Switching 401(k) Companies? Avoid These 3 Costly Surprises!

Switching 401(k) Companies? Avoid These 3 Costly Surprises!

So you’re thinking of switching to a new 401(k) company.

Perhaps your current 401(k) is expensive and you think you can get a better deal and save some money.

Or maybe you’re unhappy with the service your current 401(k) provides.

There are many good reasons to switch, and with the rise of next generation 401(k)s, now is a very good time to see if a switch makes sense for your business’ 401(k).

When you do decide to change your 401(k) provider, your new provider should help you through the process. They want your business and they can’t have it until they help you convert.

However, as helpful as they might be, you can still get hit by surprises – and I don’t mean a jump-out-of-a-cake good surprise. I mean the other kind of surprise. Bad things you didn’t want. Namely, expenses and extra work you didn’t know were coming your way.

Here are the top three surprises to watch out for when you switch 401(k) providers, and what you can do about them. Plus, a bonus 4th surprise.

Evaluating 401(K) providers? Download our insider checklist now.

Surprise #1: Your Current Retirement Vendor May Charge You to Switch to a New 401(k) Provider.

What? I’m leaving and I have to pay just to take my plan elsewhere?


This is common practice in the 401(k) industry. When you switch 401(k) providers, you can get hit with fees. Breaking up can be expensive. Fees can range from a few hundred dollars to a few thousand. They should have been part of the original contract you signed with the 401(k) company, but hey, that was years ago, right? So give them a call and ask them what’s it going to cost you.

What you can do :

Ask the new 401(k) provider if they will help cover some or all of this cost. Most won’t, but can it hurt to ask, right? And asking before you sign with the new company is the best time.

Surprise #2: Your New Plan Will Probably Over-Charge You in the First Quarter.

Actually, they won’t overcharge you per se, because it will be according to their billing terms, but it sure feels like it. Here’s what often happens.

Let’s say you switch to a new 401(k) plan provider in September. The new 401(k) company bills quarterly, so you get your first invoice shortly after September 30. That’s when you find out that they charged you for July, August, and September even though the new plan is only a few weeks old.

Does this really happen? You betcha. All the time. It’s all spelled out in their terms, and it suddenly dawns on you what it means when fees are billed quarterly in arrears.

What you can do :

Before you sign with a new plan, ask if they will prorate the first quarter’s fees based on the actual time you are in the plan.

Some do and some don’t. It may be something that they will do you for you if you ask during the shopping phase.

If they don’t, you might want to time it so that you switch to the new 401(k) provider at the beginning of a new quarter. Or at least try to avoid starting the new plan in the final few weeks of the quarter.

It’s easy enough to wait just a few days if it saves you meaningful dough. Then again, depending on the size of your company and how much the new plan costs, it may simply not be worth waiting at all. You’ve got other things to do, I’m sure.

Surprise #3: Your New Plan is More Expensive Than you Realized.

This is actually the biggest risk of all because the other surprises are one-time events. But expenses last forever (or at least until you switch 401(k) providers again, which, let’s face it, you really don’t want to be doing all that often).

What you can do :

Really, the only thing you can do is to avoid this in the first place by being a smart shopper. Check out our guide to choosing a small business 401(k). It will help you wise up to some of the games that go on and help you ask you the right questions.

Make sure you are paying attention to both the employer expenses as well as the employee expenses. Expenses can be a real drag on your investment returns and literally rob your future self. So you’ll want to carefully consider your 401(k) expenses.

Bonus Surprise #4 – You Just Switched to a 401(k) Provider Who Does Not Integrate with Your Payroll

If your current 401(k) company automatically integrates with your payroll system, you might assume all do – but you’d be wrong! 401(k) payroll integration is a huge time saver – and can also reduce the risk of costly mistakes. When there is no payroll integration, a lot of manual and repetitive tasks suddenly crop up.

What you can do:

Confirm with your new 401(k) provider that they support payroll integration with your payroll system. Make sure you do this before signing with the new provider! And if they do not support your payroll, then you are stuck either allocating time for the manual work that your team will have to do, switching to a payroll system that works with your new 401(k) system (if they support any!), or staying with your current 401(k) company.

If you’ve had other “surprises” we didn’t cover here, give us a shout to let us know about them. We will update this post to help others who are making a switch.

Evaluating 401(K) providers? Download our insider checklist now.