National Association of Government Defined Contribution Administrators, Inc.

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2 TABLE OF CONTENTS Transitioning Third Party Adminstrators/Recordskeepers... 1 Transition Preparation... 1 Record Keeper Notification... 1 Plan Sponsor Transition Responsibilities... 2 Incoming Record Keeper Responsibilities... 3 Outgoing Record Keeper(s) Responsibilities... 4 Participant Communications... 4 Written Materials... 5 Web-Based Communications... 5 On-Site Education... 6 The Plan Transition Process... 7 Administrator and Payroll File Testing... 7 Stable Value/ General Account Considerations... 9 Plan Transition Timing... 9 Conclusion... 10

3 Transitioning Third-Party-Administrators/Recordkeepers Plan sponsors look forward to positive relationships with the firm, or firms, they ve selected to administer their defined contribution plans. At the same time, plan sponsors have the fiduciary responsibility to carry out their duties solely in the interest of their participants, ensure that the services being provided are at a reasonable cost, and may be under a legal or policy requirement to periodically bid a plan s services. Plan sponsors may also determine that the third-party-administrator/record keeper has experienced a change in focus or capability that warrants a review of their services. As a result, plan sponsors should consider periodically conducting a market search for similar services as a best practice and choose to either remain with their current record keeper or make a change. A consistent focus of any change in record keepers is to minimize the impact and inconvenience to active and retired plan participants, as well as plan sponsor staff. This section will describe a series of best practices and address some of the critical tips to ensure a successful plan transition, should a plan sponsor choose to change record keepers. The plan sponsor s legal counsel, whether internal or external, should be prepared to: Review and approve the new contract. Confirm that all features and enhancements committed to during the RFP process are incorporated into the agreement; Address any contract disparities that arise with the incoming record keeper; and Consider incorporating transition expectations into the contract agreement with the new record keeper. Transition Preparation Record Keeper Notification If you are choosing to move your plan from one record keeper to another, the first step is to provide proper written notification to the current record keeper(s). Most contracts will have a Termination Section outlining the terms and process for the plan sponsor to notify the current record keeper of the intent to terminate, and plan sponsors should have an idea of any contractual restrictions (length of contract term, any special termination clauses, etc.) that may exist. The notification typically needs to be in writing, be signed by an authorized representative of the plan sponsor, include a desired transition time line, request any specific paperwork needed to terminate the contract, and provide a contact person at the new record keeper. Plan sponsor written notification is essential before any kind of interaction can occur between the outgoing and incoming record keepers. The plan sponsor will likely find that the outgoing record keeper is unwilling to discuss a plan transition with the new record keeper prior to receiving the proper documentation from the plan sponsor. As a plan sponsor with fiduciary responsibility over these plans, there should be no dispute with your authority to serve notice on the plan assets. 1

4 The letter should also make clear any expectations the plan sponsor has regarding the outgoing record keeper s continued administration of the plan up to the date of the transition, such as continued processing of all enrollments, benefit payment requests, unforeseeable emergency withdrawal requests, and educational services. An additional service agreement extension may need to be negotiated if the targeted transition does not coincide with the expiration of the current service agreement. One of the first steps to a plan transition is the development of an Implementation or Transition Plan which should be prepared by the incoming record keeper in consultation with the plan sponsor. A transition plan will typically cover a time period of 90 to 120 days and should extensively and clearly outline the roles and responsibilities of the various parties involved. Those parties include the plan sponsor, the outgoing record keeper, the incoming record keeper s local and home office teams, and a plan consultant, if one is involved in the transition process. The transition plan identifies the many tasks that are involved and assigns responsibility for each task along with targeted time frames for task completion. A preliminary conference call will help to raise issues any of the parties have with the proposed transition plan and ensure complete buy-in with all of the parties involved. Successful transitions often will involve an ongoing weekly conference call of all parties to ensure the plan transition remains on track. Plan Sponsor Transition Responsibilities Plan sponsors who maintain consistent oversight and clearly think through and articulate the standards they re seeking can ensure a smooth and successful transition. The plan sponsor should be prepared to take on a number of responsibilities even though the incoming record keeper will be the primary driver for much of the plan transition work. A day-to-day plan sponsor administrator contact should be designated as the go-to person who will provide transition oversight, represent the plan sponsor in all planning calls, review all planned participant communications, and assist in scheduling on-site transition meetings for the incoming record keeper. Payroll personnel must assist in coordinating proper contribution data transmission with the new record keeper and be prepared to discuss any unique plan features such as loans or Roth contributions. Finally, a member of the plan sponsor s Information Technology (IT) staff will be needed to assist in the smooth advance testing of contribution data. Should the plan have custom investment options, it would be advisable to contact the investment managers or custodian about the imminent transition to a new record keeper. The approval of a final investment line-up is a critical responsibility of the plan sponsor. The selection of the investment line-up will have a direct effect on the communication efforts and time commitment for other steps in the transition plan. Whether a bundled plan, where the investment options are chosen from the record keeper s investment platform, or an unbundled plan structure, where the investment options are chosen independently of the record keeper platform, finalizing the new investment line-up is an important transition step. Investment line-ups will be discussed later in this section. 2

