How open MEPs could hit 401(k)s, advisers

Open multiple-employer plans have the potential to shake up the 401(k) industry, and banks and insurance companies stand to benefit from the disruption.

As such plans begin to emerge in the wake of the SECURE Act’s passage, they could consume some of the assets that would otherwise flow into traditional employer-sponsored plans, said Fred Reish, a partner at Drinker Biddle & Reath.

But the plans will also present an enormous opportunity for financial advisers who have some level of retirement plan business.

“Virtually everyone agrees [open MEPs] will have some impact. But if you go beyond that, what will be the most impactful scenario, they would cannibalize individual 401(k) plans,” Mr. Reish said.

So-called “open” multiple-employer plans were authorized under the sweeping Setting Up Every Community for Retirement Enhancement Act that Congress approved late last year as part of the government’s 2020 spending package. In the SECURE Act, the plans are referred to as pooled employer plans, or PEPs.

The new rules differ from current MEP regulations, which limit membership in plans to businesses that have some type of affiliation. In addition, Congress did away with the “one bad apple rule” that could disqualify plans if one employer was out of compliance, which reportedly had discouraged many employers from joining MEPs. Those changes could dramatically expand the use of the plans.

Smaller employers that are on the fence about starting up a 401(k) plan for their workers instead could easily be persuaded to join a PEP, Mr. Reish said. Moreover, some existing small plans could move their assets into PEPs, which often could result in lower fees for participants and some fiduciary relief for employers, he said.

Initially, the participants in the plans will likely be small businesses, with banks and insurance companies being among the first to pursue that business, he said.

Financial institutions such as the Bank of America could benefit, if they opt to go into the PEPs market, as they have the advantages of a record-keeping system and a distribution arm in the form of Merrill Lynch, he said.

Big business

And the brand strength that BofA or another bank would bring to the PEP playing field could attract larger employers to the PEPs they could set up, he said. In that scenario, PEPs could see a deluge of assets.

“Over time, the companies signing on for plans may get bigger and bigger,” Mr. Reish said.

The ease of outsourcing fiduciary responsibility for plan design and investment selection will be a draw for larger employers, and using PEPs could allow them to realize cost reductions compared to their existing arrangements, said Rick Jones, senior partner for retirement solutions at Aon.

As PEPs begin to be developed, the industry could see new associations or nonprofits emerge that focus on the plan type, Mr. Jones said.

“From a target perspective, most of the attention [currently] is on that third of the workforce that is not covered by an employer-sponsored retirement plan,” he said.

According to the Department of Labor, about 38 million working Americans do not have access to employer-sponsored plans.

That puts many workers at an extreme disadvantage when it comes to saving for retirement, a recent paper from T. Rowe Price suggests.

The firm last year surveyed more than 3,000 plan participants, 600 people without access and 250 who have access to plans but opt not to participate. Among T. Rowe's findings is that people over 50 are 16% more likely to say they feel confident about being able to retire if they participate in a plan.

More tellingly, plan participants reported having much higher levels of savings than those who do not participate. Account owners have a median of $172,000 in household assets, compared with $7,000 for those without access to plans and $2,000 among those who opt not to participate in plans, according to T. Rowe.

Opportunity abounds

PEPs present “potentially a very large opportunity for financial advisers, whether they concentrate in the 401(k) space” or merely dabble in it, said Harry Dalessio, head of institutional retirement plan services at Prudential.

“It gives them the opportunity to offer a simplified approach to their clients and spend less time on the day-to-day oversight of the plan,” since the oversight is being outsourced to third parties, Mr. Dalessio said. The forthcoming market for PEPs will give advisers “the opportunity to scale their businesses and scale their staffs in a much different way.”

Because plans will be built from scratch and could apply “best practices” for automatic features, default asset-allocation investments and a focus on retirement income, they could become “a model for an end-to-end retirement plan for U.S. workers,” he said.

Prudential has been evaluating the possibility of entering the PEPs market, and it will likely decide whether to do so later this year, Mr. Dalessio said.

“We have not participated at the smaller end of the market for number of years – we’ve primarily been focused on the mid- to large corporate market segment, as well as the tax-exempt market,” he said. “That’s an area where we don’t look to be a first mover – perhaps a fast follower in our own unique way.”

Whether existing retirement plan clients will consider moving from their own plans to PEPs has yet to be determined, he said. One big question is whether employers would consider adopting such plans in lieu of their own, if the costs and benefits of each are equal, he said.