By Tim Slavin
It looks real this time. Both chambers of Congress have pushed similar bills through committee that contain provisions to extend Multiple Employer Plans (MEPs) beyond the so-called “common nexus” rule. These open-MEPs enable unrelated small businesses to gain economies of scale by pooling together resources, thereby lowering administrative costs (a serious hurdle for small businesses). By the end of the year, we could finally see genuine opportunity for the 51% of private-sector employees who do not currently have access to workplace retirement plans.
Open-MEPs will undoubtedly make a major impact across the retirement industry. Many advisors who currently service small business retirement plans are paying attention. Reactions range from cautious enthusiasm to notable apprehension. Some are worried that the largest recordkeepers will simply swallow up small businesses in their own MEP offerings, leaving local advisors on the outside looking in.
Although we can’t be certain, the new legislation points to a potential upside for local advisors. Below are three scenarios in which advisors might be the biggest winners if the new open-MEPs become law.
Scenario 1: Advisors may be able to consolidate multiple existing clients into their own sponsored MEP.
In the retirement industry, the name of the game is scale. For recordkeepers and TPAs, scale enables lower costs and better margins. For sponsors and employees, scale provides for lower administrative costs and better returns. No matter what role advisors play moving forward, you can be certain they’ll need to leverage scale to be successful.
The good news is that local advisors who already serve small businesses have a natural pool of clients who can participate in an open-MEP. Some of the legislative details are still hazy and incomplete, so we’re not entirely sure what’s possible yet. But it looks like advisors will be able to form their own open-MEPs, into which they can conglomerate existing small business clients.
Congress will need to settle some tough questions, however. For instance: Who can sponsor and service an open-MEP? Can an open-MEP service provider be terminated without dissolving the MEP itself? Which party assumes ultimate fiduciary liability? Advisors currently managing plans under ERISA 3(38) may already have a head start sponsoring an open-MEP in this capacity.
Scenario 2: Advisors may be able to create new business by encouraging local associations to sponsor an open-MEP.
Proactive advisors can work through associations, such as the Rotary Club and the Chamber of Commerce, to market open-MEPs for geographically-clustered small businesses. Unlocking this opportunity, however, will require a high degree of patience, persistence and ongoing education. There will be a significant learning curve for smaller organizations to get up to speed regarding the pros and cons associated with participating in an open-MEP.
Advisors should try to learn everything possible now about how open-MEPs work, how they’re formed, and how they’re serviced, so they can hit the ground running as soon as the new law takes effect. It will be vital to develop strategic messaging, including step-by-step information that can help smaller organizations navigate the process.
It’s rare when legislation immediately opens a totally untapped market. In any city there’s potentially hundreds of employers who can participate in an open-MEP. Finding sponsors to lead the way will be a key piece of the puzzle.
Scenario 3: Advisors may be able to tap into existing large associations.
Finally, there’s a wide array of associations and businesses today that may be prime candidates for consolidating members into a sponsored open-MEP. Imagine, for example, if national retirement or automobile associations formed their own respective open-MEP. Similarly, payroll services providers may be good candidates, too. These companies already service a critical mass of small businesses. And many of them already provide retirement recordkeeping services, too.
Even if advisors can’t leverage scale via their own existing client base, there’s tremendous untapped opportunity for associations and business that could—but currently do not—sponsor a MEP. Some of the above-mentioned are very large organizations that may be out of reach for many smaller, local advisors. But looking at midsize and smaller associations that serve, say, industry-specific contractors may be a good bet.
We aren’t sure yet which direction the market will take. Maybe larger recordkeepers and broker-dealers will consume the new market. But there’s a good chance that bottom-up innovation, led by advisors who already service the small-business retirement market, will be the primary catalyst to shape the new market. Time will tell. But advisors should prepare for every eventuality.
Tim Slavin is SVP – Retirement, Broadridge Financial Solutions