Overview
A core component of any 401(k) recordkeeper transition is the transfer of plan assets. Assets are typically transferred in one of two ways:
- Liquidated and “mapped” into comparable investments at the new recordkeeper, or
- Transferred in-kind, without liquidation.
The approach is documented in a conversion strategy document, developed with guidance (optimally) from the plan advisor and approved by the plan sponsor’s retirement plan committee in accordance with the plan’s investment policy. Once approved, the incoming recordkeeper is responsible for executing the strategy exactly as documented. Ultimately, however, the plan sponsor – together with its advisor – retains responsibility for ensuring instructions are followed and transfers are fully reconciled.
The Challenge
A large public-company plan sponsor (approximately $80 million in assets and 700 participants) was transitioning from one well-known recordkeeper to another. As part of the transition, several investments were explicitly designated to transfer in-kind, and this was clearly documented in the conversion strategy.
During execution, the outgoing recordkeeper failed to follow the directions from the incoming recordkeeper to transfer all certain designated funds in-kind. Several funds were improperly liquidated, and the proceeds were sent as cash instead. Compounding the error, assets from the liquidated funds were transferred via separate wires over two days, leaving a portion of plan assets temporarily uninvested.
While the incoming recordkeeper noticed that assets did not arrive in full on the scheduled transfer date, they did not escalate or challenge the discrepancies due to poor internal communication between “siloed” groups. Further, although the transfer of assets ultimately reconciled between recordkeepers in total dollar amount, neither recordkeeper properly questioned the improper liquidation, the deviation from the conversion strategy, nor the resulting loss of earnings to plan participants. Last, the loan transfers did not reconcile, which was not caught by either recordkeeper.
The incumbent advisor did not actively oversee the process, which would have prevented this confusion. Further, when the plan sponsor raised concerns regarding these issues, the advisor dismissed them on the grounds that assets had “reconciled.” Uncomfortable with this response, the plan sponsor engaged Twelve Points.
Our Approach
Upon engagement, Twelve Points conducted a forensic review of the asset transfer. We quickly confirmed that the outgoing recordkeeper failed to follow the documented conversion strategy and that the incoming recordkeeper did not enforce it. The errors resulted in lost earnings to affected participants exceeding $280,000.
Initially, both recordkeepers denied responsibility, each attributing fault to the other. After several weeks of analysis, negotiation, and direct advocacy using alternative contacts at both recordkeepers, the outgoing recordkeeper agreed to make the plan whole by covering the full participant earnings loss.
The Twelve Points Difference
A retirement plan advisor’s role extends beyond investment selection. It includes active oversight of governance, operations, compliance, and critical events such as recordkeeper transitions. Simply assuming that recordkeepers will protect the plan’s interests is an unacceptable risk, one that can materially harm both the sponsor and participants.
Plan sponsors should choose advisors who are not only experienced, but independent and willing/able to advocate forcefully on their behalf. Independence matters. Many advisors who are part of a large financial services or “aggregator” firm may be subject to conflicts of interest due to their ownership organizations’ financial or strategic ties to recordkeeping firms. An advisor that specializes in retirement plans who is free from conflicts of interest is best positioned to hold service providers accountable and protect participant outcomes, without compromise.
Connect with the Twelve Points team today to see how we can support you.