5 Incoming Record Keeper Responsibilities Much of the transition responsibility is assigned to the incoming record keeper and often those responsibilities involve the firm s home office team, which focuses on the technical side of the transition, and the local service team that will often focus their attention on contract coordination and the delivery of on-site transition services. While the titles and responsibilities may vary among providers, the incoming record keeper generally will have these roles addressed: Critical Home Office Personnel include: - A Key Plan Contact will provide oversight of the transition process, ensure proper processing of all contract and adoption materials and may assume ultimate oversight responsibility once the plan transition is completed. - A Conversion Specialist will develop and manage the transition project plan, and coordinate regular (often weekly) conference calls including the plan sponsor, the outgoing record keeper, the plan sponsor conversion team and consultant, if applicable. - A Communications Specialist will take lead responsibility for developing transition communication materials and the website, including any custom look or tools that may have been agreed to, as well as communicate important news, such as fund changes, blackout periods, and new log-in requirements. - IT Personnel will assist the plan sponsor in preparing data testing prior to the new plan implementation. The new record keeper s Local Service Team will often include these personnel: - An RFP Response Leader, likely part of the finalist presentation team, who often has responsibility for facilitating final contract negotiations and signature, and ensuring a timely decision on investment transitions, including assisting the plan sponsor and consultant in finalizing a potential fund mapping. - A Local Service Manager will assist the plan sponsor in coordinating a schedule of on-site service transition meetings that meets the plan sponsor s needs, work with the Employer to prepare proper messaging to participants, and ensure appropriate staffing levels. - Local On-Site Representatives will conduct on-site education and transition meetings for plan participants. A common transition education period can cover multiple locations, but is dependent upon the size of the plan and each plan sponsor s individual needs. 3

6 Regardless of each individual record keeper s service design, a plan transition is a total team effort, effectively communicated and planned, fluid enough to address unexpected obstacles, and incorporating a wide range of headquarters and regional staff to address the plan sponsor s technical, communication, and service needs. Outgoing Record Keeper(s) Responsibilities A successful transition requires the support of the outgoing record keeper(s), and most record keepers understand that their active cooperation will help sustain their reputation in the market place, as well as benefiting the plan and its participants. Most important, your outgoing record keeper should provide a Deconversion Specialist who has the expertise to oversee the many technical aspects of a transition and the authority to make decisions for the firm. The outgoing record keeper will be expected to provide a wide range of participant data in a mutually agreed upon electronic format. That information includes all current participant investment records including balances and fund allocation, loan details, ongoing installment withdrawals, beneficiary records, qualified domestic relations order (QDRO) records, and any other participant data that is essential to the ongoing administration of the plan. It is important to be aware of any categories of participant data that cannot be transferred from a prior to new service provider, and develop contingency plans for addressing those situations. The data being transferred to your incoming record keeper doesn t mean it is being eliminated from the outgoing record keeper s system. In today s electronic age, applicable or analogous guidance from the Department of Labor (DOL), the Securities Exchange Commission (SEC), and the banking industry generally mean that records will be retained for years after transitioning a plan. There may be future occasions, such as an account correction or adjustment, or historical records request, where additional historical data is required and it is important for both the incoming and outgoing record keepers and the plan sponsor to plan for special situations and maintain a professional working relationship. Plan sponsors can set those expectations at the onset of the transition process. Others have opted to incorporate transition expectations into the original contract agreement. Participant Communications Participant communications are a priority objective for a successful transition process. As always, but particularly so in a transition, plan sponsors should be aware that communications serve two purposes: (1) to disclose all material information that is required to be provided or may impact a participant s account; and (2) to engage the participant in ways that promote awareness of the most essential pieces of information. It should be noted that these two objectives can sometimes be in conflict with one another disclosure does not necessarily equal successful engagement. Paying attention to this inherent tension is important as you develop your communication materials. 4

