Will the Pandemic Give MEPs and PEPs a Boost?

Economic stress caused by the COVID-19 pandemic has led to new pressures on retirement plan sponsors, including consolidation. One result may be additional impetus for multiple employer plans and pooled plan arrangements, a recent blog post suggests.

 

In “Will COVID-Related 401(k) Plan Shrinkages Push Companies to Pooled or State Solutions?,” a recent entry in Fiduciary News, Christopher Carosa takes a look at what the situation may portend for 401(k) plan consolidation. The idea of consolidation, he writes, is not new. But it may be gathering steam, he suggests, and cites the remarks of Dimitry Farberov, Investment Advisor at Miracle Mile Advisors: “The COVID-related economic slowdown makes 401k plan consolidation more likely as firms look to lower operational costs across the board to keep the business going and retain key employees.”

 

Carosa notes that there were similar reactions during the Great Recession, and that while retirement plans did not undergo a significant consolidation then, the situation could be different this time. He cites RMB Capital Vice president and director of Retirement Plan Solutions James Rosselle: The COVID-related economic slowdown makes this more likely as plan sponsors are going to be looking for ways to outsource non-essential tasks, so they can focus on growing their business, and this is one way to do so.”

 

“The reasons behind this switch are many, pervasive, and hard to argue against,” writes Carosa. He cites Drew Carrington, Head of Institutional DC at Franklin Templeton in San Mateo, CA, who argues that through pooled arrangements not only can employers that otherwise could not offer a plan themselves do so, they also can do so immediately, and without the administrative and fiduciary risks with which they would otherwise have to contend. Farberov adds that another of the advantages of a pooled arrangement is lower cost for an individual employer.

 

Consolidation can entail state-sponsored plans. Carosa argues that state-sponsored plans “have an advantage today” because there are few MEP options right now; he reports that Roselle expresses a similar sentiment, observing that state-sponsored plans have an advantage in some states and are “attractive to employers” because their plans are already are in existence, are easy to establish and function in a way similar to IRAs. For good measure, Carosa adds that 401GO CEO Jared Porter also has noted that state-sponsored plans entail low cost and fewer responsibilities for an employer. Porter adds the caveat, however, that state-sponsored plans can bring “some administrative hassle” for employers.

 

Consolidation also could mean the formation of multiple employer plans (MEPs) or pooled employer plans (PEPs). Carosa cites Leading Retirement Solutions CEO and attorney Kirsten Curry, who writes of the “great flexibility and customization of retirement plan design, investments and more” that MEPs and PEPs will offer because of new regulations. Rosselle adds that he believes that MEPs and PEPs allow an employer to spend more time “focusing on the overall business objectives.”

 

And recent regulatory and legal developments could lay the groundwork for the expansion of MEPs and PEPs, Carosa suggests. He cites Farberov, who argues that the Setting Every Community up for Retirement Enhancement (SECURE) Act “significantly broadened” the environment for MEPs and PEPs; Carosa himself adds that regulations that will go into effect in January 2021 will “erase many of the obstacles hindering” them.

 

Carosa and Roselle assert that the changes the SECURE Act and new regulations will bring the shortcomings of state-sponsored plans into sharper relief. “Unless state-sponsored efforts can defy the stultifying reality of any political process, they are unlikely to pivot fast enough to overcome the fast-paced offerings coming from the private sector,” Carosa writes.