MEPs have been floated as a way for small employers to somehow pool resources and negotiate better 401(k) deals that are supposedly available only to large employers. A great deal of lobbying money and Congressional attention has been invested in expanding MEP availability. Incoming Senate Finance Committee Chairman Hatch has authored a bill that makes the expansion of MEPs a key part of 401(k) reform legislation. The “open” MEP concept has also been included in other proposed legislation. Expect it to be reintroduced in 2015.
What’s not to like? Plenty. The idea that small employers cannot provide low-cost plans to their employees is a myth perpetuated by vested interests in the financial services industry. MEPs are a solution to a problem that does not exist – and they bring other potential risks to small employers.
The case for open MEPs is that by streamlining plan design concerns and standardizing investment line-ups across many small business 401(k) plans, small employers can pool resources and negotiate better deals with plan service providers – just like the big employers do. That made sense about 25 years ago when mutual funds had 4.5% loads and index funds did not exist. Today, low cost plans are available to all employers regardless of size or assets.
So why the push for open MEPs?
Because of lobbying from Wall Street interests. The big fund companies want them because they are a cheap way to gather assets from small business 401(k) plans. Actively managed mutual funds have lagged passive index funds in 401(k) plans – especially at the small end of the market for years now, and the gap is growing. In addition, the distribution model of relying on brokers or investment advisors for retail distribution is expensive. MEPs represent a way to open up a new direct-sold channel to small business 401(k) plans that eliminates the cost of the broker-dealer middleman. It’s simply a novel way to “bundle” 401(k) services – the same tired, expensive product in a bright shiny new wrapper.
The “designated service provider”
The “designated service provider” concept attempts to overcome the weaknesses inherent in MEP administration. Under the Senator Hatch’s SAFE Retirement legislation, the government would regulate MEP service providers. Those meeting new Federal standards would not be subject to the current rules that can cause a MEP to be disqualified if one employer breaches fiduciary duties. The need for the regulation speaks eloquently to the flaws in the current process. Implicitly, we need new regs because the current arrangements are not adequate to make MEPs a good option for America’s workers.
Small businesses have plenty of high quality low cost options available. We don’t need a new marketing tool from Wall Street.