The answer may be multiple employer plans (MEPs) and multi-employer plans. Replicating these structures with key design elements could drive coverage and savings rates.
Employers are risk adverse and avoid administrative burden and increasing business costs, however they may not understand the positive effects that retirement savings plans can have on employee engagement, profitability, and retention.
study of American workers by the nonprofit Transamerica Center for Retirement
Studies (see “Overcoming SmallFirm Retirement Benefit Challenges”), found a pervasive gap in plan
coverage. At small companies, only 36%
of part-time workers had access to a 401(k) or similar plan, compared to 68% of
Employers cite costs and administration as reasons for not offering a retirement plan, but small businesses make up more than 99% of U.S. businesses and nearly 50% of the private-sector workforce, so expanding coverage among small businesses is critical to enhancing retirement security.
Let’s consider the areas that can help workers retire comfortably:
- Coverage: In order for employees to save, businesses need access to a workplace savings plan that is not expensive, burdensome, or fraught with complexity and risk. Pooling assets and delegating certain responsibilities achieves scale and reduces risk. If your business is working with a professional employer organization (PEO), or if you are a member of an association or co-op, ask about available solutions.
- Savings Rates: Fifty-two percent of U.S. households have savings of $10,000 or less (see “Retirement PlanOffering Strongly Linked to Confidence”). To increase savings rates, MEPs or pooled retirement plans must have an automatic savings rate default of 6% with a 2% increase each of the next two years to achieve the 10% savings rate goal. Automatic enrollment has been successful for employers, and employee opt-out rates are typically low.
- Longevity Risk: American workers are concerned about outliving their retirement nest egg. Some form of annuitization coupled with active investment management must be available to those who are at or near retirement.
This all sounds simple, but it’s not that easy. While the tools exist, finding them can be a challenge. Once you have the tools, building the pooled retirement vehicle may be similar to building or restoring a classic car—finding parts and figuring out how they fit together can be difficult.
Associations, co-operatives, service providers, and advisers can remove complexity by providing tools that reduce cost and prevent the risk of future problems.
The bylaws of the association or co-op can be viewed as the blueprint needed to build the chassis. In this case, an MEP or master trust will serve as the savings plan chassis. The service providers are the mechanics that help construct the MEP.
In the case of an MEP, the bylaws must be reviewed to ensure that they only allow employers or members with two or more employees to adopt the MEP. There must be a “like industry,” and members must generally control the operation of the association and plan in form and substance with the same voting rights. Historically, the association must have offered other benefits to members—not just a retirement or benefit plan. Employee Retirement Income Security Act (ERISA) counsel can determine a qualified employer group under ERISA.
ChassisOnce the bylaws have been reviewed along with ERISA employer group considerations, the plan document, recordkeeping system, and trust/investment structure are added to the MEP chassis. An individually designed or volume submitter plan document, recordkeeping system geared toward MEPs and pooled investment vehicle are required.
Certain types of mechanics are required to assemble the MEP. While the association or co-op will be the named plan sponsor, they make high level decisions and ensure that the mechanics do their jobs correctly. They are not involved with day-to-day tasks.
- Third Party Administrator (TPA): TPAs ensure compliance testing is completed for all adopting employers. They keep plan documents up to date and make changes or amendments along the way. In most cases, TPAs serve as payroll remitters. They also prepare loan and distribution documents for the plan administrator.
- 3(16) Plan Administrator: 3(16) plan administrators have certain fiduciary duties related to overseeing and operating the MEP. They often act as surrogate plan administrators on behalf of the employer-member and association. The 3(16) can also quickly identify and resolve issues such as non-conforming employers.
- 3(38) Registered Investment Adviser (RIA): RIAs focus on investments including fund menu construction, fund selection or removal, benchmarking, and provider oversight. They help develop and manage a process to choose investments that are best-suited to the association. This includes drafting an investment policy statement, leading investment committee meetings, and assuming certain fiduciary responsibilities.
- Recordkeeper: Recordkeepers give the association or co-op breadth and depth as it relates to service and scalability. The recordkeeper can make the TPA and 3(16) plan administrator more efficient depending on their platform and technology.
Standard versus optional features
The idea behind MEPs is to standardize anything relating to plan design. This standardization creates economies of scale and ideally lowers cost over time. There is also flexibility with optional features such as employer contribution formula, vesting, eligibility, and entry dates.
There are tangible benefits to offering and participating in an MEP. The key is maintaining efficiency that allows for greater through put, reduced risk, lower fixed cost, and lower price. Associations and co-ops are searching for ways to increase member retention and acquisition—this benefit offers a significant way to achieve both goals while helping more Americans save for a secure retirement.
While the MEP is viewed by most as the preferred method of achieving coverage in the small market, not all associations or co-ops can sponsor an MEP. However, there are other solutions that can mimic the benefits of an MEP. Remember, nothing replaces strength in numbers in an association or co-op setting.
Jim Kais is the senior vice president of defined benefit and special market sales at Transamerica Retirement Solutions.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.Any opinions of the author(s) do not necessarily reflect the stance of Asset International or its affiliates.