Open MEPs Will Be a Retirement Plan Market Disruptor

A reiteration of the Retirement Savings and Enhancement Act (RESA), the major provisions of which would open the door for use of multiple employer plans (MEPs) for unrelated employers, was recently introduced in the House of Representatives.

During a webcast hosted by Ignites, Pete Swisher, senior vice president and national practice leader at Pentegra Retirement Services, in White Plains, New York, said only 4% of bills actually become law, so he wouldn’t make any prediction about the passage of the legislation, but he said he believes the retirement industry will continue to see a variety of structures that will promote open MEPs. He expects companion legislation to be introduced in the Senate soon, and noted that RESA has “massive” bipartisan support.

Swisher reminded webcast attendees that pooled employer plans (PEP) are not new; RESA is about who is allowed to sponsor an MEP. Last October, the Department of Labor (DOL) issued a proposed rule for Definition of “Employer” under Section 3(5) of the Employee Retirement Income Security Act (ERISA) – Association Retirement Plans and Other Multiple-Employer Plans. The proposed rule fell short of allowing for open MEPs, which would not require that participating employers be related in some way, but opened the door for professional employer organizations (PEOs) to offer association retirement plans. However, this still requires employer members of the plan to have contractual relationships with the PEO; the proposal did nothing to eliminate common nexus requirements—such as industry or geography—currently imposed on closed MEPs.

Stakeholders have urged the DOL to expand on its association retirement plan proposal, and Swisher said final regulations are expected soon.

Kelly Michel, chief marketing officer for Envestnet Retirement Solutions (ERS) based in San Jose, California, told webcast attendees she expects passage of legislation allowing for open MEPs to pass, and soon.

The road to MEP implementation

However, even if legislation does pass soon, it will be some time before open MEPs will be up and running. “The big deals [in implementing open MEPs] are who can sponsor one, who can provide services, who can get paid, and can a service provider be fired from its own MEP?” according to Swisher. Regulations will need to be proposed to answer these questions, with a comment period offered, and final regulation will not be issued until comments are reviewed and any changes to proposed regulations made.

The answers to some of these questions will require prohibited transaction exemptions (PTEs), Swisher noted. “The employer as the plan sponsor is not getting paid, is looking out for employees, and can choose fiduciaries and service providers. How will that work for MEPs? Is the provider the plan sponsor? Who’s setting compensation? Can an MEP provider choose other providers?” Swisher queries.

He contended that either joining an MEP will mean a plan sponsor has chosen an administration/recordkeeping provider, and that may be enough, or an independent fiduciary will be required to oversee open MEPs.

A disruptor in the retirement plan market

“My personal take is MEPs will be the next big disruptor for the retirement plan market. They will impact nearly every single stakeholder,” Michel said.

For one thing, while the hiring of a 3(16) plan administrator is somewhat a newly pushed idea, Michel said with MEPs, the role of the 3(16) plan administrator will be critical. “It will make or break an MEP’s success,” she said.

Roles will change. Michel said for employers, it will be a matter of how much control they will have and whether they can avoid some fiduciary duties. If a recordkeeper decides to sponsor an MEP, the businesses of third-party administrators (TPAs) and advisers may be impacted. Each employer may use its own adviser, but will the MEP offer one adviser. Likewise, will it use just one TPA or no TPA at all? If a broker/dealer or adviser decides to sponsor an MEP, who will it use for recordkeeping and TPA services or as an investment provider or adviser? “Who the broker-dealer or adviser decides to use may encumber other organizations from working with them on their other business,” Michel said.

She added that recordkeepers and advisers will need to change their distribution and marketing efforts to bring in plans to MEPs.

Swisher said typically plan providers don’t want to take on more risk, but, on the other hand, they want to expand their business. “I think there will be a diversity of models for MEPs. Providers will want to preserve something as close to their current business model as possible,” he said.

Michel agreed that typically recordkeepers especially have tried to avoid taking on fiduciary responsibilities, so she said she thinks there will be a new entrant into the marketplace—a large entity that can introduce something not in the marketplace today. “Think Google providing something for constituents,” she said. According to Michel, this will create reaction from the rest of the marketplace—others will have to respond to that. “It only takes one disruptor to drive activities among other stakeholders,” she said.

Other than the changing roles of stakeholders, Michel said she anticipates an increase in automatic retirement plan features, risk mitigation and simplification of administration. “Plan sponsors think they are unique, but usually the majority of plan design is similar,” she contended.

Will retirement plan coverage improve?

One of the main goals of legislators in passing MEP legislation is to increase retirement plan coverage for American workers—especially those employed by small businesses.

Swisher said, “Everyone thinks this will improve coverage and make retirement plans super cheap. I don’t agree.” He added, “It won’t take a $600 thing and make it a $200 thing, which would have to be done to increase the coverage. The fiduciary focus will be on getting it right, which will drive up costs.”

However, he conceded that having multiple plans with assets pooled together will increase purchasing power. He also said he thinks there will be a lot of MEPs, not just a few big MEPs, so there will be competition, which may help lower costs.