7 Plan participants need reassurance that the plan sponsor is making changes in their best interests and that the changes will enhance the overall participant experience so an effective communication plan is critical to a successful transition. Your incoming record keeper s Communication Specialist should be a strong resource for you and be familiar with ways to mediate participant concerns. The ideal transition is one that requires no action on the part of the individual participants. Emphasizing that no action is required on their part is a first step towards providing reassurance. A communication plan generally involves written material, internet communications, and personal on-site education. Written Materials Written transition materials should be distributed to all plan participants and include all f the fundamental information impacting participant accounts. That information generally includes: an introduction to the incoming record keeper, highlights of the plan changes and improvements, a general time line for the events that are most impactful and visible to plan participants, a reassurance that plan participants generally do not need to take any specific action as part of the transition, a review of the current or possibly new investment line-up along with any fund mapping that will occur, and a summary of the on-site educational seminar schedule that has been arranged to directly speak with plan participants. This can also be an opportunity to highlight any new or unique services that are being added. This material should be in the hands of plan participants preferably as much as 60 days ahead of the actual transition. This makes it essential that the plan sponsor work actively with the incoming record keeper to edit and approve written communications in a timely manner. Larger committees may wish to delegate the approval process to either a designated individual or a smaller Education Task Force to ensure all deadlines can be met. As with all communication materials, a best practice for developing them involves the use of focus groups to provide feedback as to how participants are interpreting the information you plan to provide them. Focus groups often result in modifications of your materials because they help to expose areas where more complex or technical information is being misinterpreted, or where the disclosure components of your materials are in conflict with your engagement/awareness objectives. Web-Based Communications The use of the internet continues to grow in popularity and usage and is an essential component of a transition s communication plan. Special customized web features, or a customized look and feel, may be part of the record keeper s service platform, based on the size of your plan. Development of these features will require active participation by the plan sponsor. Most of the same information included in the written communication materials will be posted on the new website, although web technology allows the site to expand and 5

8 provide particular personal planning tools, such as scheduling of individual appointments with local service staff and informational video presentations that are not available in print. Including something on webinars either in this section or in the on-site communication would be appropriate. This is another tool that s useful, particularly for large or decentralized employers, where on-site meetings are more challenging to implement. On-Site Education Even with quality written communications and all of the web-based technology enhancements being introduced, many public sector plan participants are used to a personal touch by a local representative. This fact makes on-site attention particularly critical during a plan transition. An incoming record keeper should work with the plan sponsor to create a broad schedule of transition meetings at the plan sponsor s most critical staffing locations and at the times that meet the participants work schedules. It is often worth it for the plan sponsor and incoming record keeper to sit down and take the time to carefully compose the message to be delivered at these group sessions. These sessions allow the plan sponsor to explain the overall process, highlight the reasons and rationale for the change and introduce the enhanced benefits that will be provided under the updated plan. It may also be time well spent for the plan sponsor to have at least one staff person or Committee member present at the sessions to address any questions that arise about the decision process. Existing Retirees Already in Distribution Retirees may feel particularly vulnerable during a plan transition, both out of concern that their voice may not have been heard but also because they have grown accustomed to, or even dependent upon, current ongoing withdrawals from their accounts to meet their financial obligations. In addition, the account balances of this segment are often among the largest and it is important to the plan s overall financial health for those assets to remain in the plan. A separate or targeted communications plan geared to retirees can help assure them that the transition process should not involve the completion of any additional paperwork and will not interfere with the income stream to which they have grown accustomed. A common approach to ensure there is no interruption to a retiree s potentially critical retirement income stream is for the outgoing record keeper to accelerate installment payments the month of the transition. The outgoing record keeper can then share all Automated Clearing House (ACH) bank and wire information for these withdrawals in advance of the transition date with the incoming record keeper, so that they can be tested and confirmed. It can take up to two weeks to receive proper bank confirmations for the new record keeper but the accelerated benefit payment process by the outgoing record keeper helps to ensure all withdrawal amounts are received without interruption. This approach is typically explained in the communication materials. So whether it is the written materials or the website, retirees know they do not have to communicate back to either their prior employer or the incoming record keeper about vital benefit payments. All of this essential retiree data is electronically stored and electronically shared as part of the transition process. Retired participants, therefore, should not experience any interruptions or be burdened with making new decisions. 6

