Legislation in the U.S. House proposes sweeping changes that could disrupt the current status quo in the retirement industry, increase the attractiveness in having a retirement plan for small employers, and result in an archetype shift for the advisers and recordkeeping providers who serve them.
According to the most recent data from the Bureau of Labor statistics, fewer than 50% of private sector employees have access to an employer-sponsored retirement plan. Most without access work for companies with fewer than 100 employees.
Congress hopes to increase small business retirement plan participation by making multiple employer plans (MEPs) accessible to any business, without requiring businesses to share an industry, geography or affiliation. Currently, federal law restricts participation in MEPs to businesses that have some sort of association, usually by industry or occupation. The emerging “open-MEP” model eliminates many legal barriers, enabling unaffiliated businesses to combine resources, take advantage of economies of scale and lower administrative costs.
Typically, small businesses that sponsor retirement plans rely on a local adviser to manage assets and facilitate the plan design process. Advisers who currently service small businesses rightly wonder what the industry will look like if this new legislation becomes law.
At a high level, there are two main ways the open-MEP market could take shape. One of these would be from the bottom-up and adviser-driven. The other potential approach would be top-down and driven by recordkeepers. The former could mean a wider opportunity for advisers to grow their services across more small businesses. If, on the other hand, recordkeepers or other aggregators grab the market, then it could mean serious disruption for local advisers.
Bottom-up open-MEP market driven by local advisers
One hope of Congress is that open-MEPs would increase access and reduce barriers for small companies to provide retirement benefits to their employees. If successful, there could be a sharp increase in new participants within the U.S. defined contribution marketplace, and new plans may be facilitated by the local adviser. As the first access point to retirement plans for many small businesses, local advisers may have the first opportunity to capitalize on existing client networks.
Advisers may be able to act as a gateway for new and existing small business clients to move to provide retirement to their employees by joining open-MEPs. Advisers will be needed to support participants and to provide education as the number of plans and participants swell.
While there is a likelihood that availability and proliferation of open-MEPs will enhance the opportunity for advisers to interface with a larger number of small business owners, it is likely that their role and compensation will no longer center on plan investment responsibilities.
Regardless of whether local advisers remain the central figures in providing investment advice for small plan investments, they are likely to have a significant role in sales and education regardless of how open-MEPs change the retirement marketplace.
Top-down MEP market driven by leading recordkeepers and other larger retirement services providers
The reality is that the existing MEP market is already serviced by large recordkeepers that bring the scale and experience of managing thousands of plans on complex recordkeeping platforms. Several of the top recordkeepers have developed recordkeeping capabilities to manage MEPs and to deliver the enhanced fiduciary services needed to easily transition to an open-MEP model.
These recordkeepers will have a leg up on creating and growing open-MEPs. Leading payroll services providers are good candidates to take a bite out of this potential market, too; they already have a small business client base and recordkeeping services.
Today, local advisers often provide advice or even discretionary management to plan sponsors regarding plan investments. Under an open-MEP, this approach would belie one of the key benefits of most MEPs—the aggregation and concentration of money into investment sleeves to increase buying power, increase investment policy oversight and lower costs. With the leverage of large asset pools, most open-MEPS will be managed by institutional investment managers. This is a good thing for small-business employees, but not necessarily a good thing for advisers.
At the same time, the open-MEP market will likely coalesce around a variety of specialized open-MEPs that target specific industries and employer/employee characteristics. For example, current MEPs sponsored by some professional associations offer a wide array of complex investment options. Such offerings may be appropriate for groups such as doctors and lawyers, but may not be appropriate for other industries in which employees are generally not investment savvy. In some open-MEPs, it will make sense to significantly limit or simplify investment options, as many sponsors do today.
Given this potential landscape, the expectation is that many local advisers could primarily serve in a consultative capacity, helping small business owners decide which open-MEP would be right for their unique employee needs. They’ll also serve in an educational capacity, helping employees navigate investment options and the enrollment process.
It’s not clear who will lead
At this stage it’s too early to know for sure how things will play out with the key players and potential growth of the small plan pool. Nevertheless, it looks increasingly likely that open-MEPs will become reality, maybe as soon as this year. A wait-and-see approach won’t work. Advisers must prepare today for potential outcomes, and be ready to capitalize on every opportunity.
*Note from the editor* This feature article is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of PLANADVISER Magazine or Institutional Shareholder Services.