Pity the poor plan sponsor.
Unless and until Congress gets its act together and passes legislation enabling some form of universal open 401(k) MEP plans, plan sponsors will continue to suffer from the burden of hiring, monitoring, and managing third-party service providers for a business they, by the grace of ERISA, have become only accidentally acquainted with.
When your primary duty is to make widgets, it’s totally understandable that plan sponsors are less proficient at overseeing their employees’ retirement plan, (see “The 3 Biggest Service Provider Mistakes 401k Plan Sponsors Make,” FiduciaryNews.com, June 27, 2017).
More to the point, do corporate executives serve the employees better by focusing on growing the business or by focusing on making the 401(k) plan most efficient?
Certainly, both efforts help employees, but in which one does the plan sponsor have the comparative advantage?
You remember the term “comparative advantage” from Econ 101? It usually applies to global economics.
For example, both China and the United States can produce labor-intensive products and invent products that require technological advances. China, however, has a comparative advantage when it comes to producing labor-intensive products because, given the very large supply of human capital in China, the cost of labor is much less in China than in the United States.
Likewise, the United States has the comparative advantage when it comes to inventing products that require technological advances because the America economic system both permits greater freedom to explore and greater incentives for invention.
In the world of retirement plans, it’s probably a good guess to say plan sponsors have the brainpower to both run their business and run their employees’ retirement plan.
The question, though, is “What activity represents a better use of their time?” That’s where comparative advantage comes in.
To discover where one’s comparative advantage lies among an array of potential tasks, determine how hard it is to secure an adequate replacement for each of those tasks. One’s comparative advantage exists in the tasks where it’s most difficult to find a replacement.
In the case of those managers assigned to administer their company’s retirement plan, unless they are dedicated employees, their comparative advantage remains with their primary duty. They can always hire a replacement to manage the retirement plan. It’s more difficult to hire a replacement for their specific role in widget making (and, if it were easy, their boss would hire that person and fire our unlucky manager).
Delegating retirement plan responsibilities by hiring professionals doesn’t fully incorporate the comparative advantage strategy. Plan sponsors still have to manage those service providers. That takes time. Time better spent on making those proverbial widgets.
But there’s a better way. Many companies fortunate enough to belong to a business association already experience this. Such affiliated groups can offer 401(k) MEPs to their members.
These so-called “closed” 401(k) MEPs pool the members' employees into one collective 401(k) plan with the association acting as plan sponsor. This takes the burden of vetting, supervising, and benchmarking plan service providers from the part-timers in the company to the full-timers in the association.
Those plan sponsors not in business associations don’t have access to closed 401(k) MEPs – the only form of MEPs currently permitted by the DOL. These companies must use “open” 401(k) MEPs. Such animals exist but, because they don’t have the approval of the DOL, open MEPs lack many of the “comparative advantage” benefits of closed MEPs. To borrow a currently favorite phrase, open MEPs are in the “best interest” of nearly every plan sponsor.
Moreover, Congress, in a rare display of bipartisan agreement, appears to agree open 401(k) MEPs will help encourage retirement saving by getting more companies to participate in retirement plans.
Now, there are some aspects of MEPs that still need to be ironed out, but the fastest way to smooth out these issues might be to enact legislation to create open MEPs and let the competitive markets determine who can come up with the most effective solution.
There’s one thing we know for sure. At the very least, open MEPs will solve the biggest challenge all current plan sponsors face: how to best exploit their comparative advantage.