9 The Plan Transition Process Administrator and Payroll File Testing During a transition, data will flow from your former to new administrator, and you will be required to establish new data exchanges between your employer payroll system and new provider. An essential step to a successful plan transition is the sharing of one or more test files for both the administrator-to-administrator exchange as well as the payroll-tonew-administrator exchange. These should be clearly identified by the incoming record keeper s project plan. A project of this significance should be well tested prior to the actual transition date to ensure the two record keeping systems and payroll/recordkeeping systems are communicating efficiently. Record keepers and payroll staff will decide jointly on an acceptable file layout, send the test data through a secure means, and review the actual participant data to ensure all required data elements are provided. An empty file is easier for the outgoing record keeper to produce, but actual test(s) of all participant data are far more likely to identify any problems in system communication and any missing information that must then be addressed. There is generally no charge for this testing, however, some firms may charge a fee for this testing service. Before the transition, it is also important to ensure participant balances are correct and reconcile any incorrect balances. Be sure to discuss how any incorrect balances will be corrected with the outgoing recordkeeper before the transition. Special Plan Services Each plan maintains its own unique design and plan sponsors can choose from a wide range of supplemental services and features that may require special attention and decision-making during a transition. These are some of the most common, though hardly an exhaustive list of those features. Loans If your plan includes a loan feature, there is a significant amount of data that should be transitioned to ensure continued effective administration of those loans. That data includes loan durations, interest rates, payment amounts, sources of those loan payments, and ensuring data for participants with multiple loans is clearly broken out. You will also want to request that complete loan historical information is included to ensure that permissible individual loan amounts are not exceeded with the incoming record keeper. Brokerage Accounts While the majority of plan assets remain invested in a plan s core investment line-up, some plan sponsors have opened up access to an entire range of investment funds, and possibly individual securities, through a brokerage window. These accounts require an extra layer of attention. Most frequently, assets moving from one brokerage account to another are transferred in-kind via the Automated Customer Account Transfer (ACAT) System. If a brokerage window is offered, it will require advance analysis from the incoming record keeper to ensure that each brokerage service offers all of the investments that participants have selected. If a particular mutual fund is offered by the current brokerage service but is not available through the new service, the most common solution is to require a sale of the non-available asset and the investor either transfers that money to an available investment before the transition or is transferred over as cash. 7

10 Roth Contributions Roth contributions have different tax treatments from pre-tax contributions, must be record kept as a separate source, and must be clearly identified and distinguished in the participant transition records. If any pre-tax balances had been converted from pre-tax to Roth, those assets must be clearly identified in the conversion data. While the proportion of Roth versus pre-tax assets is currently quite low in most plans, this is a plan feature that is likely to grow in importance and must be accounted for. Managed Accounts There is a broad range of differing financial services in the industry that are the backbone drivers for third-party investment advice and managed account services. Much of the entered details that go in to each individual participant s personal account management are not easily transferable, making actual transition of this service a challenge. If the existing service as it stands will not be transferred there should be advanced notice to investors along with information on what replacement service will be offered following the plan transition. Required Minimum Distributions (RMDs) Specific data for all current and upcoming RMD participants should also be identified, including account balances, year-to-date withdrawals that help meet the RMD requirements, and the existing RMD payment stream that is in place. An analysis of RMD payments can come after the actual plan transition occurs. Beneficiary Records These records should be a standard part of the data shared between the current and the new plan record keeper. Many of the records are current and accurate, and participants rarely want to have to go back in and re-enter what they ve already selected, and often will not make the effort to do so, even if asked. But despite the data being shared and transferred, participants should be encouraged to use the plan transition as an opportunity to review and correct any beneficiary information that is not current. Usually changes can be done easily on-line with the new plan record keeper. Investment Selection: Mapping vs. In-Kind A critical plan transition decision for plan sponsors relates to the investment line-up offered in the plan. There are a number of approaches that can be taken and it is here, in particular, that plan sponsors may seek the support of an outside consultant. The plan sponsor should also review its Investment Policy Statement (IPS) to make sure all planned changed are in compliance with the IPS, or determine if any amendments are needed to the IPS. The plan may intend to retain all of the existing investment options and literally just transition to the new record keeping service. This approach to investment transfer is known as an in-kind transfer, where no actual sale of fund shares occurs and participants remain invested in the exact same funds and share classes as they currently invest; it is just the account records that transfer. 8

