Anyone deep in the Apple or Android ecosystem knows the feeling. You could switch. Nothing is stopping you. But years of apps, passwords, photos, and habits have piled up, and crossing to the other side would be a hassle. The competing product would have to be a lot better—not just a little better—to justify the trouble.
The same dynamic plays out in retirement plan recordkeeping. Plan sponsors retain the legal authority to change providers. The contract can be terminated. Competitors can submit bids. But the more embedded a recordkeeper becomes, through data, technology integrations, established workflows, and employee familiarity, the harder it gets to actually exercise that authority. Christopher Carosa explores the challenges of switching recordkeepers in a recent Fiduciary News article(opens in new tab), drawing on perspectives from several industry voices.
“Operational disruption has always been a concern in changing recordkeepers, but daily valuation really shifted that focus,” Nevin Adams, an independent consultant in Maryville, Tennessee, told Mr. Carosa. Quarterly systems gave plan sponsors a generous window for transitions. Continuous expectations compress that window and make any disruption far more visible.
Jeff Coons, chief risk officer at High Probability Advisors, put it more bluntly in the article: “For many years, it has felt like having your teeth pulled would be less painful than leaving a recordkeeper.” He added that many recordkeepers “pride themselves in their refusal to numb the plan’s pain by cooperating and sticking with timelines for the transition.” The result is that expensive and inefficient providers can hold onto plans despite fiduciary risks and administrative costs because staying is still easier than leaving.
The leverage doesn’t stop at operations. Recordkeepers also control something valuable beyond the service itself: access to participants and their data. They operate the websites participants visit, answer their calls, maintain their account information, and increasingly know a lot about their financial circumstances. That puts them in a privileged position(opens in new tab) between the plan sponsor and the people whose accounts they administer.
Mr. Adams noted that recordkeepers have no fiduciary role—despite plaintiffs’ attempts to establish one—but that hasn’t stopped them from leveraging their relationships with participants to encourage decisions that benefit the recordkeeper, such as rolling a termination balance into an IRA or moving assets into a managed account. He recalled a time when plan sponsors routinely prohibited outside dealings with participants on matters unrelated to plan administration. “That no longer seems to be the norm.”
Mr. Coons sees the same pattern: “With their broker-licensed call center employees having access to both plan data and financial wellness site data, they are able to sell their investment and retirement products during key life events like the birth of a child or a job change with little concern for the fiduciary risks associated with those proprietary product recommendations.”
Brand familiarity adds another layer. Participants see the recordkeeper’s logo when they check balances. They call its representatives with questions. Over time, the distinction can blur between the company administering the plan and what participants think of as “my retirement company.” Mr. Coons recalled seeing TV ads about 20 years ago from a major recordkeeper that were clearly targeting participants, not plan sponsors. “That strategy has been the backbone of most recordkeeper business and product decisions since that time.”
Operational dependence, data control, participant access, and brand recognition all reinforce each other. None of it eliminates the plan sponsor’s authority to make a change. But as Carosa writes, a provider doesn’t have to make leaving impossible to become entrenched. It only has to make staying easier.
