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Switching your 401(k) plan providers<\/a> can be a complicated affair. Changing to a new recordkeeper, custodian or payroll provider can have a direct impact on your 401(k) plan audit<\/a>, requiring thorough planning to keep both current and upcoming audits moving smoothly along. Careful documentation and clear communication with your 401(k) plan auditor can help your audit stay on track, but following the best practices below can prevent avoidable issues in the first place.\u00a0\u00a0<\/p>\n Your recordkeeper is responsible for administering your 401(k) plan. They manage daily activities such as processing distributions, allocating contributions to participant accounts or initiating loan forms. Sometimes, your recordkeeper and custodian, who manages the plan assets, will be the same entity. Fidelity is an example.\u00a0\u00a0<\/p>\n Keep in mind that changing your recordkeeper during the plan year will require your 401(k) auditor to test your internal controls<\/a> for your previous provider and your current one. This is to ensure that if someone took a loan or a distribution with your first recordkeeper, your controls worked as intended. If you made the change as of January 1 or December 31, all transactions may have occurred under one or the other, but that\u2019s a very rare circumstance.\u00a0\u00a0<\/p>\n Your auditor will also need to test the transfer of participant data to ensure all funds were correctly transferred to the proper account and category, e.g. Roth, employer or pre-tax. Since you\u2019ll have financial statement data coming from two different sources, your auditor will need to reconcile and combine them. If there\u2019s any sort of lag between asset transfers, it may cause gain\/loss issues.\u00a0\u00a0<\/p>\n On some occasions, differences in reporting between recordkeepers can create complexity and confusion \u2013 for instance, if one recordkeeper includes loans in their information while the other recordkeeper lists them separately. Defaulted loans may also be cleared out when they\u2019re transferred, which can create issues with reconciliation. These issues aren\u2019t worst-case scenarios, but they are time-consuming.\u00a0\u00a0<\/p>\n As the transfer progresses, it\u2019s recommended that you verify everything\u2019s working correctly. Ultimately, the plan administrator is responsible for making sure every participant is accounted for and has the same number of assets allotted to them under their new recordkeeper that they had with their old one, with the exception of any gain\/loss changes that occurred during the transfer.\u00a0 Don\u2019t wait for your auditor to discover any discrepancies; document actions you took to fix any issues you discovered.\u00a0<\/p>\n If your previous setup worked well with your first provider, try to keep it as intact as possible as you transfer to your new provider to help keep things simple. Review all your links. Perhaps you have an automatic link between your payroll provider and your recordkeeper that will need to be reset. Take this time to also review your controls for your current processes; they\u2019ll more than likely need to be changed or at least re-examined.\u00a0\u00a0<\/p>\n Historically, when you\u2019re moving away from one provider to another, your old provider may become less responsive once you stop paying. Remember that audits happen a year in arrears. As far as your old recordkeeper is concerned, they\u2019re done with you. You\u2019ll still need to reach out to them for information, but don\u2019t be surprised if they don\u2019t prioritize their response. You may be able to access what you need on their website, but it can sometimes be difficult to get access to that information that requires their assistance, which can cause delays.\u00a0\u00a0<\/p>\n Custodians are the entity that actually hold the plan assets. In the case of Fidelity, they may also be your recordkeeper, but you don\u2019t typically work with your custodian on a daily basis. In some cases, either your recordkeeper is sold or decides to work with a different custodial group, so you may not have been the one to decide to make the change. Regardless, from an audit standpoint, the same double testing procedure that occurs with changing recordkeepers will have to take place here, too. Your controls will also be examined by your auditor to make sure they understand how they worked both before and after the change.