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Bipartisan support of the Setting Every Community Up for Retirement Enhancement, or SECURE Act of 2019, in the US Congress includes provisions to expand access to Multiple Employer Plans (MEPs) in a bid to make it easier for small businesses to offer retirement benefits. Under current federal law, MEPs are available only to businesses with a “common nexus” (i.e., sponsored by an industry or trade association). The proposed “Open-MEP” model eliminates key legal barriers, enabling unaffiliated businesses to combine resources, take advantage of economies of scale and lower administrative costs.

The new legislation would transform the retirement industry and significantly affect every layer of the value chain. From participants and sponsors to recordkeepers and trust companies, here's how actors across the retirement services value chain will likely be impacted.

Small-business employees

Open MEPs represent a huge boon for small-business employees. According to the most recent data from the Bureau of Labor statistics, fewer than 50% of private sector employees have access to an employer-sponsored retirement plan.

This will change if Open MEPs become reality, as these vehicles remove critical barriers, which will increase adoption.

In addition, small-business participants will see greater returns, thanks to reductions in ongoing administrative and investment management costs.

Small business plan sponsors

Open MEPs will also greatly reduce cost barriers for small business employers, including the reduction or elimination of plan startup costs and annual plan-level audits (required today for companies with 100 or more employees).

Perhaps equally important, the Open MEP model will enable business sponsors to offload most of their fiduciary responsibilities in selecting the entities serving their plans. In some cases, the burden may be minimized to only the fiduciary act of selecting which Open MEP the plan is a part of.

Even medium and larger companies that currently sponsor a plan will likely consider a move to an Open MEP simply to alleviate fiduciary liabilities and lower costs. A key consideration for mid- and large-size businesses is the potential loss with an Open MEP of customization and control that these firms receive today.

One area of change that may not be viewed with similar enthusiasm: Open MEPs will likely standardize administrative, reporting and compliance activities at the employer level, adding new rigor to office administrator workflows.

Today, there's tremendous variation with respect to how small businesses provide data to their TPA or RK/TPA for activities such as ongoing payroll deductions or periodic testing requirements. In an Open MEP, small businesses will need to add more rigor to provide the information in the manner required under the Open-MEP arrangement, resulting in some initial friction from employer HR / Administration as they adjust.

Fully-bundled recordkeepers

Fully bundled recordkeepers that provide TPA services, recordkeeping functions, web-based platforms, trustee services, and, in some cases, custodial services will have a significant advantage in an Open-MEP marketplace. Many of the biggest names in the industry already provide fully-bundled services to existing MEPs or similar Master Plan arrangements, so the transition to an Open-MEP model will be swift and less complicated.

Payroll services firms will also have a head start, if only because they already have such deep penetration into the small business market. Today, some large payroll companies provide fully-bundled retirement plan services, so expect them to leverage that operational sophistication as we move toward an Open-MEP model.

Local advisors

Given that large recordkeepers are poised to grab the bulk of the market with bundled solutions, advisors who currently serve small business plans should expect their role to change significantly.

In the future, local advisors may help small businesses select which Open MEP to join and may provide ongoing educational services to participants. But local advisors are less likely to assume the kind of investment selection and investment fiduciary roles they occupy today.

Third-party TPAs

At this point, it's not entirely clear what role TPAs are likely to play in an Open MEP market. Many of the functions TPAs perform support employers who remain liable for their 3(16) plan administrator fiduciary responsibilities within unbundled plan arrangements, but most TPAs do not directly assume fiduciary responsibility.

If unbundled plan providers seek to create Open MEPs, local TPAs may be required to assume 3(16) plan administrator fiduciary responsibilities. Time will tell.

Custodians

The evolution of the Open MEP market will be disruptive for custodians. First, the consolidation of resources into Open MEPs means custodians are going to be squeezed on fees.

For example, a custodian today might service 100,000 or more small firms each with an average of $1M in assets and command 5-10 basis points for the service. Imagine, however, if those 100,000 small firms consolidate into a handful of MEPs. Custodial fees as a percentage of assets would decline because of MEP negotiating power, but economies of scale would decrease operational costs for custodians at the same time.

Further, the investment vehicles of choice will certainly change. Today, small asset pools are served in with retail mutual fund investment options which are high volume but are transactional and without customization. Large asset pools are afforded higher complexity but lower cost CIT and Synthetic GIC vehicles within underlying 3c7 trusts. The consolidation under an Open MEP both increases the complexity of the custodial services while lowering the number of vehicles managed through consolidation of assets.

You can easily imagine scenarios in which overall revenue declines, but margins increase. Of course, you can also imagine the alternative.

3(38) investment managers / investment consultants

The biggest winners in a new Open MEP market could be 3(38) investment managers who currently serve multi-billion-dollar defined benefit or defined contribution plans, private endowments, public pensions and pooled corporate investments.

Today many small-business sponsors are paying 50+ basis points to their advisors for non-fiduciary or 3(21) investment advice fiduciary services. By contrast, consolidating into an Open MEP enables sponsors to pay a handful of basis points for the absolute best investment management consulting available under more formidable 3(38) investment management.

In other words, major investment management consultants currently out of reach for small businesses will become the biggest servicer of these small business plans through the open-MEP model.

Trust companies

In a similar vein, trust companies willing to serve as discretionary fiduciary trustees of 3-C-11-81-100 trusts are likely to be big winners too. The same is true for associated services providers and Trustees who successfully operate Collective Investment Trusts (CITs) and Synthetic GICs.

A new opportunity emerges for Trustees under Open MEPs. There is now a way to bundle fiduciary services to allow Trust companies to move beyond directed plan trustee services, and to offer discretionary MEP “plan” trustee services. By providing discretionary fiduciary services, they alleviate the last area of fiduciary responsibility typically placed on the plan sponsor. A limited number of trustees offer this service today and are well positioned for a significant lift.

Be ready

Open MEPs will provide economies of scale that drive new efficiencies up and down the value chain. Investment management firms and trust companies that currently play almost no role in small business retirement plans are poised to assume outsized influence in an Open MEP market.

Meanwhile, the advisors and TPAs who traditionally serve the small business retirement market could see a diminished role. Regardless of which firms grab the market, small business sponsors and employees stand to gain the most by accessing premium retirement services at much lower cost.

Jim Young is Vice President, Product Management, Retirement, Asset Management and Annuities at Broadridge Financial.

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