11 Or there may be a partial in-kind transfer of funds, where some funds are not sold while other funds are sold and replaced by new investment choices. Or the plan may need a complete fund-mapping approach to replace the current investment line-up with a new range of fund choices. In this case, shares in the existing funds are sold and mapped over to the most comparable or like fund in a new revised investment line-up. Each approach has its merits and the decision is directly tied to the plan sponsor s goals and objectives for the transition. Stable Value/ General Account Considerations There is a range of plan investments designed to minimize market risk for investors and provide a fixed rate of return. These types of funds will generally require special transition considerations. Stable value funds are fixed income investment options designed to preserve principal with stable value investment contracts issued by one or more bank or insurance company wrap contract providers to ensure the share price never becomes negative. These funds generally have liquidity restrictions that require advance notification of fund withdrawals initiated at the plan sponsor level. This restriction is called a put requirement and typically lasts 12 months or longer. Due to the 12-month put, stable value fund assets may transfer later than the broader plan transition. Insurance company General or Fixed Accounts are backed by the underwriting insurance company and also typically include plan level transfer restrictions (i.e., 20 per cent of assets per year over 5 years), or allow for the immediate transfer of assets with a market value adjustment (MVA). The MVA can be estimated in advance of the transition, but the actual MVA and its financial effect is usually not known until the date of the asset transfer. Short-Term Redemption Fee Considerations Some funds require investors to own shares for a minimum time period before selling them without incurring a sales charge. These types of charges are meant to minimize the potentially harmful effects of short-term trading by a few investors in a fund. If your plan has a fund that implements a short-term redemption fee, the current record keeper may freeze this fund to new contributions in the face of a plan transition so investors are not charged this fee. Plan sponsors should understand the specifics surrounding their capital preservation options and/or funds with short-term redemption fees and communicate those details in the plan transition materials. Some states may have laws or regulations that prohibit the hold-back of assets as described above, so plan sponsors should be aware of any state laws or regulations that are applicable to their plan. Plan Transition Timing All of this preparation and planning comes to fruition at the point of actual plan transfer to the incoming record keeper. The outgoing record-keeper will usually impose a black-out period before the plan transfer in order to prepare for the successful transition of plan data. During the black-out period, plan participants will be unable to execute any account 9

12 transactions such as withdrawals or fund transfers. It is important that this blackout period be communicated with participants as clearly and as early as possible. It is important to note that plan participants assets will generally remain fully invested until transition in order to minimize the amount of time that assets are out of the market. During this black-out period, while the outgoing record keeper is preparing for the transition, good practice is for the outgoing record keeper to share an Enrollment Refresher File of all participant indicative data with the incoming record keeper, allowing the new provider to initiate the reconciliation process of participant data before the actual asset transfer occurs. Proper asset wire transfer instructions should be shared, and a go-to person from both record keepers should be readily available to address any issues that may arise. A well-organized and effectively coordinated plan transition can occur literally overnight. If the assets are wired, and the final reconciliation file is shared with the incoming record keeper before the 4:00 p.m. EST close of financial markets, assets can be reinvested and participants can literally be with one record keeper on one day and fully invested with the new record keeper the next day. As streamlined and successful as a professionally-orchestrated plan transition can be, plan sponsors often choose to try and manage plan participant expectations and describe a potential three-to-four day process to participants, allowing for the potential need to address missing information or resolve a data reconciliation issue. Conclusion Transitioning a defined contribution plan to a new record keeper can feel like a daunting task for a plan sponsor. A successful plan transition will be achieved through advance planning, the proper level of expertise and support, mutual professional cooperation between the incoming and outgoing record keepers, an open and honest communication plan with plan participants, and minimizing or eliminating any additional work that is required of plan participants and retirees. Many plan sponsors have successfully executed these transitions to achieve what they feel will be an improvement in the overall quality of the benefit for plan participants. Plan sponsors who maintain consistent oversight and clearly think through and articulate the standards they re seeking can ensure a smooth and successful transition. Neither NAGDCA, nor its employees or agents, nor members of its Executive Board, provide tax, financial, accounting or legal advice. This memorandum should not be construed as tax, financial, accounting or legal advice; it is provided solely for informational purposes. NAGDCA members, both government and industry, are urged to consult with their own attorneys and/or tax advisors about the issues addressed herein. Copyright 2014 NAGDCA 10