A couple of weeks back, I found a Multiple-Employer 401(k) Plan (MEP) marketing piece by State Street Global Advisors (SSGA) that copied (without attribution) a 401(k) plan fiduciary hierarchy I had created for a blog. The piece claimed employers could fully outsource their plan’s hierarchy – and any personal liability for failing to meet its fiduciary responsibilities – to a MEP 401(k) provider. The problem? While outsourcing the 401(k) hierarchy is possible, outsourcing its liability is not.
In truth, there is no way for employers to fully outsource their 401(k) fiduciary liability. Whenever an employer outsources any portion of their 401(k) responsibilities (fiduciary or not) to their 401(k) provider, they retain a fiduciary responsibility to “monitor” that provider – to ensure they are doing a competent job for reasonable 401(k) fees. If an employer fails to meet their monitoring responsibility, fiduciary liability can result if participants are harmed.
Unfortunately, the SSGA piece is hardly extraordinary in its deceptive marketing of MEPs. MEP providers and their investment fund partners routinely tout plan benefits that either don’t exist or are just as accessible with a single employer 401(k) plan. The reason is simple - to protect asset-based fees that can quickly grow out of control. Fortunately, it’s not hard for employers to see through the deceptive MEP marketing and understand the facts – thanks to today’s 401(k) investments and technology, single employer 401(k) plans can offer lower fees and the same level of outsourced fiduciary services (if desired). These developments have made MEPs obsolete.
For those that don’t know, a MEP is a 401(k) plan that is co-sponsored by two more unrelated employers. For decades, trade associations have offered “closed” MEPs to members – which unaffiliated employers could not join. More recently, 401(k) providers have begun offering “open” MEPs – which any employer can join. Regardless of type, the MEP provider is considered their plan’s lead sponsor – with the employer co-sponsors being subordinate. Because MEPs can potentially co-mingle the 401(k) assets of hundreds of employers, they require more complex annual administration.
In return for their added complexity, MEPs are supposed to offer two key advantages over single employer plans - lower 401(k) fees due to “economies of scale” and unequaled 401(k) liability reduction. In truth, MEPs offer neither.
The truth about MEPs
By gathering the 401(k) assets of multiple employers, MEPs claim to offer lower fees and higher quality services to small employers with few 401(k) assets through “economies of scale.” This claim might have been true 10+ years ago, when unchecked hidden 401(k) fees – which are based on a percentage of assets - rewarded plans with lots of assets. However, that’s not the case today. Now, even start-up 401(k) plans with no assets can access low-cost investments and investment advice. Further, technology has made 401(k) administration services cheaper than ever to deliver, allowing 401(k) providers to charge low flat fees – which are based on employee headcount instead of assets.
While hiring an ERISA 3(38) financial advisor can be a great idea, I don’t recommend that employers outsource other 401(k) fiduciary responsibilities. That’s because monitoring a 401(k) provider with fiduciary (discretionary) control over plan assets or administration can be difficult to impossible – ironically increasing an employer's fiduciary liability. However, for employers that want outsourced 401(k) fiduciary services anyway, there is no shortage of single employer plan providers willing to deliver them – they’re not exclusive to MEPs.
Good luck getting out of a MEP
Typically, an employer’s process for terminating a 401(k) plan is straight-forward because the IRS considers a plan termination a distributable event – which means employees are immediately eligible to roll their accounts to a new retirement plan or take a cash distribution.
However, this simple termination process is not available with a MEP because employers lack the authority to terminate their portion of a MEP. That means employee accounts can be stuck in a MEP until they terminate employment or become eligible for an in-service distribution.
This under-reported MEP pitfall can easily trigger employee anger.
Don’t believe the hype!
I hate seeing deceptive 401(k) marketing! It erodes public trust in my industry - making employers less likely to sponsor a retirement plan and employees less likely to participate. MEP providers and their partners are often among the worst culprits. Their claims about lower 401(k) fees and unequaled 401(k) liability reduction just are not true.
In reality, a single employer 401(k) plan can offer lower 401(k) fees and more simple monitoring – making 401(k) fiduciary responsibilities easier for employer to meet.