Multiple employer plans occupy a largely ignored area of the defined contribution market, but a confluence of factors is likely, in the near future, to make such retirement plans more popular for plan advisers serving small-market clients.
These plans, commonly referred to as MEPs, let employers band together to offer a common retirement plan to their employees. That provides scale and cost savings small employers often can't achieve on their own through a single 401(k) plan, and allows them to offload otherwise burdensome administrative duties and fiduciary responsibility. However, many advisers and industry practitioners view MEPs as unwieldy under current rules, and uptake has been relatively low.
That could be changing, though. Federal legislation that has a good chance of passing by year-end, together with the Labor Department's new fiduciary rule, which governs investment advice in retirement accounts, will likely encourage more retirement plan sponsors to go after this business.
“They're not of huge interest to plan advisers [currently],” Brian Graff, executive director of the National Association of Plan Advisors, said of multiple employer plans. If proposed legislation passes, though, there would be “a lot of interest among broker-dealers and plan advisers in setting up MEPs for existing small plans to reduce costs, and to help with compliance with the fiduciary rule.”
WHAT ARE THEY?
MEPs can refer to both defined contribution and defined benefit plans. They're easily confused with the similar-sounding, though different, “multiemployer plans.” Multiemployer plans are collectively bargained (essentially, union plans), while multiple employer plans aren't.
401(k) plans can be expensive for small employers and come with several moving parts that, for some, pose an administrative hurdle, according to Scott Dauenhauer, a principal and owner of Meridian Wealth Management.
MEPs, though, simplify the process for employers by allowing the sponsor of the shared plan to take over responsibilities. MEPs can be set up in multiple ways. For example, some may have one employer who serves as the lead sponsor, serving as plan trustee and contracting with service providers, while in others the participating employers band together to jointly sponsor a MEP.
“It delegates fiduciary duties away and gives you access to a plan with monitoring and oversight you probably couldn't do on your own, at a price point that's likely lower than you could've gotten on your own,” Mr. Dauenhauer said.
Many hold out hope these plans could help close the gap in retirement-plan coverage through the workplace, where Americans are most likely to save for retirement. Only 52% of employees working for employers with less than 100 workers have access to either a DC or pension plan compared with 83% of employees working for employers with more than 100 workers, according to the Bureau of Labor Statistics.
States have recently taken action to try narrowing this gap. Some such as California and Illinois have passed legislation creating automatic-enrollment, payroll-deduction IRA programs, meant primarily for small businesses. These programs are mandatory for businesses of a certain size that don't already offer a retirement plan through the workplace.
MEPs offer a voluntary alternative, yet participation has been limited. Data on these plans is scarce, but a report published by the Government Accountability Office in 2012 offers a snapshot — MEPs represent less than 1% of private-sector DC plans, and roughly 6% of all DC assets.
Low participation is partly due to a difference in treatment between “open” and “closed” MEPs. “Closed” plans can only be established if participating employers share a commonality — chapters of a nonprofit organization, for example.
Open MEPs don't have a commonality requirement and therefore have the most potential to wrangle in small employers, because the commonality requirement of closed MEPs makes them more limited in scope. But, in 2012, the Labor Department made open MEPs less attractive by subjecting each employer in the MEP to certain responsibilities, such as filing a Form 5500, undergoing a plan audit and obtaining an ERISA bond.
Those requirements don't exist for closed MEPs, which allow for the plan's sponsor to have a single Form 5500, plan audit and ERISA bond.
Since the DOL “clamped down” on open MEPs, there hasn't been much activity in that arena, Mr. Graff said.
However, The Retirement Enhancement and Savings Act, which unanimously passed the Senate Finance Committee in September by a 26-0 vote, would give multiple employer plans a shot in the arm.
The legislation, which many expect to be attached to a must-pass spending bill at the end of the year, would create “pooled employer plans.” These are essentially open multiple employer plans that would allow unrelated employers to join a common plan, but without the administrative requirements for individual employers.
“It would treat an open MEP no different than a closed MEP,” Terrance Power, president of The Platinum 401k Inc., a third party administrator, said.
That could save participating employers several thousand dollars per year in audit fees alone, Mr. Power said.
The bill would also remove the “one bad apple rule” in effect now in which an administrative mistake by one employer could disqualify the MEP for all participating employers.
FIGURING IT OUT
“MEPs offer an opportunity [for advisers],” Fred Barstein, founder and CEO of The Retirement Advisor University, said. “There are a lot of elite advisers I've talked to who are looking at this and trying to figure it out.”52%Portion of employees at companies with less than 100 workers who have access to a DC or pension plan
These elite advisers — those advising on roughly $250 million or more in assets and dozens of plans — have tended to move up-market to larger 401(k) plans, Mr. Barstein said. MEPs provide a way for them to profitably serve small-market clients while continuing to use a business and service model that's geared more toward mid-sized and large plans.
More small plans are anticipated to be up for grabs once the DOL rule kicks in, as less experienced plan advisers exit the business to avoid fiduciary liability.
“I think people are starting to realize — in the small market, anyway — I need to have one model,” Mr. Barstein said.
Rather than conducting vendor searches, doing fee benchmarking and picking funds for several small plans, an adviser would only need to do these things for one plan reaching several employer clients.
Further, multiple employer plans could help lessen liability under the DOL fiduciary rule, for the simple reason that fiduciary responsibility is restricted to one DC plan as opposed to several, Mr. Barstein said.
Final legislation would also designate who could sponsor a so-called pooled employer plan. In addition to third-party administrators and other providers, advisers themselves may be able to “hang out their own shingle” and start a pooled employer plan on behalf of clients, according to John Kalamarides, senior vice president of institutional investment solutions at Prudential Retirement.
Advisers could theoretically set up a multiple employer plan and merge existing clients into it, which could help an adviser get scale more quickly, Mr. Kalamarides said.
“If we go to an open MEP system that's what we'll probably do,” Aaron Pottichen, retirement services practice leader at CLS Partners, said. “We almost have to because we'd have to compete with everyone else, and the only way to compete is if you have lots of scale.”
However, this sort of open-MEP environment would also present challenges. For one, it would likely lead to less marketplace competition among MEP sponsors, according to Mr. Pottichen, who recently set up a closed 403(b) MEP for a group of nonprofits in Central Texas.
“In the world of the fiduciary rule, size will win because it will be less expensive,” which will lead to consolidation among the largest established MEPs, Mr. Pottichen said. It could be difficult to compete with advisers with bigger books of business, as well as record-keeping firms that establish them, he added.
Both Mr. Pottichen and Mr. Dauenhauer cautioned against potential conflicts of interest for advisers hoping to sponsor a MEP. Some large plans might be able to get a better deal as a single 401(k) plan that's not part of the MEP, but an adviser would have to resist any temptations to keep them in for additional scale.