two tilting trees holding one heavy next with golden eggs

It's so tempting to view 401(k) MEPs as a panacea. They aren't. I know – I'm a survivor.

Before we get into that, let's review the misconception many people have about the SECURE Act when it comes to the 401(k) MEP (or "PEP" if you prefer). Yes, the legislation did remove the much hated "one bad apple" rule. It did not, however, cure all that ails the MEP (see "Exclusive Interview: Ary Rosenbaum Says, Despite SECURE ACT, Some 401k MEPs Challenges Remain," FiduciaryNews.com, January 22, 2020).

You may ask how I know this.

I know this from first-hand experience.

Long ago, I fought on the front lines of the 401(k) MEP battles. It took years, but I came upon the answer. And it worked, too. Unfortunately, the long-standing reality of the human drama – unrelated to the MEP itself – caused that novel piece of handicraft to atrophy on the vine. But first, the problem and its solution.

The beauty of the 401(k) MEP is that it allows many small plans to band together to achieve economies of scale that lower the average cost of administering those plans. This sounds great in theory. In practice, it's another thing.

Here is my story.

It turns out individual plan sponsors had their own ideas regarding plan design. Should they allow loans? Did they need safe harbor protections? Would there be matching, vesting, and a probationary period before contributions are allowed?

In truth, some of these choices could have been built into a single flexible plan (and were). Others, however, could not. They can only have been addressed via separate and distinct plan documents.

In case you're new to this game, when I say "separate and distinct plan documents," I mean "separate and distinct plans." In our case, that meant creating three 401(k) MEPs, not one. What are the implications of separate and distinct plans? Well, you know those lovely economies of scale I mentioned earlier? They're only accessible if you surpass a certain level of plan assets.

That's "plan" singular.

Each of those "separate and distinct plans" needed to pass that critical asset threshold. In other words, the initial critical mass problem increased threefold.

Fortunately, the association in question had enough members to jumpstart all three different flavors of their MEP benefit. And because the differences were company-specific, not investment-specific, the plans' sponsor didn't have to worry about potential conflicts of interest between administering three separate plans.

Now, I'm not an ERISA attorney and, to be honest, we had several ERISA attorneys advising us when we did this. And you better be talking to an ERISA attorney if you're thinking of dipping your toe into the MEP/PEP pool come 2021.

Before then, and this doesn't require help from an ERISA attorney, you should study the costs associated with the MEP to determine what critical mass of assets you'll need to attain order for the MEP to become sustainable.

Oh, by the way, what happened to that association? What often happens to organizations that rely on humans for leadership. People change. Priorities change. Pretty soon everything changes.

I wonder, given their role on the leading edge of MEPs and the renewed interest in these vehicles today, if they have any regrets.

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401(k) MEPs are not a panacea – Carosa

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