(b)lines Ask the Experts – Issues with Recordkeeper Transitions

“Are such ‘blackout’ periods unusual, and is there anything else about which I should be aware during the conversion process?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:        

You’ve come to the right place, as the Experts have experienced many recordkeeper transitions!

First of all, congratulations on your selection of a new recordkeeper! This is an excellent question, since the movement of assets in relation to a change in recordkeeper, long a standard transaction in 401(a)/(k) plans, is becoming increasing common in ERISA 403(b) plans. The reason? More and more 403(b) assets are being invested in group contracts, which an employer can transfer to a new custodian (and/or, in rarer cases, group annuity contract holder) in the event of a change in recordkeeper. Such a transaction streamlines administration for plan sponsors, since they do not need to administer plan assets at the old and new providers.

However, in most cases, this type of transaction comes with a temporary inconvenience known as the “blackout period”, where assets are transferred from the old provider account(s) to the new provider accounts. The period is necessary to make certain that the participant accounts recordkept at the old provider are successfully transitioned to the new provider. Each participant account is reconciled to insure that all account balances in participant-directed investments reconcile to the balances at the prior recordkeeper, and that participant loans, vested percentages, and other account balance features are accurately reflected at the new recordkeeper as well.

A potential blackout period of two weeks is not unusual; depending on the plan complexity, the Experts have seen blackout period of that length, or even longer. However, since blackout periods are always difficult from a participant communications perspective, you should work with your providers in an attempt to shorten the blackout period as much as possible. For example, is there anything that you, the plan sponsor, can do to shorten the period? That is a question that you should be posing to your new recordkeeper.

As for anything else about which you should be concerned, some major issues associated with recordkeeper conversions are as follows:

• Participant communication of the asset transfer: Nothing can send a worse message to a participant during a conversion than receiving a statement/transaction confirmation that states that the participant has zero dollars with his/her former recordkeeper, without receiving a corresponding statement from the new recordkeeper that his/her funds have been deposited with the new provider. Participants believe that their funds have simply disappeared! And this unfortunate event happens more often than you would think, To avoid the “disappearing money” perception, some recordkeepers provide transaction confirmations to each participant stating that the entire account balance was transferred from one provider account to another, and indicating the amount of that balance. And outgoing recordkeeepers work with the new recordkeeper to suppress any zero-balance statements/confirmation until the new recordkeeper has issued a statement/confirmation. You should ascertain how your recordkeepers are handling this situation to make certain that those participants do not contact you about “disappearing money”
• Loans: Loans are among the most difficult transactions for a recordkeeper, and can often be the subject of errors in a conversion (assuming that your plan’s loans were indeed transferred). You will want to take the time to scrutinize the conversion loan report. Are the repayment amounts the same?  Is the repayment frequency (e.g. monthly, biweekly) the same? Was the outstanding loan balance information for ERISA purposes (e.g. highest outstanding loan balance over the last 12-months) carried over accurately to the new provider? How does the blackout period affect the loan amortization schedule and related repayment schedule, if at all (this is especially critical if your plan is utilizing payroll deduction for loan repayments). A little review now can avoid a lot of headaches (in the form of loan defects) later!
• Data issues: During a conversion process, incorrect data is often discovered; this is especially the case if the assets had been recordkept for many years by the same provider. Bad addresses may surface, “lost” participants may suddenly be “found,” and participants who have long-ignored their accounts might be in for some unpleasant surprises related to their neglect. Some of this potentially negative feedback can be addressed by reviewing the participant reports from the outgoing vendor PRIOR to conversion. Are all addresses correct? Have efforts been made to locate lost participants? Are vested percentages correct? Has the participant ever made an investment election, or has he/she been invested in your default investment option for years? Addressing potential issues that may have been “hidden” for many years at your prior recordkeeper may prevent such issues from being exposed to the glare of participants at the new recordkeeper.

Thank you for your question!