(Photo: Mike Scarcella/ALM)
The Setting Every Community Up for Retirement Enhancement Act or SECURE Act has been billed as the most significant retirement legislation to pass since the Pension Protection Act of 2006.
But its ultimate impact on the expansion and design of workplace retirement plans will largely depend on the supporting guidance and regulations drafted by the Labor Department.
"Let's take a deep breath and give Congress real credit," said Phil Waldeck, CEO, workplace solutions group at Prudential.
"The law is a great example of a public-private partnership, and it's the right policy for both parties. But Labor will play an essential role going forward," added Waldeck.
One provision in the law is designed to evolve—in potentially substantial ways—the workplace retirement plan market.
The creation of Open Multiple Employer Plans, which allow unaffiliated businesses to pool workers under one retirement plan, is designed to address the 55 million Americans—nearly half the private sector workforce—who don't have access to a retirement plan through their employer.
The Joint Committee on Taxation's budget score of the SECURE Act assumes 700,000 new retirement accounts will be created through Open MEPs over the next decade.
The accuracy of that estimate will depend on the regulations that emerge this year; SECURE puts Open MEPs on line in the beginning of 2021.
"The bill makes significant steps forward in improving how the defined contribution system works for more workers," said Chris Jones, chief investment officer at Edelman Financial Engines.
"But the devil is always in the details, and the question is will there be a workable framework to allow small employers to take advantage of Open MEPs. We are cautiously optimistic," added Jones.
Administrative savings unclear
Open MEPs come with several selling points for employers.
One claims that pooled plans limit the administrative burdens for individual employers. Under SECURE, an Open MEP will file one Form 5500 for all participating employers.
But beyond that, it is unclear where the all-in administrative burdens to participating in a MEP are reduced, says Aron Szapiro, director of policy research at Morningstar.
"Other than the Form 5500, it's not clear what the administrative cost savings are," said Szapiro. "Pooled plans have enhanced administrative requirements, and there will likely be additional requirements for Open MEPs in the future."
In a recent paper, Szapiro speculated that Open MEPs could actually add to an employer's administrative costs, given the complexity of maintaining a plan with many employers.
Morningstar's analysis of Form 5500 filings shows small plans pay four times as much in administrative costs as large plans. That number does not include indirect administrative costs, such as revenue-sharing agreements.
In order for Open MEPs to drive those costs down, regulators will be challenged to design reporting and monitoring requirements that are not onerous to employers while assuring the plans are well-regulated, writes Szapiro in a recent policy paper.
A prohibited transaction exemption for proprietary products
Unlike a Labor Department regulation on pooled retirement plans that went into effect last year, the SECURE Act allows recordkeepers, asset managers, and insurance companies to be the fiduciary sponsors of Open MEPs.
That is intended to reduce individual employers' fiduciary risk under the Employee Retirement Income Security Act. Employers that participate in an Open MEP will be held to a fiduciary standard in selecting a MEP provider, and will have an ongoing obligation to monitor providers. But the MEP sponsor will serve as the fiduciary in selecting investment options.
While the law permits plan providers to sponsor MEPs, Labor will have to issue guidance specifying whether investment managers and annuity providers that are also recordkeepers can sponsor a MEP and use proprietary products in investment lineups without creating a conflict of interest under ERISA.
"We'd like to see clarity on how a recordkeeper can be a sponsor and provider to a MEP," said Waldeck. "What we need is the development of a market, which will happen over time. Clarity on how providers can be sponsors would create more players in the market."
Under one analysis, service providers will have a responsive audience at the Employee Benefits Security Administration, the arm of Labor that regulates retirement plans.
Preston Rutledge, the assistant secretary of Labor for EBSA, was a senior advisor to the Republican majority on the Senate Finance Committee, and was instrumental in crafting the original legislation that allowed plan providers to sponsor Open MEPs.
Moreover, under a recent reorganization at EBSA, oversight of rule making was moved to a political appointee, with the intent of expediting the Trump administration's policy goals.
"Recordkeepers will have to be involved in a significant way in the Open MEP market," said Jones.
"Under the current administration, I wouldn't see a restriction on proprietary products as probable," added Jones, who said Edelman Financial Engines is not considering sponsoring MEPs at this time.
"Regulators have to work within what the law says," said Waldeck. "I think the legislation is clear, and I don't expect adverse developments from Labor. Silence is a more probable concern than unhelpful guidance. We want thoughtful regulations. SECURE helps Labor with clear guidance on how to proceed."
One option will be the creation of a new prohibited transaction exemption that specifies how potential MEP sponsors can build menus with proprietary products.
Consumer advocates can be expected to voice concerns if that prospect emerges.
Another potential market development is the use of third-party 3(38) fiduciaries to oversee the service providers that will be fiduciary sponsors of MEPs.
"We want to put participant protections first," said Morningstar's Szapiro. "Given MEP sponsors can use 3(38) fiduciaries, let's see how that works before creating a new prohibited transaction exemption." Morningstar offers 3(38) fiduciary services to plan sponsors.
Time will be needed to form MEP market
For retirement savers to benefit from Open MEPs, participants in the potential plans will need access to institutionally priced investments, which are typically not available to smaller single-employer plans.
"If these work, it will be because MEPs scale up and offer new employers without any assets in a retirement plan access to institutionally priced products," said Szapiro.
In order to have the assets to qualify for institutional share classes, MEPs may have to be formed by employers with existing plans, and existing assets. Or, the market could provide pricing on investments specific to MEPs in order to stimulate the market's development.
"Given the amount of money and time spent lobbying for Open MEPs, it's clear industry really wants to make these things work," said Szapiro. "I do think you will see some attractive pricing."
While the SECURE Act is clearly a move in the right direction to strengthening the country's retirement system, immediate outcomes should not be expected, said Waldeck, who noted Prudential has been advocating for Open MEPs for nearly 13 years.
"It will take time for sponsors to take action, and years for industry to provide capabilities," said Waldeck, citing the experience of target-date funds as a qualified default, which happened in 2006.
"It will take a decade for the impact of Open MEPs to be felt," added Waldeck.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
