There are many proposed bills that would pave the way for the use of open multiple employer plans (MEPs)—arguably the most well-known being the Retirement Enhancement and Savings Act (RESA)—and these bills have wide bipartisan support.
Pete Swisher, senior vice president and national practice leader at Pentegra Retirement Services, in White Plains, New York, notes that MEPs are not exactly new; multiple employer plans have been in existence for many decades, but they require a common nexus, such as industry or locality, among the employers who participate. Legislation for open MEPs would remove that common nexus requirement.
Lawmakers and retirement plan industry stakeholders support the idea of open MEPs, also known as pooled employer plans (PEPs), because they believe open MEPs will be cheaper plans for small employers and will improve employer-sponsored plan coverage among working Americans. But, how many have thought about the changes in the retirement plan industry open MEPs may bring?
In a webcast, Kelly Michel, chief marketing officer for Envestnet Retirement Solutions (ERS), based in San Jose, California, said, “My personal take is MEPs will be the next big disruptor for the retirement plan market. They will impact nearly every single stakeholder.”
Changes for plan sponsors
Swisher says the only fundamental difference between a MEP and a single employer plan is the pooling, especially the centralization of plan administration and governance. For example, rather than 100 plan sponsors each having their own plan document and each having to document committee minutes and file a Form 5500, there will be one governing plan document, one governing committee and one administrator filing a Form 5500. How exactly these mechanics work will depend on how the MEP plan sponsor puts its program together, he says.
Swisher says he likes an expression used by Michael Kreps, with Groom Law Group in Washington, D.C., who suggests that in crafting MEP legislation, lawmakers can take a “let a thousand flowers bloom” approach. His argument is that it is not necessary for the government to require a MEP to be run in just one way with one type of service provider. Instead, Congress can let providers innovate. There could be various structures of open MEPs—one that is centralized and homogenous for plan sponsors; one that is centralized, but offers choices that can be customized for employers; or even one that is not fully centralized and keeps some plan governance actions with employers.
“We probably can’t predict all the different variations that will emerge,” Swisher states.
Michel says employers currently have lots of options to outsource fiduciary responsibilities, but when they have the opportunity to participate in an MEP and completely shift the risk of day-to-day plan management, it could create a new way of thinking for plan sponsors. “Most of the time, if they can lay off risk, they will,” she says.
For this reason, Michel believes the conventional wisdom that MEPs will be a path for small employers is short-sighted. She contends that among large plans, there is not a lot of variance in plan design; there are some with special provisions, but with the introduction of automatic plan features, the uniqueness of plan designs has diminished. “If you’re a large plan sponsor, and 80% of your plan provisions are similar to that of a MEP, you’ll weigh the uniqueness of your plan against the risk of maintaining it yourself,” she says. Michel believes that, as better solutions evolve, all plan sponsors will evaluate shifting their responsibility to another entity.
Changes for plan advisers
Swisher says one of the flowers that may bloom will be a MEP with no advisers, “Those plan sponsors will get a different service experience—via mobile technology or phone—there will be no hand holding by an adviser,” he says.
However, he questions how such a MEP will be distributed and served. Swisher believes the adviser community is what gets plans distributed. “The notion that plans will distribute themselves has been proven false,” he says. “If we’re talking about closing coverage gaps, MEPs would have to cover plans for a very large number of employers. Even if there are state mandates, there will be no action without people to spur action along. Distribution is important to this.”
In addition, according to Swisher, some lobbying groups are trying to make sure open MEP legislation includes a provision that employers are responsible for selecting the fund options for their participants. If that happens, there will be different fund menus within an MEP, and there will be advisers helping employers.
However, Swisher does see the possibility for disintermediation. Current plan sponsors may each have advisers serving in various capacities, but if these plan sponsors join a MEP, there will be just one committee and perhaps just one adviser for all employers.
Michel says advisers will look to MEPs to deliver better solutions at a better cost structure. “Retirement plan advisers only have so many hours in a day, and they have to decide how to spend their time and with whom. They may have 100 clients and run investment reports quarterly with different parameters. To drive efficiencies, they will look to MEPs.
In addition, Michel says with large broker/dealers (B/Ds) not completely in the retirement plan market and not really knowledgeable about plan design, MEPs will provide more supervision. “A large organization with 20% of advisers focused on retirement plans and the rest who are really wealth managers—retirement plans are not their core focus—MEPs can bring them supervisory needs and professionals. It will help B/Ds deliver products to help advisers have guardrails to deliver what they are comfortable with,” she says. “It will help large advisory firms expand the number of advisers working in the retirement plan space without having to be knowledgeable about every aspect of the retirement plan market and steer them from making bad choices.”
Changes for plan providers
Both Swisher and Michel believe the use of technology has the ability to change how a retirement plan is managed. Swisher says open MEPs may accelerate the use of technology—but also create a less personal experience for plan sponsors and participants. Will technological ability drive what entity sponsors an open MEP?
Retirement plan recordkeepers are often risk averse and may not be the first to raise their hand to sponsor an open MEP, but once one does, there will be a reaction from the rest of the market, Michel says. Large recordkeepers will have an advantage—they will have captive clients, they can streamline a way to deliver services and they can deliver product solutions geared more toward turnkey support, she adds.
“Recordkeepers could be the biggest market disruptor. We’ve seen over the last decade more recordkeepers taking on 3(16) administrator duties; it is not far beyond that to sponsor MEPs,” Michel says.
Recordkeepers sponsoring open MEPs could lead to more disintermediation. For example, Michel says, if a defined contribution investment only (DCIO) provider is not on the list of options available for the plan, it can be disintermediated for a large part of that recordkeeper’s business. Likewise, if a recordkeeper that sponsors an open MEP was partnering with third-party administrators (TPAs), they could be disintermediated.
But, open MEPs may also mean a chance for more innovation, as MEP sponsors try to differentiate themselves in the market. For example, as Swisher mentioned, some lobbying groups are trying to make sure open MEP legislation includes a provision that employers are responsible for selecting the fund options for their participants. This could create more diversity of funds, more diversity of sales efforts and the notion of giving participants more choice.
In addition, Michel notes that the focus of much retirement plan market innovation has shifted from accumulating assets to helping employees with asset decumulation in retirement. “Open MEPs could be a new opportunity for more focus on how to deliver more robust solutions and engage more advisers,” she says.
Michel suspects that an entity outside of the retirement plan market could join it to sponsor an open MEP. Google and Amazon, for example, have the technology and are always looking for ways to add value.
Swisher believes there will also be different types of fiduciary service providers. “A service provider can’t sponsor a MEP, decide its own compensation, and tell employers, ‘You can leave the MEP, but you can’t change my compensation.’ That is a clear prohibited transaction under the Employee Retirement Income Security Act,” he says. He adds that after open MEP legislation is passed, there will need to be regulatory action including prohibited transaction exemptions and provisions for who will be the fiduciary of an MEP.“I have been saying for years, and continue to believe, [open MEPs] are poised for major growth. But, the entire industry will not be reshaped overnight, and it won’t be a complete toppling of the order of the day. Everything will happen gradually,” Swisher says.