What is a MEP 401k? (Multiple Employer Plan)
A multiple employer plan—or MEP— is a single retirement plan that can be used by 2 or more employers. MEP’s have been used successfully for years by trade associations and other similar professional employee organizations. Unfortunately, rules and regulations have prevented most small businesses from gaining access to them. A MEP 401k can be a powerful tool for small businesses to provide enhanced employee benefits at a much lower cost than if done on their own. A small business 401k plan can easily cost the employer $5,000 per year or more for maintenance, reporting, and recordkeeping. That $5,000 per year doesn’t include costs associated with fulfilling many fiduciary responsibilities such as employee education and investment selection and management. It also doesn’t cover investment or fiduciary financial advisor costs. As you can see, for small businesses the costs of establishing and implementing a 401k retirement plan can be hefty! In fact, for most small business it’s cost prohibitive to maintain a 401k plan.
Where does this leave today’s workers?
According to the Employee Benefits Research Institute, workers earning between $30,000 and $50,000 are 16.4 times more likely to save for retirement if they have a retirement plan through their employer. Unfortunately, the lack of a workplace retirement plan leaves most workers ill-prepared for retirement. Of course, there are other options to save for retirement. Subject to IRS rules most workers can fund an IRA or Roth IRA. Some workers may opt for (generally) high-cost life insurance based savings plans. Still, others may choose to invest their money on an “after-tax” basis. IRA’s have limitations ($6,000 for 2019 or $7,000 if you’re over 50) which will not meet the savings needs of most workers in retirement. Granted these numbers do index upwards for inflation, but $6,000 per year for a 30-year-old worker hoping to retire at age 65 growing at 7% is only $829,421. That same nest egg could generate $66,840 per year ($5,570 per month) for 30 years in retirement. That may sound great, but the reality is it does not include taxes or inflation. Taxes aside (because tax calculations vary widely), taking out 3% per year for inflation the monthly income is closer to $1,621 in real dollars. That’s not enough to enjoy retirement by most peoples standards! Other savings alternatives like life insurance programs are incredibly costly and generally have lower returns than a high functioning 401k plan with low-cost investments. Moreover, investing on an after-tax basis – well the numbers get worse from there as you’re paying taxes each year and lose that tax-deferral. Perhaps these limited savings options are why 40% of American workers don’t have confidence in their ability to retire comfortably. Maybe it’s also why President Trump recently signed an executive order to expand access to workplace retirement plans through MEP’s!
Nexus and “Bad Apples”
Under current legislation, MEP’s are quite limited. To establish a MEP, all employers must share a common nexus, or connection — for example, all franchisees of a fast food chain or all members of a trade organization such as marketing or architecture firms. Without this nexus, employers are considered separate and unrelated. In this case, they’d separately need to file the 5500, hold separate insurance, and be responsible for their plans investment decisions. To make matters worse, under the “bad apples” scenario a group of employers who band together to create a single 401k plan would only be as strong as the weakest link. Should one employer break the rules, the entire group plan could be disqualified. The nexus requirement and bad apple liability make group retirement plans highly unattractive.
Who’s got the fiduciary liability in a MEP?
Under a MEP the sponsor is generally considered to have an ultimate fiduciary responsibility. This means the MEP sponsor must abide by all rules and regulations as they usually would for their plan, however, the burden is more substantial because the addition of multiple employers casts a wider liability net so to speak. At the core of these fiduciary responsibilities lies all investment decisions, plan structure decisions (such as auto-enrollment and auto-escalation), and the overarching obligation to not only provide a great retirement plan but to ensure all participants within the plan are educated. These responsibilities cannot be taken lightly. On the investment side, it’s highly advantageous for the MEP sponsor to engage the services of a 3(38) fiduciary. Haven’t heard of a 3(38) fiduciary yet? You’re not alone! A 3(38) fiduciary takes the highest level of responsibility with any plan engagement. While a 3(21) fiduciary (the majority of advisors) will provide recommendations to the plan, a 3(38) fiduciary makes the decisions and takes that burden off the plan sponsor. A 3(38) fiduciary can ONLY be:
- An RIA (Registered Investment Advisor)
- A bank
- An insurance company
This requirement—and the responsibility/liability—excludes the overwhelming majority of financial advisors (roughly 80%) engaged in 401k plan business. As a MEP sponsor obligated at the highest level to all plan participants, it only makes sense to engage a 3(38) plan fiduciary.
What are the benefits of a MEP?
Economies of scale. Put simply, small business can’t compete with the buying power the government Thrift Savings Plan or Microsoft’s 401k plan has. A MEP allows business to band together to provide that same type of buying power. That buying power is MASSIVE! Take for example standard fees on a 1.25 million dollar 25 person 401k plan. According to the 401k Averages Book (16th edition):
- The total plan cost per participant is $768
- The average investment expense is 1.38%
- The total bundled expense is 1.54%
- Of the total fees, financial advisor/revenue sharing fees are .85%
Assuming that same average account balance ($50,000 per participant), the fees on a typical 1,000 participant plan with $50,000,000 in assets:
- The total plan cost is $486 per participant
- The average investment expense is 0.95%
- The total bundled expense is 0.97
- Of the total fees, financial advisor/revenue sharing fees are .40%
The scale of a larger plan can equate to very substantial savings for workers. It went from 1.54% total costs to 0.97% total costs or about a third less!
What can those savings do for the average worker?
That’s the MAGIC question! Most people don’t realize the power of “a little.” Small hinges swing big doors, and this is the perfect example. Take for example your average 30-year-old who wants to retire at age 65. She’s got 35 years to save. In situation #1, she has an average 401k plan at a small company. In situation #2, she’s part of a bigger plan as a multiple employer plan. She’s a hard worker making $50,000 per year and saving (a recommended minimum) 10%. She’s also highly ambitious and climbing the corporate ladder, so her pay increases by 5% per year. Her investment strategy is a balanced growth-oriented portfolio and averages 7% per year.
As you can see, there’s a HUGE advantage for her access to a low-cost plan such as a MEP. That advantage equates to a little more than $200,000 over her lifetime! Dare I ask the question “What would you like to do with an extra $200k in retirement?” That same $200,000 at 7% equates to an additional $1,300 per MONTH over her 30 years of retirement spending. I’m pretty sure most of us could find great utility in that extra money, especially when it cost nothing to get it, just access to the right retirement plan . . .
What’s next for MEP?
Only time will tell. I’ve advised 401k and other retirement plans for over 23 years. Under President Obama, I saw the first “real” push at helping expand and protect retirement plan options for the masses of workers who don’t have access to one. President Trump seems to be carrying his torch with his “expand MEP’s” directive (although I’m sure he would call it “his” torch). I highly suspect MEP’s will open up shortly. The nexus rule will be erased, or a more “lenient” version will be put in place. The “bad apples” rule will eventually go away, and voila! American workers (specifically the business who employ them) will have greater access to save for retirement than ever before!