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Exclusive Interview: Pete Swisher Explains Why Companies Don’t Care About MEPs (or PEPs or Even 401k Plans)

Exclusive Interview: Pete Swisher Explains Why Companies Don’t Care About MEPs (or PEPs or Even 401k Plans)
February 19
00:03 2020

Our readers have been asking us to interview Pete Swisher and we are more than happy to oblige! Pete is Founder and President of Waypoint Fiduciary LLC, and is known nationally for his work on retirement plan governance. He is a prolific writer and speaker for the financial community and was the founding Chair of NAPA’s government affairs committee.

In 1988 he graduated with a degree in Linguistics from the University of Virginia, where he was selected for the prestigious Echols Scholar Program. He served in the first Gulf War as Executive Officer of a U.S. Marine infantry company. He lives with his family in the horse country of Central Kentucky.

FN: Pete, great to have you for February’s Exclusive Interview. While we’ve quoted you in past articles, this is the first time you’ve been the subject of this monthly feature. Tell us a little bit about your background. What led you to where you are today?
Swisher: My road has probably been the less travelled one when I compare my own journey to others’ in financial services. I was a relative latecomer, starting as a retail financial advisor at age thirty after serving in the Marine Corps after college. I gravitated early to employee benefits and especially retirement plans, and felt a real affinity for the spirit of being a fiduciary because it matched well with the values I was taught as a young officer, and the oath of office I took (which still binds me), feels just like the responsibility I accept as a fiduciary, and that is meaningful to me. So my career unfolded as that of a salesperson who is also a fiduciary, and who studied hard to become an expert. I think most people in the industry would probably define me first by my expertise, but I define myself first by my oaths.

FN: Talking about 401k MEPs in particular, when did you first get interested in them and what attracted you to them?
Swisher: MEPs go back more than ten years for me, to when I was fortunate to be involved in operating and growing a pair of fledgling MEPs—a 457(b) and a 401(a)—for municipalities. Also, like most people in the business, I was involved in cases where the plan was technically a MEP because the companies were related but not a controlled group. And in those early days I would get questions from advisers about association plans and other group programs, and even though I didn’t know the answers at that time it started me asking the right questions.

FN: In the past, not many people – especially 401k plan sponsors and small business owners – were familiar with the MEP concept. How did they initially react when you talked to them about it?
Swisher: Business owners and executives don’t care about MEPs or PEPs or 401k plans of any kind—not really. They care about what work they have to do, what responsibilities they have to accept, and how much they have to pay. They care about stuff that helps their people or their business, hopefully in that order. So we learned early on that going to a business owner and saying, “Buy into this MEP” is the wrong strategy because the instinct is for them to respond, “What’s a MEP?” The MEP then becomes this product that needs defining and discussing and cajoling, when instead you could just say, “Would you rather not be the go-to person who is legally responsible for your retirement plan?” or variations on that theme, to which the answer is usually, “Of course I’d rather not be responsible. What’s the catch?”

FN: Before the SECURE Act, what was the greatest misconception about 401k MEPs?
Swisher: That they were all about making plans cheaper. It is true that MEPs are the least-cost way for employers to have the least responsibility, but it doesn’t stand to reason that a program run by professional fiduciaries would be all about being the cheapest. Yet because of the pooling of assets that’s what everyone gravitates toward—that it’ll be massively cheaper. That may be true someday, but not today.

FN: How has the SECURE Act changed the rules on open MEPs?
Swisher: SECURE creates a new type of MEP called a Pooled Employer Plan (PEP) that is specifically permitted to include all types of unrelated businesses as participating employers. Outside of a PEP, the Department of Labor’s (DOL’s) rules require most MEPs to have a pre-existing organizational relationship or “nexus,” like being part of the same association or trade group. So SECURE makes “open” MEPs more broadly available.

FN: It’s been two months since the passage of the SECURE Act and, other than industry trade journals, we haven’t seen a whole lot of coverage on 401k MEPs in the mass media. Why do you think this is so and what must happen to change this?
Swisher: When some big players in the retirement industry start announcing the rollout of new product and distribution strategies based on SECURE’s provisions, I think the mainstream media will start paying attention. Those announcements are coming.

FN: For companies with existing stand-alone 401k plans, what are the key factors they must consider before converting their current plan into a 401k MEP?
Swisher: MEPs are genuinely a superior structure for creating a best-in-class retirement program with minimal effort on the part of participating employers, so the factors are not complicated: is the package of services right for my people, and is it right for my organization? Employers joining MEPs must still determine whether the MEP is a prudent choice, but their responsibilities after that choice drop significantly.

