Multiple employer plans, or MEPs, have enjoyed bipartisan support on the Hill – and have even been included in various legislative proposals – NAPA Net readers weigh in on their experience, concerns, and aspirations for these offerings.
MEPs were, of course, a subject of discussion in a recent hearing by the House Education and the Workforce’s Subcommittee on Health, Employment, Labor and Pensions alongside other legislative and regulatory solutions seen as improving retirement plan access. Enhancements to the design – specifically eliminating the “common nexus” requirement and the one-bad-apple rule – have most recently been incorporated in the Retirement Security for American Workers Act (H.R. 854).
More than half of this week’s respondents are working with some variety of MEP. Twenty-seven percent work with closed MEPs (only), 23% work with both open and closed MEPs, and about 13% worked only with “open” MEPs, including some that were in the “planning” process. That said, the rest – and we’re talking about more than a third (37%) – are not working with this plan design.
One reader noted, “The closed MEP's we have are more work than they are worth. Tough to administer. Also the smaller adopting employers are subject to audit requirements (auditor asking sampling questions) when they wouldn’t be if a single employer plan. They get frustrated and the cost savings is not worth the effort.” Another observed, “The open MEP is a no brainer – inexpensive with 3(16), 3(38), managed accounts as well as low cost indexes and ETFs. If a company has 1m or less in the plan it’s the go to. Closed – yes, but getting an association or PEO to offer a closed MEP isn’t the easiest sale.”
We also asked those who weren’t currently working with MEPs if they would like to be able to do so in the future. Just over half (54%) said “yes,” and another 16% said “probably.” About 1 in 20 said they weren’t sure, and a similar number said it depended on the client, though nearly one-in-five said “no.”
Now, MEPs are said to have any number of advantages – and we asked readers to weigh in with what they thought was the biggest ones. More than half (55%) said combined assets/lower fees, with “administrative efficiency” ranked second (39%), just ahead of “reduced fiduciary liability," which garnered 37% (more than one response was allowed). Simplified plan audits was named by a quarter, while 14% saw no particular advantage, viewing these as “a marketing ploy.” Among those was the reader who commented, “The marketing appears to oversell potential advantages without touching on responsibilities and potential complications. small employers and even MEP sponsors appear to be unaware of many compliance requirements.”
Several readers went for “all of the above.” As one reader explained, “I’ve worked on hundreds of small micro plans and 90% of the sponsors don’t do what you tell them to and they don’t care. With the MEP structure at least the ERISA guidelines are being followed. It’s still like pulling teeth to get the enrollment/education meetings scheduled.”
One of the widely touted benefits of an open MEP is the notion that it would expand access to retirement plans, presumably because those advantages would lead more employers to establish a plan. On this point, readers were of mixed opinions. Nearly 4 in 10 (39%) said it would – “definitely,” but 23% said “probably not,” and 12% said that it wouldn’t, but that it “should make things better/less costly for plans already in existence.” One reader said, “They will absolutely expand access, but whether that access will be taken advantage of enough to justify the effort is up in the air. As with a lot of governmental efforts, not only is the juice not worth the squeeze, the juice is likely to start smelling funny by the time it’s available for consumption.” Another commented, “It certainly will open the market up to smaller employers who did not sponsor a plan because of fees and offer those employers in states that are getting into competition get with private sector an alternative option,” explained another.
“Only if they make plan sponsorship mandatory,” said another reader. “SIMPLEs already exist to serve the low-cost, low-service market...” One reader in the “it depends” category said, “That will depend on the advisors who are willing to understand open MEPs and sell them.”
We noted that the Retirement Security for American Workers Act (H.R. 854) provides for MEPs, but wouldn’t require smaller employers to retain fiduciary responsibility for selecting or monitoring the MEP provider – and asked readers how they felt about that. Once again, opinions were diverse and divided. A slim plurality (35%) said, “I think it's a good idea – smaller employers shouldn’t have to worry about that, and aren’t really capable of making that evaluation anyway.” A nearly equal 29% said “this would be a big problem,” and 17% were of the opinion that it “has the potential to put retirement savings at risk.” On the other hand, about 14% “didn’t have an issue with it,” and 5% “hadn’t really thought about it.”
