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Will COVID-Related 401k Plan Shrinkages Push Companies to Pooled or State Solutions?

Will COVID-Related 401k Plan Shrinkages Push Companies to Pooled or State Solutions?
May 12
00:03 2020

We’re seeing companies squeezed by the economic shutdown focusing on survival, not retirement. That can change the way all employee benefits are offered, not just retirement savings plan benefits. It may be, however, that it is far easier to radically change the delivery mechanism for retirement savings compared to, say, health insurance. What will those different vehicles look like? Which has the advantage today? Which will likely have the advantage tomorrow?

It’s clear we’re seeing a movement to reduce among many firms right now, and the 401k plan is on the chopping black. “The COVID-related economic slowdown makes 401k plan consolidation more likely as firms look to lower operational costs across the board to keep the business going and retain key employees,” says Dimitry Farberov, Investment Advisor at Miracle Mile Advisors in Los Angeles, California.

The idea of suspending or even terminating the company 401k plan isn’t new. We saw similar behavior in the 2008/2009 recession. Eventually, many of those benefits were restored to their original form. That may not be the case this time. James Rosselle, Vice president and director of Retirement Plan Solutions at RMB Capital in Denver, Colorado, says, “The COVID-related economic slowdown makes this more likely as plan sponsors are going to be looking for ways to outsource non-essential tasks, so they can focus on growing their business, and this is one way to do so.”

Where can current plan sponsors find more efficient options to delegate these non-core functions? Farberov says “one of the ways to do this is to consolidate the firm’s retirement plan with a vehicle like an MEP to lower the firm’s overall costs while maintaining employee retirement benefits and, therefore, morale.”

The reasons behind this switch are many, pervasive, and hard to argue against. “An employer may decide to participate in some kind of pooled retirement plan arrangement for a variety of reasons, but one of the most important is the view that the company doesn’t have the staff, resources or expertise to deliver a best-in-class plan to their employees,” says Drew Carrington, Head of Institutional DC at Franklin Templeton in San Mateo, California. “A pooled arrangement allows an employer to achieve the scale of a large plan right away, and to delegate many of the fiduciary and administrative challenges to the pooled provider.”

When it comes to identifying a pooling alternative, there are two leading contenders. “Companies may prefer a pooled vehicle like a MEP/PEP or state-sponsored plan to reduce administrative costs, limit fiduciary risk, and save time spent administering the plan,” says Rosselle. “By utilizing one of these options more time can be spent focusing on the overall business objectives.”

Today, state-sponsored plans – where they are offered or mandated – have an advantage today because MEP opportunities are more limited. “State-sponsored plans have a current advantage over MEPs/PEPs in several states as they have already been established and are available immediately,” says Rosselle. “They are also easy to set up and operate similar to IRA accounts, making them attractive to employers.”

 

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State-sponsored plans also appear to give employers what they’re looking for right now. “State-sponsored plans are extremely attractive now since they don’t have any hard costs for the employer and put most of the responsibility onto the employee,” says Jared Porter, CEO at 401GO in West Jordan, Utah. “They do add some administrative hassle for the employer but those costs are often overlooked.”

But will this current edge last? “MEPs/PEPs may have an advantage in the future because of their great flexibility and customization of retirement plan design, investments and more with the new regulations,” says Kirsten Curry, CEO & Attorney at Leading Retirement Solutions in Seattle, Washington.

These new regulations, which become effective in January of 2021, erase many of the obstacles hindering MEPs/PEPs today. “With the recent passage of the SECURE Act in 2019, the opportunities and benefits available to MEPs/PEPs have been significantly broadened, while many of the gray areas that have scared small business owners away have been clarified,” says Farberov. “The reduced administrative costs, lower investment fees, and greater buying power of a ‘pool’ of firms will continue becoming more and more attractive, particularly in industries suffering from margin contraction.”

These changes will highlight the weaknesses of state-sponsored plans. “Under the MEP/PEP design, a sponsor can still offer a match (even a custom match appropriate for their employee base), and the higher savings limits of a 401k plan,” says Carrington. “The current state-sponsored designs are IRAs, typically Roth, or post-tax structures, which mean both lower savings limits and a company match is not allowed.”

Unless state-sponsored efforts can defy the stultifying reality of any political process, they are unlikely to pivot fast enough to overcome the fast-paced offerings coming from the private sector.

“MEPs/PEPs will gain an advantage in the future as the MEP/PEP market evolves, more choices are made available and plan sponsors understand how they can benefit employees over the long term,” says Rosselle. “MEPs/PEPs have greater plan design flexibility and higher contribution limits which can be attractive to many employers.”

This forecast doesn’t fully take into consideration potential alternatives to MEPs/PEPs themselves, but it does point towards a coming trend that current plan sponsors best not ignore.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on TwitterFacebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA

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