closeup of dome area of U.S capitol building with flag (Photo: Mike Scarcella/ALM)

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The Setting Every Community Up for Retirement Enhancement Act orSECURE Act has been billed as the mostsignificant retirement legislation to pass since the PensionProtection Act of 2006.

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But its ultimate impact on the expansion and design of workplaceretirement plans will largely depend on the supporting guidance and regulations drafted by the LaborDepartment.

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"Let's take a deep breath and give Congress real credit," saidPhil Waldeck, CEO, workplace solutions group at Prudential.

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"The law is a great example of a public-private partnership, andit's the right policy for both parties. But Labor will play anessential role going forward," added Waldeck.

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One provision in the law is  designed to evolve—inpotentially substantial ways—the workplace retirement planmarket.

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The creation of Open Multiple Employer Plans, which allowunaffiliated businesses to pool workers under one retirement plan,is designed to address the 55 million Americans—nearly half theprivate sector workforce—who don't have access to a retirement planthrough their employer.

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The Joint Committee on Taxation's budget score of the SECURE Actassumes 700,000 new retirement accounts will be created throughOpen MEPs over the next decade.

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The accuracy of that estimate will depend on the regulationsthat emerge this year; SECURE puts Open MEPs on line in thebeginning of 2021.

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"The bill makes significant steps forward in improving how thedefined contribution system works for more workers," said ChrisJones, chief investment officer at Edelman Financial Engines.

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"But the devil is always in the details, and the question iswill there be a workable framework to allow small employers to takeadvantage of Open MEPs. We are cautiously optimistic," addedJones.

Administrative savings unclear

Open MEPs come with several selling points for employers.

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One claims that pooled plans limit the administrative burdensfor individual employers. Under SECURE, an Open MEP willfile one Form 5500 for all participating employers.

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But beyond that, it is unclear where the all-in administrativeburdens to participating in a MEP are reduced, says Aron Szapiro,director of policy research at Morningstar.

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"Other than the Form 5500, it's not clear what theadministrative cost savings are," said Szapiro. "Pooled plans haveenhanced administrative requirements, and there will likely beadditional requirements for Open MEPs in the future."

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In a recent paper, Szapiro speculated that Open MEPs couldactually add to an employer's administrative costs, given thecomplexity of maintaining a plan with many employers.

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Morningstar's analysis of Form 5500 filings shows small planspay four times as much in administrative costs as large plans. Thatnumber does not include indirect administrative costs, such asrevenue-sharing agreements.

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In order for Open MEPs to drive those costs down, regulatorswill be challenged to design reporting and monitoring requirementsthat are not onerous to employers while assuring the plans arewell-regulated, writes Szapiro in a recent policy paper.

A prohibited transaction exemption for proprietaryproducts

Unlike a Labor Department regulation on pooled retirement plansthat went into effect last year, the SECURE Act allowsrecordkeepers, asset managers, and insurance companies to be thefiduciary sponsors of Open MEPs.

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That is intended to reduce individual employers' fiduciary riskunder the Employee Retirement Income Security Act. Employers thatparticipate in an Open MEP will be held to a fiduciary standard inselecting a MEP provider, and will have an ongoing obligation tomonitor providers. But the MEP sponsor will serve as the fiduciaryin selecting investment options.

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While the law permits plan providers to sponsor MEPs, Labor willhave to issue guidance specifying whether investment managers andannuity providers that are also recordkeepers can sponsor a MEP anduse proprietary products in investment lineups without creating aconflict of interest under ERISA.

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"We'd like to see clarity on how a recordkeeper can be a sponsorand provider to a MEP," said Waldeck. "What we need is thedevelopment of a market, which will happen over time. Clarity onhow providers can be sponsors would create more players in themarket."

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Under one analysis, service providers will have a responsiveaudience at the Employee Benefits Security Administration, the armof Labor that regulates retirement plans.

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Preston Rutledge, the assistant secretary of Labor for EBSA, wasa senior advisor to the Republican majority on the Senate FinanceCommittee, and was instrumental in crafting the originallegislation that allowed plan providers to sponsor Open MEPs.

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Moreover, under a recent reorganization at EBSA, oversight ofrule making was moved to a political appointee, with the intent ofexpediting the Trump administration's policy goals.

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"Recordkeepers will have to be involved in a significant way inthe Open MEP market," said Jones.

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"Under the current administration, I wouldn't see a restrictionon proprietary products as probable," added Jones, who said EdelmanFinancial Engines is not considering sponsoring MEPs at thistime.

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"Regulators have to work within what the law says," saidWaldeck. "I think the legislation is clear, and I don't expectadverse developments from Labor. Silence is a more probable concernthan unhelpful guidance. We want thoughtful regulations. SECUREhelps Labor with clear guidance on how to proceed."

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One option will be the creation of a new prohibited transactionexemption that specifies how potential MEP sponsors can build menuswith proprietary products.

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Consumer advocates can be expected to voice concerns if thatprospect emerges.

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Another potential market development is the use of third-party3(38) fiduciaries to oversee the service providers that will befiduciary sponsors of MEPs.

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"We want to put participant protections first," saidMorningstar's Szapiro. "Given MEP sponsors can use 3(38)fiduciaries, let's see how that works before creating a newprohibited 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 inthe potential plans will need access to institutionally pricedinvestments, which are typically not available to smallersingle-employer plans.

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"If these work, it will be because MEPs scale up and offer newemployers without any assets in a retirement plan access toinstitutionally priced products," said Szapiro.

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In order to have the assets to qualify for institutional shareclasses, MEPs may have to be formed by employers with existingplans, and existing assets. Or, the market could provide pricing oninvestments specific to MEPs in order to stimulate the market'sdevelopment.

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"Given the amount of money and time spent lobbying for OpenMEPs, it's clear industry really wants to make these things work,"said Szapiro. "I do think you will see some attractivepricing."

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While the SECURE Act is clearly a move in the right direction tostrengthening the country's retirement system, immediate outcomesshould not be expected, said Waldeck, who noted Prudential has beenadvocating for Open MEPs for nearly 13 years.

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"It will take time for sponsors to take action, and years forindustry to provide capabilities," said Waldeck, citing theexperience of target-date funds as a qualified default, whichhappened in 2006.

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"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.