In 401(k) Plans for Small Business

Multiple Employer Plans (MEPs) have been recently touted as a recent legislative success to help small businesses start 401k plans. And while we support any policies that help increase access and lower the cost of providing 401k options to small businesses, there are also some major drawbacks, in terms of reduced flexibility and additional potential fiduciary issues, that plan sponsors should understand before they commit to these structures. In a nut shell, I believe MEPs are not “all that”.

The Case for Multiple Employer Plan (MEPs)

Most small business do not sponsor a 401k, even though this is a valued benefit for employees that could help with employee recruitment and retention. A Multiple Employer Plan is a plan that is established between two or more unrelated employers. In concept, each additional employer “piggybacks” on the work done by the initial co-sponsor of the MEP. While the piggy-backing employer loses flexibility on customizing a plan for their situation (the plan must be exactly the same for all of the co-sponsors), there is an opportunity for some costs savings. Advocates of MEPs argue that this effective “group purchasing” model can amortize the fixed start up costs of a 401k plan and centralize fiduciary responsibilities. For small businesses that do not want to spend the time to figure this area out for themselves, it appears to be an easy solution. However, practice often conflicts with reality.

What are the Fixed Costs to Administer a 401k Plan?

One of the strongest arguments for Multiple Employer Plans is that they amortize high 401k administrative costs over a larger base of employees, thereby bring the cost of the benefit down. This case is particularly relevant for high cost recordkeepers and third party administrators. However, if you carefully pick the right provider, and it may not be as much of an issue as you think (see below).

What are the Ongoing Costs to Manage a 401k?

The second important factor used to justify the use of a MEP is it helps reduce the fiduciary burden on the plan sponsor. What is a fiduciary burden? It is the legal obligation of the plan sponsor and trustee to perform certain tasks. The Department of Labor outlines these responsibilities as including:

  • Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
  • Carrying out their duties prudently
  • Following the plan documents (unless inconsistent with ERISA);
  • Diversifying plan investments;
  • Paying only reasonable plan expenses;

Granted, this appears to be an intimidating list of obligations that many small business owners have little (or no) interest learning how to navigate. However, being part of a Multiple Employer Plan doesn’t absolve plan sponsors from all of these obligations. In fact, being a part of a MEP may make it more difficult to monitor the plan, due to complexity and delegated decision making structure.

Isn’t There Another Way Besides Multiple Employer Plans?

I would ask yourself some basic questions before jumping on the MEP band wagon.

How much money are you really saving?

It should not cost more than $1,200-1,800 plus a modest per participant annual to administer a “plain vanilla” small business 401k plan. I utilize some recordkeeper & TPA that can administer a 50-participant 401k plan with $100,000 in assets for approximately $45/participants plus 0.10% investment management fee. There are few, if any, Multiple Employer Plans that can match this pricing structure.  In addition, there are related costs – accounting, payroll administration & coordination – that also need to be figured into a full cost analysis.

How Do I Navigate the Complex World of Fiduciary Responsibility?

One of the easiest ways to do this is to hire a Registered Investment Adviser (RIA) that has an ERISA focus. Most financial advisers only advise on 1-2 401k plans and are largely unfamiliar with all the nuances of this area. I believe that “market” Investment advisory fees range between 0.50-1.00% of assets under management – or about $500-750/year on a plan with $100,000 in assets. This fee should include education, investment security recommendation, and monitoring. I strongly believe it is the education part of my practice that is most valued by participants, but it is the service that is most often not delivered by other financial advisers. Most 401k participants simply get befuddled by the investment process and need independent help to navigate this complex world.

How Much Flexibility & Service Do I Gain by Sponsoring My Own Plan?

Lots. You gain an ability to change plan design, investment selection and 401k participant services, just to name a few.

  • Plan Design: Plan design can be changed to match the current business condition for your business. Therefore, if the sun is shining on your business, you may want to make tweaks to the plan to offer more generous benefits to attract and retain workers. If you participate in a Multiple Employer Plans, you cannot make any changes to your plan. If business conditions deteriorate, you may want to reduce certain benefits to cut costs, but maintain the plan.
  • Plan Termination: For some, MEPS could be like a 401k Hotel California, where you can check in, but it is very difficult to leave. For instance, you can’t just terminate your MEP 401k plan, as it is also a plan for multiple other employers who may be experiencing different business conditions. What you would need to do is transfer the assets to a self-sponsored 401k and then terminate that new plan. While not impossible, certainly it would be a large pain in the administrative neck.
  • Investment Selection: Investment selection can be changed to match the demographics of the participant population and needs. For instance, some participants approaching retirement may want an active manager monitoring their investments to make prudent capital allocation decisions on their behalf. Other may not care and choose to opt for a low cost index fund. However, there is no better investment line-up that has well thought out options, as participants can choose the right investment product for their investment strategy.
  • Service: Finally, there are hundreds of ways to dial up (and down) participant services. You may opt for a vendor that has a 401k which is integrated with your payroll services. While these vendors are “more expensive” on the surface, they can make the cost of compliance fall for your accounting staff (and those that manage them!). In addition, these vendors often have world class internet, mobile and phone support.

In summary, it is a complex world out there. If you want some help navigating it, help consider giving me a call first before you jump into a situation that is difficult to unwind.

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