Cutting Edge: When Your Employer Switches 401(k) Providers

How to figure out what it means for your portfolio

A few months ago, we received notice from our human resources department that we were switching our 401(k) provider. I wasn’t very clear on the details after I read the jargon-laced e-mail that went out and I nearly drove myself into a tizzy trying to figure out what this switcharoo would mean for my 401(k). With employers trying to cut costs and/or looking for the best options for their employees (and the business, of course), switching institutions is not uncommon, says Eric McKissack, CEO of Channing Capital Management.

“[Employers] could move [401(k)s] to get better services for employees. They could also move them to get a more flexible, better offering of funds to choose from,” he says. For employees, the question remains: What does this switch mean for my investments? McKissack discussed what we, as employees, need to be aware of when this occurs.

First, your new investments may be similar but not the same. When your employer changes 401(k) providers, your money will likely be put into a portfolio that mirrors your previous investments but is not identical to them. “Though some funds are similar between providers, they may actually have some different risk and return characteristics. And they may have different ratings, different records – differences that might not be optimal from a casual look,” alerts McKissack.

To see where your portfolio stands, you’ll need to go through the details of your past and current portfolio. Don’t fret, McKissack says. This is a simple, do-it-yourself type of job. Check with your human resources department to find out how you can obtain a copy of your old and new investments, then look up the mutual funds you were previously invested in and your new funds on Morningstar.com to compare.

While we were making the transition, our 401(k)s went through a “blackout” period, which is not uncommon. This is when all accounts are settled and all dividends are paid out. It’s also a maintenance period – to ensure that contributions don’t get misplaced. Typically, the blackout period doesn’t make that much of a difference when it comes to long term activity, says McKissack. “You’re usually given a chance to make changes [with the new provider] pretty soon [after the switch],” says McKissack, so take a look at the new offerings along with your investment goals and make the necessary changes.

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