Multiple Employer Plan Solutions on the Horizon
Multiple Employer Plans (MEPs) have garnered quite a bit of attention recently as lawmakers continue to discuss ways to provide small employers with more opportunities to offer retirement benefits for their employees. There are many benefits to Multiple Employer Plans (MEPs), especially in the small plan market. (Frequently addressed on 401kTV – (here, here, here, and here). However, the question looms, are these plans right for every small business? The answer is, it depends.
Vestwell founder and CEO Aaron Schumm made a pretty strong case in a recent InvestmentNews article that MEPs may not be right for all small employers. In other words, he encouraged small employers to stop and consider if MEPs are suitable for their company and employees rather than blindly jumping on board a speeding MEPs train with other small business owners. In case you haven’t heard of multiple employer plans allow groups of small employers to band together to create a larger, group retirement plan. The purported benefits to small company plan sponsors are that multiple employer plans deferred some fiduciary liability, administrative responsibility, and costs.
All fine and well. However, as Schumm aptly points out, MEPs can also be restrictive. In his words, “… they provide a one-size-fits-all solution in a world where customization has become king.” In short, MEPs fit like a glove for some plans; for others, not so much. Here are some of the cons, per Schumm:
- Multiple employer plans tend to be more complex than single-employer plans. Administration is an area in particular where mistakes can happen — ones that are expensive and time-consuming to fix.
- Multiple employer plans may also require detailed tracking of services and other offerings across multiple plans, which smaller employers may not have the resources or staff to manage.
- Oversight of multiple employer plans may be inadequate since participating employers delegate so much of the day-to-day duties to the entity that controls the MEP. As Schumm explains, “… while the Retirement Enhancement and Savings Act will eliminate the much-despised “one bad apple” rule — which requires plan sponsors to bear financial and other risks for other participating employers that fail to satisfy their compliance requirements — it does not address the day-to-day mechanics of how MEPs will be monitored for prohibited transactions, misuse of plan assets and excessive fees.”
Schumm offered specific examples where MEPs did not benefit certain small companies. In one scenario, a company that was part of a MEP wanted to adopt environmentally and socially responsible investments, for its fund lineup. However, the multiple employer plan did not provide for flexibility in choosing a plan’s investment menu, so the company would have had to move to an independent plan if it wanted to adopt those options. Plan design is another issue that may arise. For one company, facilitating profit-sharing became a concern, because it would have meant adding a more flexible vesting schedule than the multiple employer plan allowed. Schumm also mentioned hidden fees as another issue — one business ended up de-adopting a multiple employer plan because it was not informed up front that adding revenue sharing would cost an additional 25 basis points.
This is not to vilify multiple employer plans — they have many merits and provide options for small employers to offer retirement benefits if they are the right fit. Employers who are considering adopting MEPs need to ask the right questions from the start, to discern whether a multiple employer plan arrangement will work for their business and employees. In some cases, MEPs may not be the best option for a company. MEPs may be one-size-fits-all in their intention, but that doesn’t make them a universal retirement plan offering for every small business. Schumm asserts that once a business exceeds a threshold of 15 employees or fewer, employers need to evaluate the advantages of multiple employer plans vis a vis the unique needs of their company and its employees. In that context, multiple employer plans may or may not fit the bill.
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