Small Business 401(k) Plans – I hate to criticize a bipartisan effort in the US Senate, but…
On January 29, 2014, U.S. Senators Bill Nelson (D-FL) and Susan Collins (R-ME) introduced the Retirement Security Act of 2014, a bill intended to encourage small employers to offer retirement plans by reducing plan administrative costs and encourage employees to save more. Sounds good, right?
The problem is this – the way the bill gets to lower costs is to allow unrelated small businesses to join “multiple employer plans,” or “MEPs.” The thought is that small businesses can spread administrative costs over multiple businesses and thus lower costs. But MEPs are chock full of significant limitations that often leave business owners frustrated.
It used to be small employers wanting to start a new retirement plan had limited options that were often expensive or offered limited investment choices. This is no longer the case. As I have blogged before – it’s new technology that has allowed providers to compete away the high costs of plan admin and investments. Employee Fiduciary clients pay low, non-asset based fees and can choose almost any investment for their fund lineup. We have yet to see a MEP that can beat Employee Fiduciary on fees and investment choice.
Even if a small business 401(k) plan could save some money with a MEP, it would still need to weigh the negative baggage inherent in MEPs. Specifically:
- MEPs are more complex than single employer plans. Under a single employer plan, each plan has its own trust account. Under a MEP, multiple plans share the same trust. This means more accounts, and in turn, more trading and reconciliation. In other words, more moving parts, and increase potential for errors.
- An employer that chooses to co-sponsor a MEP may have limited plan design and investment choices. MEPs frequently require all the co-sponsors to elect the same (or similar) plan provisions and investment options in order to simplify plan administration and reduce costs.
- Each employer must count service performed for the other co-sponsoring employers for determining eligibility and vesting. That means tracking service time cooperatively across all MEP employers.
- MEPs may be more prone to abuse than a single employer plan. A recent GAO study of MEPs (http://www.gao.gov/assets/650/648285.pdf) noted a “concern about whether MEPs are any more or less prone to abuse than other types of pension arrangements. Labor officials said the potential for inadequate employer oversight of the MEP is greater because employers have passed along so much responsibility to the entity controlling the MEP. Labor officials noted that potential abuses might include layering of fees, misuse of the assets, or falsification of benefit statements.”
- Each employer must count service performed for the other co-sponsoring employers for determining eligibility and vesting.
The Frugal Fiduciary 401(k) Help Center – Bottom Line Recommendation
MEPs just don’t pass the “frugal” test. Too many drawbacks without clear advantages for small businesses. Simply put, gone are the days where a small employer had to pay an arm and a leg for a quality stand-alone retirement to cover their employees.
Senators – please reconsider the MEP aspects of your legislation and instead focus on strengthening fee disclosure rules. Competition through transparent pricing has, and will continue to drive down the cost of retirement plans for all.