Even though a 401(k) MEP can be structured to accommodate most of the 'customizable' aspects employers seek, there are still limits on how much control they can have, and for some, that's a dealbreaker. (Photo: Shutterstock)
Let's talk about 401(k) MEPs by starting with a story. Remember King Midas? He so yearned for gold that he wished everything he touched would turn to gold. The good news? He got his wish. The bad news? He got his wish.
When Midas grew hungry, the food he touched turned to gold. When he became thirsty, the wine he touched turned to gold. When his beloved daughter Marigold (get it?) ran to him, he touched her and she turned to gold. It's the classic "Be careful what you wish for" story.
Do 401(k) MEPs present a similar tale?
Clearly, as with any new venture, employers shouldn't dive blindly into the 401(k) MEP pool (see "A Company Fiduciary Must Ask These Questions Before Joining a 401k MEP," FiduciaryNews.com, October 1, 2019). For all the good MEPs offer, they do come with a potential downside.
In this case, however, the reward may outweigh the risk – by a large margin – at least for those who join, not sponsor, 401(k) MEPs. (Sponsoring a 401(k) MEP is a whole other matter. Perhaps we'll get to that in the future.)
Let's look at the risks first. Set aside for the moment the "bad apple" problem. This issue arises primarily in open MEPs when one of the member companies breaches its fiduciary duty. This can poison the entire MEP and potentially result in damage to the other member companies.
This is not an issue as much in closed MEPs, which are generally sponsored by trade associations, chambers of commerce and professional employer organizations. Following the DOL redefinition of employer (which came out in July), this is the type of MEP we expect most employers to be considering right now.
So, if a "bad apple" scenario doesn't exist, what other risks must employers consider?
There are two: loss of control and lack of value.
Any time you delegate to a third party, you forgo a certain amount of control. Even though a 401(k) MEP can be structured to accommodate most of the different "customizable" aspects employers seek, there are still limits. For some employers, this could be a dealbreaker. For these employers, the loss of control is too great a cost.
On the other hand, some existing 401(k) plans may have already achieved the economies of scale promised by MEPs. This is particularly true for larger existing plans compared to startup MEPs. For these companies, the value of joining a 401(k) MEP may not be there (yet).
On the other, other hand, a 401(k) MEP offers immediate benefits that supersede any of these risks.
For example, when the economies of scale benefit may not be available as described above, another factor may offer a far greater advantage. This is the same upside that counters the loss-of-control downside.
We're talking here about the quite valuable time savings that comes with delegation. Successful entrepreneurs know the importance of avoiding tasks that can be more efficiently accomplished by others. Think about it. Who brings the revenue into the business? In smaller firms, it's usually the same people assigned to run the 401(k) plan. Imagine how much more revenue they'd be able to bring in if they didn't have to worry about running the company's 401(k) plan?
That's a powerful value that simply can't be compared with the dollars and cents of economies of scale.
Growing a sustainable business is the top priority for all business leaders. Isn't that also in the best interests of all employees?
Sure, employees may have a best interest concern in their retirement plan. They also have a best interest in making sure the company bathrooms are clean and sanitary. Does that mean the company president should be scrubbing toilets? Nope. It makes more sense to pay a professional custodian.
The same can be said about retirement plan administration. Doesn't it make more sense to have a full-time professional organization take care of this?
That's the reward of the 401(k) MEP. That's why it's going to be the future of all 401(k) plans. Maybe not today. Maybe not tomorrow. But soon. And for the rest of your life.
Sometimes the cure is worse than the disease, so be careful what you wish for. You may just get what you want.
And that may be precisely what you need.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
