Outside-IN

Why MEPs aren't right for all 401(k) plan sponsors

Multiple-employer plans provide a one-size-fits-all solution in a world where customization has become king

Jan 2, 2019 @ 5:06 pm

By Aaron Schumm

Multiple-employer plans, or MEPs, are all the rage these days, and some variation of the offering is expected to become law in the near future. MEPs allow smaller companies to partner up, thus becoming "larger" plans, and are marketed as providing sponsors with reduced fiduciary liability, administrative responsibility and cost.

However, there are also some restrictions around MEPs, namely that they provide a one-size-fits-all solution in a world where customization has become king. For that reason, there has been a movement toward the de-adoption of MEPs that is not only very real, but also sheds light on why MEPs are a good option for some plans and a poor fit for others.

First, MEPs are more complex than single-employer plans, especially from an administrative perspective. More moving parts can lead to more administrative errors that can be expensive and time-consuming to correct. MEPs may also require tracking of service and other offerings across all employers in the plan, which small employers may not be equipped to handle.

Furthermore, by definition, using a MEP means that participating employers have limited design and investment choices. MEPs may require all employers to adopt the same plan provisions and investment options even though the features that are suitable for some participating employers might not be right for all of them. For instance, an employer with many seasonal employees, who would otherwise be excluded from plan participation due to being part-timers, may be required to contribute a match in a MEP safe harbor plan because it signed on to a MEP alongside employers with different workforce demographics.

Perhaps most significantly, MEPs are more prone to abuse than single-employer defined-contribution plans. MEPs may have inadequate oversight because each participating employer has delegated so much responsibility to the employer that controls the MEP. And while the Retirement Enhancement and Savings Act will eliminate the much-despised "one bad apple" rule — which requires plan sponsors to bear financial and other risks for other participating employers that fail to satisfy their compliance requirements — it does not address the day-to-day mechanics of how MEPs will be monitored for prohibited transactions, misuse of plan assets and excessive fees.

So while MEPs can open up retirement plan options for very small companies — typically 15 employees or less — once an employee base is over that threshold, the unique needs of the company really come into play.

Take some real-world examples from companies we've connected with in the past few months. In one instance, a company wanted to include certain environmentally and socially responsible investment options in its lineup. Since MEPs don't have flexible investment options, the company was not able to add the options without moving to an independent plan.

Another consideration is plan design. For one company, this became an issue when it wanted to facilitate profit-sharing and, in doing so, add a more flexible eligibility investing schedule than its MEP supported.

Hidden fees is another issue we've seen. We spoke with an employer de-adopting its MEP who was not told up front that it would cost an additional 25 basis points to add in revenue sharing.

Small companies can learn a lot by asking the right questions and thinking about their short- and long-term vision for their 401(k) plans. After all, the goal is to best support employees not just today, but for their future as well.

Aaron Schumm is the founder and CEO of Vestwell.

0
Comments

What do you think?

View comments

Recommended for you

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

May 16

Conference

Chicago Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

INTV

Why millennial demand for ESG is falling on deaf ears

Editorial director Fred Gabriel and senior columnist Jeff Benjamin say there's a disconnect between the big appetite for environmental, social and governance funds in 401(k) plans and their offering.

Latest news & opinion

Finra panel dismisses $100 million case involving drop in Merrill Lynch stock

Former brokers bringing charges related to stock losses during financial crisis have had 15 cases proceed, four stopped so far.

Finra panel dismisses $100 million case involving drop in Merrill Lynch stock

Former brokers bringing charges related to stock losses during financial crisis have had 15 cases proceed, 4 stopped so far.

ESG options scarce in 401(k) plans

There's growing interest among plan participants, but reluctance to add funds that take into account environmental, social and governance factors persists.

Ameriprise getting ready to launch its bank

Firm's advisers will soon have access to lending products such as mortgages.

Envestnet acquires MoneyGuide for $500 million

Deal will allow Envestnet to deepen integrations between MoneyGuide and its other wealth management solutions.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print