Previously, we have discussed a number of the do’s and don’ts of switching plan providers, such as investment advisors and recordkeepers. This post focuses on why plan sponsors, plan administrators and plan recordkeepers all should take greater care in reviewing plan documents as part of the process of switching from one recordkeeper to another.
Typically, once a public agency plan sponsor decides to move its plan(s) from one recordkeeper to another, the agency staff and the new recordkeeper’s transition team agree upon a proposed “conversion date” – usually 120 to 150 days in the future. The establishment of a conversion date drives the all sorts or calendars, deadlines and checklists (familiar to all recordkeepers), which must be adhered to in order for the plan(s) to transition in an orderly fashion as planned. Many of the checklist items, such as the selection and/or mapping of investment options, are well-understood and addressed in a deliberate, well-documented fashion.
In most cases involving a change in recordkeeper, it is necessary to “map” and restate the prior recordkeeper’s plan document onto a new plan document provided by (and more familiar to) the new recordkeeper. Unfortunately, this process is often done somewhat “behind the scenes” by the recordkeeper’s team – usually without review or scrutiny by the public agency’s employee benefits counsel. The goal in most cases is simply to copy or replicate the material terms of the old plan onto a new plan, so that all plan features are carried forward along with the recordkeeping changeover. This “focus” on duplicating and carrying on with the plan can and does create a number of problems:
- Is it appropriate? Often times the new recordkeeper is so intent on recordkeeping the plan (and its assets), it doesn’t stop to consider whether the plan is valid or appropriate for the agency. We have seen several cases where the new recordkeeper has “carried-over” a 403(b) plan that the public agency was not eligible to maintain.
- Does it contain “unusual” provisions? We also have seen successor recordkeepers “map” unusual provisions of an existing plan – ones that are not provided for in their plan document. This “forcing” of plan language (to “fit the glass slipper”) almost always signals a questionable or problematic plan provision or feature – one that calls for review by benefits counsel. If the new provider’s “pre-approved” plan document does not readily accommodate the old plan’s language, the parties should stop to consider if there is something wrong with the old plan’s language. Remember, if an existing plan contains a “disqualifying” provision, or has been operated improperly, the new, successor plan will in most cases simply carry this problem forward.
- How is it being administered? Finally, we have seen numerous occasions where a plan will be restated onto the new provider’s plan without regard to whether its terms are current or consistent with operations. Remember, the failure to operate a plan according to its terms can cause it to lose its tax-favored status. This transition is a perfect time to check to make sure that the new plan properly reflects all of the MOU (employer contribution) changes that should have been reflected in the prior plan.
It’s a mistake to assume that the migration from one recordkeeper to another would necessarily build-in a thorough document compliance review. In practice, this seldom happens. However, the required adoption of a “new” plan document provided by the new recordkeeper provides you with a perfect opportunity to stop and check whether the terms, features, and operation of your plan are appropriate, compliant and current.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at firstname.lastname@example.org or (916) 329-3685.