Employee Benefit Plan Guide for Plan Administrators – Part 4: Switching Custodians
Often one of the differences between a poorly managed plan and well managed plan is the level of service provided by third-party service providers. Plan administrators should on a regular basis, evaluate their service providers weighing factors such as fees, performance, responsiveness to inquiries, and the level of service provided to determine if a third-party service provider is still meeting the needs of the participants and the plan. In fact, this ongoing monitoring encompasses some of the key fiduciary duties that that plan administrator should perform.
If, after careful evaluation, you determine it is in the best interest of the participants and the plan to switch service providers there will be some necessary steps in order to facilitate the transition. Fortunately, both service providers should have experience as the predecessor and successor in such a transition and be able to guide you through the process. Here are some additional tips to help you navigate the path to a successful transition.
- Understand the services of the third-party service providers: This may seem elementary, but there are differences which are important to be aware of. Different services are provided by a custodian and recordkeeper, so be sure to understand each one’s roles and responsibilities as outlined in your service agreement. For example, a custodian typically holds the plan’s assets and executes trades, while a recordkeeper generally tracks contributions, earnings, and investments on a participant-level, and may perform annual compliance testing.
- Communicate with your employees: Work with your service providers to ensure necessary communications regarding the nature of the transition, accessing their accounts, blackout periods, etc.
- Reconcile the transfer of assets: Arguably the most important step. Ensure that the total plan assets per the predecessor agree or reconcile to total plan assets per the successor immediately after the transfer. If the change involved organizations performing recordkeeping functions (in addition to custodial responsibilities) it is also important to agree the total of participant accounts, and individual participant accounts – including the participant’s investment balances before and after the transfer. If the plan changes both recordkeepers and custodians it is important to also agree or reconcile the total of all participant accounts per the recordkeeper to the custodian prior to and after the transfer.
- Obtain and review the SOC-1 Type 2 Report: The SOC-1 Report (System and Organization Controls Report) is a report on the internal controls at a service organization that are relevant to your own internal controls at the plan sponsor. By obtaining and reviewing the SOC-1 report you will understand the relevant internal controls at the third-party service provider, and if your own internal controls (i.e. user entity controls) complement the third-party’s internal controls or if there is a weakness in your internal control environment.
- Request and retain the year end “audit packages” from the service providers: These reports should ensure that you have everything you need from your third-party service providers to be ready for your year-end audit. You should ensure you receive the following items as applicable from both the predecessor and successor providers:
- 29 CFR 2520.103-5 certification letter (DOL Limited-Scope Letter)
- Various trust reports including remittance schedules, distributions schedules, participant loans, etc.
- Participant account reports
Still have more questions? Our team of employee benefit plan experts are happy to answer any questions you may have about this topic.
Read our related articles:
- Employee Benefit Plan Guide for Plan Administrators – Part 1: Eradicating Eligibility Errors
- Employee Benefit Plan Guide for Plan Administrators – Part 2: Common Contribution Considerations
- Employee Benefit Plan Guide for Plan Administrators – Part 3: Dodging Distribution Disasters