\u00a0\u00a0<\/p>\n Be aware that you receive an annual certification from your custodian. If you change custodians, you\u2019ll receive two certifications to cover both parts of the year. The beginning and end dates on the certifications should be the time when those entities actually held the assets. There may be an overlap, but the Department of Labor (DOL) has been clear that they don\u2019t want to see two certifications that cover the entire year. There are some exceptions, such as when assets are held by your previous custodian after all other assets were transferred, but this isn\u2019t something that happens with every plan. Issues with certification, while fixable, can delay the audit.\u00a0\u00a0<\/p>\n Keep in mind that while assets are being moved from point A to point B, there is going to be a blackout period where no one will be able to access them. Your previous custodian will liquidate the assets to turn them into cash. They then transfer the cash and the new custodian uses it to purchase assets. The DOL has strict rules for communicating information like this to your participants, so be sure to cover it with employees. Bear in mind that blackouts can be lengthy, and the market won\u2019t wait for the transfer, likely impacting the plan\u2019s assets. \u202f\u00a0<\/p>\n Payroll is where many transactions, including participant contribution withholdings, which are the most important transactions according to the DOL, take place. Funds must be withheld correctly and transferred in a timely manner, as soon as administratively feasible.\u00a0\u00a0<\/p>\n While moving from one provider to another may sound easy, it\u2019s just not that simple when it comes to payroll. There are many different levels where it can go wrong, even outside the realm of 401(k)s. One way to help see you through the changes is to think about how your payroll ran before the transition. How many different types of pay do you have? Bonuses, commissions, hourly, salary, bereavement, paid time off: there are many types of pay that all have their own codes. You\u2019ll also have a set of codes for deductions and tax withholdings. Some codes are taxable while others aren\u2019t; some are deferrable for 401(k) purposes, some aren\u2019t. All of this increases the complexity of payroll. Unless you\u2019re completely changing your payroll structure, ensure you\u2019re capturing information directly from your previous provider to send to your new one. Take inventory before the transfer so you\u2019ll have a list to work from once you\u2019ve moved to your new provider.\u00a0\u00a0<\/p>\n Do test runs in your new environment. If you\u2019re allowed to set it up in a test area, test a fake payroll with your new payroll provider to see if everything matches up. Perform a thorough review, almost an audit, of your first payroll process. Once you put the payroll process in place, the only way to catch a mistake is if a participant or your auditor catches it later on, which isn\u2019t ideal. Commit to a deep dive; don\u2019t just count the number of checks. Look into each person and each code to make sure it\u2019s all set up correctly. Don\u2019t just do this for 401(k) related activity; do this for taxes and everything else.\u00a0\u00a0\u00a0<\/p>\n Just as before, you\u2019ll need to reset links between your recordkeeper or insurance provider and your payroll system. Be sure to reset these as quickly as you can.\u202fRemember that deductions will also be reset, but contribution limits aren\u2019t, so don\u2019t let participants accidentally overcontribute to their 401(k) plan; it could create problems for them later as they go to file their taxes.\u00a0\u00a0<\/p>\n Don\u2019t forget that your 401(k) plan auditor will be working a year behind. Before switching payroll providers, try to reach out to your auditor and ask what they\u2019ll need from your legacy payroll provider. If this is your first 401(k) plan audit<\/a>, talk to your auditor about your timeline. You may need information from two years prior to your first audit for beginning balance testing that you no longer have access to.\u00a0\u00a0<\/p>\n Overall, your best strategy is to document every decision<\/a> or issue you\u2019ve resolved and communicate all necessary information to both your auditor and your plan participants. Talk to both your new providers and your old ones to make sure you\u2019ve got every piece of information you\u2019ll need for your audit. There\u2019s no such thing as too much information for your auditor at the end of the day.\u00a0\u00a0<\/p>\nChanging Recordkeepers\u00a0<\/h2>\n
Participant Data Transfers\u00a0\u00a0<\/h3>\n
Working with Your Previous Recordkeeper\u00a0<\/h3>\n
Changing Custodians\u00a0<\/h2>\n
Custodian Certifications\u00a0<\/h3>\n
Changing Payroll Providers\u00a0<\/h2>\n
Running Payroll Tests\u00a0<\/h3>\n
Questions to Ask Your Auditor\u00a0<\/h3>\n