While open multiple employer plans can be very effective for many small businesses, they may not be for everyone, a new white paper warns.
Proponents of open MEPs hail them as a means of reducing both the burden and cost of sponsoring a retirement plan for smaller employers, but as MassMutual explains in its white paper, these benefits may prove elusive depending upon the specific needs and preferences of the participating employer and the plan options selected.
“The ability to join an open MEP would likely be an outstanding new opportunity for many small businesses and their employees to achieve retirement security,” says Bob Carroll, Head of Workplace Distribution for MassMutual. “However, employers and their financial professionals will need to carefully consider what they want to achieve and how when participating in an open MEP.”
A cornerstone provision of the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in May by the House of Representatives is to ease the rules allowing for open MEPs with the goal of making it easier for small employers to band together for the purpose of providing a retirement plan to their employees.
And while the SECURE Act is currently stalled in the Senate, there is much speculation that the legislation will be approved before the end of the year. “As we wait for the Senate to act, advisors, third party administrators and employers may want to begin educating themselves on the challenges and opportunities presented by what could become the biggest change in retirement plan design since the Pension Protection Act of 2006 authorized auto-enrollment,” MassMutual states in its paper.
The issues that MassMutual recommends that employers and advisors consider when evaluating an open MEP include the following.
Selecting the Plan Design
Employers should carefully consider the plan provisions and whether they are a good fit for their specific plan goals and workforce demographics, the firm advises. It notes that plan design decisions – including rules about eligibility, vesting, auto-features, matching contributions and others – can play a significant role in how effective a plan may be. But because open MEPs are designed to streamline the process of offering and maintaining a plan, the paper emphasizes that participating employers may have limited choices when it comes to plan design.
Deciding on Plan Administration
By joining with other companies in an open MEP, employers may have the opportunity to both ease the burden of plan administration and reduce costs by taking advantage of economies of scale. That said, MassMutual notes that partnering with an experienced TPA “can be crucial” to achieving these benefits and in helping participating employers handle administrative responsibilities outside the open MEP umbrella, such as nondiscrimination testing and contribution limits, allocating employer contributions and forfeitures, calculating vesting percentages and preparing loan paperwork.
The paper further emphasizes that it’s also important to understand what support a TPA provides in helping to assess the needs of the business to minimize plan expenses and maximize participant outcomes.
Choosing Limited vs. Customized Investment Menu
Investment options available within a MEP are obviously a top consideration for an employer considering participation in the plan, the paper observes. It notes that the ability to combine assets under one universal umbrella may give MEPs the ability to offer access to lower-cost funds typically available only to larger companies, the paper explains.
However, for ease of administration, some open MEPs might require participating employers to choose from more limited options, such as preselected investment menus. “Here again, advisors and small employers would need to carefully consider how an open MEP limits investment choices and what level of customization may be available,” the paper states.
Determining Fiduciary Oversight
Finally, the paper observes that open MEPs are intended to provide small employers with a high degree of support, starting with the handing off of day-to-day administration and regulatory filings to a 3(16) plan provider and investment discretion to a 3(38) fiduciary. The paper cautions, however, that effective fiduciary support will likely come at a price. It notes, for example, that one study found that because of these operational complexities, open MEPs could cost four basis points more than a traditional 401(k) plan.
“For these and other reasons, we believe it will be critical for employers and their advisors to carefully review the pros and cons of open MEPs and to weigh their benefits relative to other retirement plan options,” MassMutual emphasizes.