“Terrible! Does no one remember Matt Hutchison?!,” said one reader. “The client needs to retain responsibility for outsourcing this fiduciary role,” commented another. “The quality of the MEP is the issue; if they don’t get it right, the small plan members will suffer... but we don’t know to what extent...” said another.
“This is similar to allowing a state to sponsor a plan and absolve adopters from any responsibility,” added another. “There have already been MEPs with fiduciary fraud committed, so who thinks it won’t happen again? Removing the buyer from any responsibility reduces their interest in making sure it’s the right choice and just buying what the MEP salesperson is selling.”
“I think there is a slight problem here in that the small employers, while they would struggle with the additional responsibility and cost, should still monitor all their service providers,” commented another. “They could be taken advantage of here, and I have seen a MEP where there were serious issues and the owner/sponsor was jailed.”
“I think they should have limited liability – but need to show the initial due diligence was adequate so that are reasonable person would make the same decision,” concluded another.
Readers had a lot to say on this topic this week. Here’s a sampling:
“I’m not sure how I feel about them! They have the potential to wipe out small plan business for advisors but definitely a useful tool to have for expanding coverage and getting better pricing.”
“I think MEPs will make managing a retirement plan book of business much more efficient and profitable. If I can create one investment lineup and meet with one committee, and still cover multiple plan sponsors, it will make life much easier for me. Then I can focus on more meaningful discussions with my plan sponsors, like plan design, plan health, employee financial wellness, etc.”
“As an advisor who has served as 3(38) fiduciary for several large MEPs, I think the primary MEP value proposition is simplicity created by outsourcing most administrative and fiduciary responsibilities. Many employers, particularly small employers, just don't want to become closely engaged with the decisions and responsibilities associated with a 401(k) plan, any more than they want to screen medical providers for their health insurance plan. Ease of use leads to more plan adoptions, which effectively results in expanded access in the marketplace. I think the employer should always retain responsibility for the prudent selection and oversight of the MEP itself, as eliminating this will more bad actors to enter the field, but that due diligence can be accomplished and documented fairly easily if the standard of prudence is set at a realistic level and proper information is made available.”
“I think early adopters will distance themselves from the competition... everyone else will just be playing catchup.”
“Open MEPs are good in concept, but the devil is in the details.”
“The biggest issue with the ‘401(k) retirement system’ is obviously the fact that small employers don’t sponsor the plans. MEPs make it easy and affordable for small employers to have plans. This is the big deal. We have one plan with 165 contractors in a single plan. They are small employers but together the plan has almost $200 mm in assets and these small employers have the cost and operational advantages of an F500 quality plan.”
“MEPs are a great concept because they allow employers to offload administrative and most fiduciary responsibilities. Let’s be honest – very few employers understand the complexities of 401(k) administration. Many have never even heard of a 408(b)2 notice or ERISA Fidelity Bond. That is problematic. With all of the positives that an MEP offers, it is still not going to solve the ‘retirement crisis.’ They need to look at special safe harbor rules for these small employer start-ups around nondiscrimination testing; the likelihood of them being top heavy is significantly higher than a 100 participant plan. For many small employers, nondiscrimination testing is a show-stopper!”
“We've seen several spinoffs from open MEPs and there was poor communication which led to compliance errors, and typically the individual employer had no idea what they’d signed on for and the MEP sponsor was not able to maintain/provide sufficient information to properly monitor and administer the plans.”
“In concept the idea is wonderful, but the reality of plan administration is much different.”
“The only benefit is lower cost on combined assets... they could also just force providers to charge a set rate for retirement plan assets. Next up, where are those Death Star plans?”
