“401ks are the best way for employers to offer a retirement savings plan and for individuals to save for retirement.” This is the marketing the 401k industry has been pushing since it was created almost by accident by the Revenue Act of 1978. And we’ve all bought into it at some point in our lives. Maybe you still believe it. If you do, you could be forgiven for taking this statement as gospel.
The 401k industry, through herculean lobbying efforts and behemoth marketing budgets, has sucked all the air out of the public conversation around retirement savings plans. In fact, unless you work in finance or HR, you might not even be aware that there are other options. Options that could reach the 81 million private sector workers without access to a 401k.
By dominating the conversation about retirement savings, the 401k industry has created a vacuum of information. And in that vacuum, arose the Multiple Employer Plan (MEP). Because if you’re a small business, you can’t afford to dedicate the financial resources and manpower it would take to set up and maintain a 401k plan for your business. It comes with too much risk due to the employer’s fiduciary liability, it’s too expensive and with the many hats small business employees must wear, it’s too complicated for them to navigate.
So in rides the MEP on a white horse. “You need to offer a 401k,” the industry says. “We can help you,” they claim. “It’ll be cheaper, less risky and way easier because we’ll do all the plan management for you.”
These statements might have been true at some point in the distant past, but are definitely not true today. Which is evidenced by the growing number of ERISA lawsuits now plaguing the MEP industry.
Here’s the truth: the 401k industry created MEPs to access a new clientbase. Not to benefit the plan participants. They pool a bunch of small businesses into one 401k so that the 401k has more assets (i.e. money) to manage. And since the industry makes money off of assets under management (AUM), the more money they have in each 401k, the more profitable that account is to the MEP administrator.
“But isn’t there some ancillary benefit to the small business? Like lower cost due to economies of scale?” No. In fact, due to technological advances it’s now often cheaper for a small business to open a single employer 401k than it is for them to join an MEP. That’s because MEPs commingle the funds of multiple companies and are incredibly complicated to manage. It can’t be done cheaply.
“What about fiduciary risk? Doesn’t the MEP administrator take that on?” No. The MEP administrator might share the fiduciary risk with the employer, and it might tell the employer it takes the fiduciary risk, but due to ERISA rules, if the employer is offering a 401k, it maintains a fiduciary duty to its employees. So in the case of an MEP, the employer is responsible for monitoring the MEP administrator to ensure its operating the plan to the benefit of plan participants for a reasonable cost. Which is really hard.
“Isn’t it simpler to outsource the management of the 401k plan to the MEP administrator?” Nope. Monitoring an MEP is exceedingly complicated. Here’s why: the MEP administrator maintains all discretionary power when it comes to managing the 401k. So the individual employers don’t have a say in which investments are offered to their employees, plus, their interests are competing with all of the other employers in the plan.
Add to this, the basic 401k rules. Staying in compliance with ERISA rules regarding rebalancing and discrimination on an annual basis is hard enough for a single employer 401k plan. But now, each employer has to worry not only about their own company staying in compliance, but every other in-plan company staying in compliance as well. For if one company is out of compliance, the entire plan is at risk.
The lack of power individual employers have within an MEP adds another complication. Once an employer signs up, that’s it. Their employees are in the plan until the plan itself is dissolved or the employee leaves the company. That’s because participating companies do not have the right to individually terminate. This has led to hundreds of thousands of dollars of assets being held hostage from employees who want to move their assets elsewhere.
In creating MEPs, the industry took a complicated inefficient product and made it worse. Then they sold it as something it wasn’t.
There was a time when 401ks made sense: when people worked for the same large company for 25 years or more, then retired. But that time has passed. Now, the average person will work for about 12 companies throughout their career (Bureau of Labor Statistics) so businesses large and small need to look beyond the 401k.
The retirement savings plan that is actually cheaper, simpler and less risky for small businesses is a payroll IRA like Icon. With a payroll IRA, your employees get personalized saving and investing with automatic savings and pre-tax contributions, with the added benefits of lower fees and full portability. Employers get the benefit of low cost and easy set up, as well as no fiduciary responsibility or complex plan management. And because the plan is non ERISA all types of employees qualify, W2 and 1099.
