Changing providers mid-year

Provider is telling us that we cannot change the investment provider mid-year. So for example, let’s assume it is February and the pan sponsor wants to move from Fidelity to Charles Schwab (neither Fidelity nor Schwab are involved here they are just an example). We are being told nope not an option you can’t leave us until January 1 next year. I believe it has something to do maybe with form 5305.

Even if there is something that is technically true about this it just seems bizarre that a sponsor would be hamstrung from making a change for better pricing / service because of a technicality. Have others heard of this? Are they being too literal or risk averse? This would basically mean the sales process for SIMPLEs is shut down for the first 7 or 8 months of the year…

Never heard of that. I've had lots of plans switch providers mid-year.  These are all 401k/PS plans I'm speaking of. 

For SIMPLEs

- You can start one mid-year if you don't have one

- You can start one 1/1 if you already have one

- You can terminate mid-year if you replace with a SH 401k

- You can terminate 12/31 (with notice) without replacing it.

It comes down to: If the current SIMPLE is tied to the investment provider, can you change without terminating the existing SIMPLE and starting a new one?  Im leaning no because SIMPLEs are weird...

But that’s ridiculous to say that the plan is the provider. I know there is a thing about this but this cannot be something that gets enforced even if true. The outcomes are preposterous. Someone is in some junky 2.5% variable annuity and the sponsor is stuck. It defies all logic…

57 minutes ago, austin3515 said:

But that’s ridiculous to say that the plan is the provider.

I agree, and I don't like the IF in that statement.  I think you can argue that if there is no interruption or distributable event for participants, no harm no foul, as you SHOULD be able to dump an underperforming service provider.

Some related issues:

- Will a new provider (B) allow you to open a plan mid-year if they know you have one elsewhere (A) that you will discontinue?

- Will A allow you to move funds even if contributions stop?  If not, Participants have two accounts until they can be consolidated

- Plan limits, B likely cant account for contributions to A

- 2 year distribution restriction.  Will B account for time at A?

I think you can do it and defend it even if its technically wrong.  Sounds complicated for a dang SIMPLE though...  We have been doing a lot of SIMPLE to SH conversions, just saying...

NoT to change topics but for a time I was asking clients for 125 premiums to reduce comp when calculating contributions.  But I knew no one else was doing it. And someone pointed out the irs doesn’t even mention this in publication 560.  This feels so much like that, where being a literalist leads to ridiculous outcomes (that is people who sign up for medical benefits get penalized, more so if they cover their family).

the 5305 is to be used with sponsors that only want to use one institution and 5304 would be used if you want to use multiple institutions. You probably already know that. 

But most institutions have their own internal forms that serve as the 5305, and I guess technically since the sponsor has "said" I'm only using one institution, it could likely mean that you beholden to one institution per year..? That's the only way I can make sense of the institution not letting a client leave is because they have to use their institution for the full year.