“Open MEPs are already here and will expand in the future. Cost is often cited as the biggest factor in favor of MEPs. This should change over time. The best feature of open MEPs (if designed correctly) is that they are run by trained fiduciaries who will improve compliance with the relevant laws and regulations. The vast majority of American employees employ fewer than 1,000 people. They generally don’t have the knowledge and experience to meet their fiduciary obligations. Outsourcing this to trained professional fiduciaries makes sense.”
“They should do away with the commonality part of MEPS – kill the open/closed. The whole idea is to make retirement plans more accessible. 99% of business owners don’t have the time or acumen to be handling the ERISA responsibilities.”
“It has the potential to fundamentally change how our industry serves employers, who and how these plans are formed and sponsored. It should spur product innovation and allow new points of efficiency for project providers.”
“I think that the press on retirement plans is that they are too expensive and too complicated for the smaller employer and the only answer is a MEP or state run plan. I don’t think many small businesses (really small) either understand the benefit of a plan or want to share the benefit of the plan with their employees.”
“It’s only a matter of time. And MEPs will dominate the small to mid-sized 401k market in 5 years.”
“Closed MEPs should be permitted. They will create operational efficiencies which will lead to more retirement plan coverage, lowers costs and increased professional fiduciary oversight.”
“Open MEPs are a good solution for the small employer. Since 413(c) does not require the common nexus, I wish the IRS would opine on the DoL's adverse opinion. I would like to see the legislation require the DoL to fully support 413(c), but have no idea how far it will go.”
“MEPs alone are not the answer. The government needs to phase out Social Security and make saving for your individual retirement mandatory. 15% of your paycheck from your first job should go to your own retirement fund. The government can't touch it, EVER. You will not ever be taxed again on it and you can’t touch it unless of dire emergencies, or the age of 65. Many more details to make sure it works, but this would be a start!”
“Horrible idea to ‘expand’ employee savings.”
“I've worked with MEPs (PEOs) in the past and found them complicated with many moving parts. This was with getting data from the PEO payroll sponsor. Open MEPs with independent and varied payroll will make it easier? Sorry, I don’t buy it. Audit expenses for a plan that wouldn’t need an audit as a stand alone, why? Exempt MEPs from audit rule, why? Provide a level playing field. My plan has $5M and 75 EEs, your plan is a start up with 25 EEs. You get better pricing because of the size of my plan? Why? I want to move my plan away from the MEP. Wait, I have to terminate and fully vest everyone because the MEP failed to deliver, why?”
“I would like to see open MEPS all be allowed to be treated as closed MEPs. I think these should be kept out of the hands of the States as well. I believe States would not have the expertise to operate these as well as problems with the investing of the plan assets. Then I think you would see an increased interest in smaller to mid-sized plans entertaining this option.”
“Open MEPs will help expand the market place. Plus it would put such retirement plans for smaller employers in the hands of responsible professionals who understand what it means to be a fiduciary.”
“As long as the one bad apple rule exists, MEPs are generally a terrible idea.”
“Smaller employers would offer their employees access to a qualified plan, if they didn’t have to worry about administrative headaches and risk of being punished by a regulator. For those organizations that offer an open MEP, I am confident that the marketplace will drive down plan costs and technology will continue to make the administrative/operating environment more efficient.”
“However, I would love to see the open MEPs go away with the removal of the common nexus and the one bad apple issue. The common nexus issue adds cost to the open MEPs due to the amount of additional work required, and the individual plan audits that are required.”
“I don't think companies are out there ready to sponsor a plan now and not doing so because a MEP does not exist for them. Whatever reason they have for not sponsoring a plan exists (at least in their minds) and I don’t see how a MEP (which is a pretty complex concept) is the magic bullet that the sponsor is waiting for. MEPS are a marketing gimmick and will have to be sold.”
Thanks to everyone who participated in this – and every – week’s NAPA Net Reader Poll!