As the Senate is moving to reconcile two major retirement bills, the prospect of a new Open Multiple Employer Plan defined contribution market has plan providers positioning to understand the implications for existing employer sponsors of 401(k) plans and the millions of businesses that currently do not offer a savings option to workers.

Open MEPs would expand the existing multiple employer plan market to allow unaffiliated employers to bundle workers under one retirement plan.

Support for the policy is seemingly unanimous among the retirement industry, consumer advocates, and lawmakers—if there are opponents, they are not making themselves heard.

Businesses with fewer than 100 employees account for more than 40 million workers, according to the Small Business Administration. More than half of employers with fewer than 50 workers do not offer a retirement savings plan.

Open MEPs are designed to close that gap by making it easier and cheaper for employers to offer savings plans. But the extent to which that can happen will depend on regulations that emerge after Congress passes a bill, which many in industry, if not most, expect to happen this year.

“How the Labor Department designs the regulations will be critical,” said Aron Szapiro, director of policy research at Morningstar.

Under the SECURE Act, which passed by a near-unanimous vote out of the House of Representatives, and the Retirement Enhancement and Savings Act, which has bipartisan support in the Senate, providers of Open MEPs would be fiduciaries and have to register with the Labor Department. Individual employers in pooled plans would maintain a fiduciary obligation to monitor providers.

The bills give Labor broad authority to craft disclosures MEP providers would give to employers, said Szapiro.

But other questions are emerging as to whether or not language in the retirement bills would allow recordkeepers, insurance companies, and money managers to sponsor Open MEPs, and whether those prospective sponsors would need a new Prohibited Transaction Exemption (PTE) under ERISA to build investment menus with proprietary products.

“A lot will depend on the balance struck in new prohibited transaction exemptions to make this market work,” said Szapiro.

Large service providers are calling for legislation or regulatory guidance that explicitly allows them to sponsor Open MEPs.

If that comes, they can also be expected to ask for an exemption to use proprietary products in order to incentivize their participation in the market.

Ultimately, Labor's guidance on those issues will shape the market.

“Some members of Congress think of Open MEPs as small employers banding together to seek these plans out,” said Szapiro. “But that's not accurate—it will be providers marketing to small businesses.”

Szapiro does not believe a PTE for proprietary investment funds is needed for the formation of a robust MEP market.

“A lot of providers want that exemption, but we don't think the market will need it,” said Szapiro. “There's no reason to issue a new PTE if it's not needed, and we think there is a decent chance a provider market will form without one. There is still a business incentive to enter the market without a PTE for propriety products.”

Using the 3(38) and 3(16) model

Szapiro envisions regulations that will utilize ERISA's 3(38) provision, which defines a fiduciary investment manager with discretion over managing retirement plan assets. Third-party fiduciaries would be paired with Open MEP sponsors.

He also sees a role for managed accounts alongside a standard investment menu in an Open MEP, to give individual employers in pooled plans the flexibility to offer a savings strategy tailored to specific demographic subsets in a pooled plan.

“The simpler the design, the better the system will work,” said Szapiro. “It has to be made to work at a low cost—even with a managed account solution.”

Deborah Rubin, vice president and director of TPA services and special markets at Transamerica, oversees a division that already aligns with third parties to bring pooled plans to employers.

Transamerica has been in the multiple plan market since 2000. Under one program created specifically for unrelated employers, third-party 3(16) administrative fiduciaries are tapped to be the sponsor of MEPs. In that relationship, Transamerica works solely as the recordkeeper to the plans.

“There's a whole universe of 3(16) independent fiduciaries that has sprouted up in the past three to five years,” said Rubin. “The 3(16) serves as the sponsor of the MEP, and has fiduciary responsibilities including plan compliance, payroll deductions, documentation, and all the requirements of a plan sponsor.”

The 3(16) sponsors often pair with an outsourced 3(38) investment manager. Transamerica is a proponent of using the third-party administrator model as sponsors of Open MEPs going forward.

“Whether or not the SECURE Act allows recordkeepers to serve as sponsors of Open MEPs, that would not disrupt our ability to support this market and expand it going forward,” said Rubin. “At this time we do not anticipate changing our strategy to leverage external partners. But anything can change.”

Open MEPs' ability to close the retirement plan access gap will depend on the regulations that emerge from Labor.

“The devil will be in the details,” added Rubin. “You never know when you see legislation at this early stage how our government will want to implement it. We can only lead people to water–we can't make them drink. But if we can take away employers' fears, provide them with administrative and fiduciary support, give them liability protections and plans at a competitive cost, we can get more employers to sponsor plans, and help more Americans on their road to retirement.”

No time like the present

If the SECURE Act or RESA are signed into law, regulators will have a year to issue the initial tranche of regulations on Open MEPs.

Even though there are significant details to iron out, employers may want to begin educating themselves now.

“Lean on your advisors and service providers—that's what we're here for,” said Christine Stokes, head of DCIO strategy at Nuveen.

Employers that already sponsor a retirement plan will have to weigh the pros and cons to potentially migrating to a pooled plan.

“The notion of limited fiduciary liability under an Open MEP sounds very appealing,” said Stokes. “But the reality is you are never off the hook from being a fiduciary if you are an employer. And it may not be easy to separate from a MEP if an employer determines it's not longer in the best interests of participants.”

And the promised cost savings from the scale of pooled plans may not be available to some existing sponsors of single plans.

“It's not necessarily the case that if you increase scale you will lower costs,” noted Stokes. “As you move further up market, those plans already have scale, and the trade offs to joining a MEP may not benefit an employer.”

Opting to migrate to an Open MEP could come at the cost of control over investment offerings and services specific to the single-plan market.

There is also the potential for administrative complexity for plan administrators when pooling assets. Stokes cited the question of different matching formulas between employers in a pooled plan as an example.

“That may outweigh the benefits of scale,” she said. “It won't be as simple as looking at one factor. Employers will have to weigh all the costs and benefits to joining a MEP.”

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