document provided by the custodian.   If this is your situation, a change in custodian means a change in adoption agreement and basic plan document.    Be sure to understand your plan’s provisions and make certain that the proper elections are selected in the adoption agreement.   Incorrect selections could potentially cause an operational failure by not following the provisions of the plan appropriately.   Consider having your ERISA attorney review the new adoption agreement prior to signing it. 

Remember: Coordination is key. We strongly suggest that you have a strategy in place and coordinate with all parties involved with the 401k plan to ensure a smooth and successful transition. 


Denise Finney is a Director in the Pension Services Group dedicated to employee benefit plan audits. With 15 years of public accounting experience, she specializes in assisting clients with annual audit requirements regarding employee benefit plans.

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