From opening retirement plan access to a previously underserved population to streamlining existing workplace savings plans, multiple employer plans (MEPs) are full of promise. This article examines ways MEPs could enhance defined contribution (DC) plans and help participants by:
Traditionally, small employers have struggled to offer retirement benefits, often citing plan expense and limited administrative resources, leaving a significant slice of the workforce at a savings disadvantage.[i] Policymakers have grappled with the challenge of company size and employment structure gating access to retirement savings — and have made strides with the SECURE Act of 2019 to position MEPs as a solution.
Evolving US Saving System
When it comes to retirement, the United States is unique. First, both provision and participation are voluntary; the employer can choose whether to provide a plan, and the employee can choose whether to participate and how much to contribute. Second, the majority of employers have to sponsor their own plan and act as the plan fiduciary.
While this system works for those employers who are large enough for in-house benefits committees and ERISA counsel, it can be costly and complicated for small businesses. With the advent of MEPs, the number of parties remains the same - including some combination of a 3(38) fiduciary, 3(16) plan administrator, directed or discretionary trustee and recordkeeper - but the services will become consolidated within the MEP structure.
At present, there two MEP structures: a closed MEP and an employer-bundled or affiliated MEP. In a closed MEP, the plan sponsor is either a lead employer of an association or employer group; a single form 5500 is filed for the entity. In the case of an affiliated MEP, each participating employer is a sponsor of its own plan and responsible for filing separate 5500s. Affiliate partners, like Empower Retirement, TIAA and Transamerica, offer fiduciary support services including acting as the plan trustee, 3(16) plan administrator, and 3(38) investment manager. The National Automobile Dealers Association in partnership with Empower is an example of an affiliated MEP. Empower aggregates all dealerships across the country into a single plan structure to help support scale and efficiency while dealers manage 5500s individually. This model has become attractive to other industries that experience high fragmentation, such as community banks and credit unions.
While still stalled in the Senate, the SECURE Act could usher in the advent of a third structure: open MEPs. SECURE calls for the repeal of the “one bad apple rule,” which currently penalizes an entire MEP for violations committed by a single employer. The combination of the “one bad apple rule” repeal and the administrative ease of filing one 5500 per open MEP is likely to make this approach the standard.
And federal regulators are already taking action. The Department of Labor (DOL) recently released its final Association Retirement Plans (ARP) regulation that would extend MEPs availability beyond the closed MEPs that exist today, although the regulation falls far short of the open MEPs provisions contained in the SECURE Act. The DOL did, however, issue a Request for Information (RFI) in conjunction with the final ARP regulation. Depending on how the DOL reacts to the information it receives in response to the RFI, it could issue further guidance permitting open MEPs. The Treasury Department also recently released a proposed regulation that addresses the “one bad apple” obstacle. Once a final regulation is issued that aspect restricting open MEPS would be eliminated.
Bringing DC to an Underserved Worker Population
Small plans tend to use a single vendor for all 401(k) services to keep costs down, using investment management fees paid by their participants to offset the administrative costs of running the plan. While using a bundled provider is simple for the business owner, there is no guarantee that their recordkeeper’s proprietary investment options are the most prudent for their participants. On their own, small plans don’t have the scale to spread the fixed costs of plan administration the way larger plans are able to do.
Through a MEP, small business owners can access simplicity, scale and best-in-class investment options for their participants. The MEP provider will not only act as an outsourced CIO, taking ERISA 3(38) fiduciary status, but also as a fiduciary on the administrative and custody aspects of the plan.
Although the employer retains fiduciary responsibility for choosing and monitoring the MEP provider, as noted above, the SECURE Act proposes to ease liability for open MEP participation, releasing individual employers from fiduciary responsibility for plan administration, investment management and custody.[ii]
Redefining the Advisor’s Role
In the era of MEPs, advisors have an opportunity to take a leading role on the shifting market stage. Acting as the 3(38) fiduciary or investment manager of a MEP, advisors can lessen their administrative burden - for example, making a single investment change that cascades across all plans - by bundling small plans together. Leveraging the twin tools of scale and efficiency, advisors may be able to move upmarket and, in doing so, offer a more robust set of services. Specifically, sponsors and participants are eager for financial education and wellness guidance, communication skills that will stretch today’s practices and separate the next generation of leading advisors. Once mastered, these engagement services can be packaged for the smaller plans served by the MEP architecture, creating a more efficient practice ecosystem.
According to our 2018 Global Retirement Reality Report (GR3) US Snapshot, all savers are seeking retirement readiness advice, but Americans reported the lowest satisfaction, with only 1% of retirees saying their employer offered meaningful support.
Beyond better serving more segments, advisors may find themselves in a race towards the relationship, regardless of their specialization. This means being able to broaden the conversation beyond retirement to include insurance and wealth management.
In the MEP era, advisors will have the opportunity to streamline the plan setup process, offer clients access to lower costs on investment options and spend their time in more one-on-one, holistic consultations with plan participants.
While the industry waits for SECURE Act passage or more expansive regulatory guidance, some of the key benefits of MEPs — lower fiduciary and administrative burdens, lower costs and an improved retirement savings experience — have already emerged. Trends that we expect to continue are:
MEPs are good business and an improvement for current and future savers. Finding a service model that can deliver quality retirement benefits to uncovered workers is not only attractive from a commercial standpoint (alleviating financial stress and supporting productivity), but will also:
As policy passage nears, employers and those who advise them should be poised for a retirement future that pivots around MEPs.
[i] Pew Charitable Trusts, “Small Business Views on Retirement Savings Plans,” 2017. http://www.pewtrusts.org/~/media/assets/2017/01/small-business-survey-retirement-savings_f.pdf
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EXP: September 30, 2020