FN: Let’s turn to the 401k MEP plan sponsors themselves by taking a look at the roles of the underlying MEP service providers and how they might interact both with the MEP plan sponsor and the individual member companies. Let’s start with the investment adviser. Explain the similarities and differences in what a MEP plan sponsor might look for in an adviser versus what a stand-alone 401k plan sponsor might look for. How might an individual member company interact with this adviser?
Swisher: Let me start with the fear side of the equation. Various industry players have had the fear that, if MEPs and PEPs become widely used, it will accelerate fee compression and lead to disintermediation and cannibalization. These fears are already being realized: there are a handful of MEPs in which advisers have been disintermediated; there are MEPs in which the fund costs have been squeezed down to relative a handful of basis points; and there are recordkeepers who are being asked by specialist advisors to reprice existing cases based on lower MEP pricing.

But, on the other side of the equation, the reality is that MEPs don’t change the underlying mechanics of operating a retirement plan very much. Yes, they call for new market strategies and distribution models and service paradigms, but the key drivers of change in our industry—like consolidation and cybersecurity and the use of technology to engage participants, such as through managed accounts—exist whether MEPs exist or not.

The role of advisers is shifting, in other words, and MEPs may accelerate the shift in many ways but they’re not necessarily causing it. The super-adviser of the future needs to be great at making life simple for employers and building efficient, effective relationships with workers as individual clients. Super-advisers will be great at coordinating retirement plan services with other benefits and products. In this new world, a super-advisor has to touch more employers and more participants more efficiently, and this is what happens in a MEP. The adviser has less governance work at the committee level that needs to be done, but that means he or she can focus on other things. Successful advisers will focus on the right things.

FN: Recordkeepers have always played a critical role in the smooth running of stand-alone 401k plans. Their role in MEPs are even more critical as they are the one’s responsible for herding all the individual member companies. What critical questions might a MEP plan sponsor ask a potential recordkeeper? How does the MEP recordkeeper interact with the individual member company?
Swisher: The recordkeeper role is very little different in a MEP than in single employer plans, at least legally. I feel sure that new models will evolve, but, again, this is being driven by factors that have nothing to do with MEPs, even if MEPs accelerate change. But recordkeepers will be expected to shoulder a lot of burdens in a PEP, and they’re not necessarily ready for it. I think the focal point for due diligence is exploring the extent to which a recordkeeper is actually responsible, either contractually or as a fiduciary, for a laundry list of administrative duties—an area where Waypoint Fiduciary will be focusing a lot of attention.

FN: While in the ideal case, all individual member companies will use the same payroll processor. Is this the reality and what are the ramifications of a 401k MEP having to accommodate several different and often competing payroll processors?
Swisher: There will be MEPs in which everyone is using the same payroll service (probably sponsored for or by the payroll provider), and there will be MEPs in which all payroll files are collected by a central hub, usually referred to as a “common remitter” or “payroll aggregator.” But there will also be MEPs in which the recordkeeper will simply do what it usually does—help clients with a variety of payroll providers. The key for MEP fiduciaries will be in supervising the timely remission of contributions and helping employers improve data quality.

FN: Finally, how important is if for a MEP sponsor to work with an ERISA attorney? Is it also necessary for individual member companies to retain an ERISA attorney for the purposes of determining whether to join an MEP?
Swisher: Most companies do not use ERISA counsel today unless something goes wrong, and the only way MEPs will change this is that, in my opinion, there should be far fewer things going wrong in a well-run MEP. ERISA attorneys’ roles have been changing for years. If you look back at the history of retirement plan documents, it used to be that attorneys custom drafted a large percentage of documents at considerable expense. Today, nearly all employers are on volume submitter or prototype documents. Today, there are something like 20,000 delinquent filers of the Form 5500 per the DOL—that number will go down if more plans have professional fiduciary administrators. The attorneys will be the ones overseeing these programs at a high level and doing what they do very well—risk management. So attorneys will be very involved with MEP sponsors, in much the same way they are involved with any large plan sponsor, but less involved with individual participating employers.

FN: Are there any other points that you think our readers might be interested in and should be aware of?
Swisher: The world is changing—we all know this and see this. MEPs, PEPs, group trusts, “groups of plans,” and other constructs are just part of that change, but they can be harnessed to ride the waves.

FN: Excellent insights, Pete! I’m confident our readers will appreciate them as there is growing interest in the trend towards MEPs, PEPs, and the like. We look forward to hearing more from you about this timely subject. In the meantime, good luck on your trailblazing activities!

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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