The prospect of removing existing barriers to employer participation in Open Multiple Employer Plans could quickly impact millions of existing participants in small and midsized 401(k) plans.
“It would bring instant gratification,” said Louis Harvey, president and CEO of DALBAR, a Boston-based consultancy to the financial services industry.
“Overnight you can reduce the expense of a plan, and on a larger scale you improve services to employees. But the biggest deal is employers can reduce their fiduciary risk on plans,” he added.
President Trump’s executive order instructing the Labor and Treasury Departments to advance new rules or guidance on participation in Open MEPs is good policy, thinks Harvey.
Under the order, regulators are to examine policies that would “clarify and expand the circumstances” under which small and mid-sized businesses can join a MEP, and it gives Labor and Treasury a six-month deadline to do so.
A 2012 advisory opinion by the Labor Department placed a commonality, or “nexus” requirement on employers in MEPs. The President’s executive order is widely interpreted as asking regulators to revisit that restriction.
MEPs allow groups of employers to pool workers under one defined contribution plan. Doing so creates economies of scale on a plan’s administrative and investment expenses. MEPs also shift a single employer’s reporting and audit requirements to the overall plan: A MEP with 25 employers files one Form 5500 form and undergoes one annual plan audit.
Closing the access gap or improving existing plans?
The executive order expressly asserts the expansion of access to workplace retirement plans as federal policy, and cites Bureau of Labor Statistics data showing that 23 percent of private-sector, full-time employees work for employers that don’t sponsor retirement plans.
Removing barriers to MEPs may “marginally” close the access gap, thinks Harvey.
“If five years from now the gap is closed by 25 percent, that would be a huge win,” he said.
But the more immediate impact would be on employers that already offer retirement plans.
“This will be the first big wave that is virtually certain to come,” said Harvey. “It will affect millions of people.”
According to the Labor Department, there were 647,019 single-employer defined contribution plans sponsored by employers in 2015. Of those, 568,622 were plans with fewer than 100 participants. Only 80 of those plans were multiple employer defined contribution plans.
The prospect of removing the employers’ commonality requirement to join a MEP could vastly reorient those numbers.
“If you give Open MEPs five years, I can imagine the net number of plans being sponsored will be a quarter of what it is today,” said Harvey.
Third-party administrators—TPAs—would be expected to be the service providers that most benefit from what Harvey thinks will be a considerable exodus of small and mid-sized employers moving from existing plans to a MEP.
“Smaller plans tend to be localized. Large recordkeepers have a national presence. TPAs have local access and are already servicing small and mid-sized plans,” said Harvey.
TPAs can be expected to jump at the opportunity to channel MEPs through the marketplace.
“How difficult is it for TPAs to stand up and say ‘I am going to be a fiduciary’ and offer my clients their own MEPs? They are in a position to solve a lot of their clients’ existing problems, and reduce their costs at a rapid rate,” he added.
Addressing the coverage gap from the employer’s perspective
Open MEPs’ efficiencies over single-plan offerings for smaller businesses are virtually indisputable.
But for employers that do not sponsor plans, there remains a hurdle that participation in a MEP doesn’t necessarily mitigate: the high cost of employer contributions to retirement plans.
Addressing that obstacle requires a shift in thinking from industry as a whole, thinks Harvey
“A lot of energy is spent looking at retirement from the participant perspective—which is really important. But the failure we are trying to overcome is the problem of businesses not offering plans,” he said.
“To address the problem of availability of a vehicle, we have to solve that problem from the perspective of the people providing the vehicle,” added Harvey.
In a recently published white paper, Harvey argues that MEPs must be structured, and marketed, with measures that control employers’ contribution costs if they are to close the access gap.
“The primary challenge is increasing the worth or value of plans to make them appealing to small businesses,” writes Harvey.
Retirement plans can be designed to help protect a small business from losing talented employees to local competition, argues Harvey.
To do that, employers need to fully understand the value their contributions add to a worker’s financial worth. A $1 increase in salary results in a $0.75 gain to an employee after taxes, whereas a $1 contribution to a retirement plan results in a $1.50 gain to the employee after accounting for appreciation.
That proposition needs to be aggressively promoted to workers. MEPs need to step in to help employers do that, thinks Harvey.
“An effective MEP should include a pre-packaged promotion that relieves the business owner of the burden of promoting its retirement plan. Such a promotion will also fulfill the requirements of plan participant communications and increase voluntary contributions to the plan,” writes Harvey.
Harvey also says the existing commonality requirement of MEPs fails to incentivize wider adoption because competing businesses are offering the same benefit.
“MEPs that limit their constituency to competing small businesses defeat the reason the business would adopt a plan. The effectiveness of the contribution expenditure to retain talent is wasted if the competing business has the same reward. This competitive standoff is the main reason MEPs have not flourished in the past,” says Harvey.
He envisions a world where providers structure MEPs among non-competing businesses, thereby delivering a distinct carrot employers can use to attract and retain talent.
He also suggests MEPs use graduated matching contributions that increase for longer tenured, and often more valuable workers, as a way to control contribution costs and encourage loyalty among workers.
“The idea comes from old defined benefit plans,” Harvey told BenefitsPRO. “It incentivizes loyalty. There’s precedent for it, and a role for graduating matching formulas in MEPs going forward.”