What, then, will be the key components of the 401(k) MEP model? Which players will dominate? Which service providers will multiply? Which may find less interest in their services? (Photo: Shutterstock)
Here's the way I see it: In 10 years, private-sector open 401(k) multiple employer plans (MEPs) will be the norm. Stand-alone 401(k) plans will be few and far between. Like pension plans today, only the oldest and largest companies with have them. And they'll be trying to figure how to get rid of all the bells and whistles they added to them.
State-run retirement plans? By 2030, after a series of state bankruptcies and scandal, the few that remain will have all the credibility of a MyRA. The good news, though, is that the (blue) states that still have them will have begun to use them to replace their public employee pensions. (They'll rationalize this shift as a way to make state-run retirement plans "sustainable.")
Where does that leave you? Well, you'll need to figure out your little island in this new world.
The first step, of course, is to consider all the different pieces that will make the future (you can get a glimpse of them in "Exclusive Interview: Terrance Power Tells All About What's Changed (and More!) With 401k MEPs," FiduciaryNews.com, October 15, 2019).
What, then, will be the key components of the 401(k) MEP model? Which players will dominate? Which service providers will multiply? Which may find less interest in their services?
It's clear the gatekeeper to this new business will be the same gatekeeper of the current 401(k) industry: the recordkeeper. Sounds like a good thing for recordkeepers, keeping the status quo.
But that's a little too optimistic. Here's the problem for recordkeepers: as stand-alone 401(k) plans begin to consolidate into fewer and fewer MEPs, there will obviously be a lot fewer stand-alone 401(k) plans. And that means a lot fewer opportunities for recordkeepers.
If you think the recordkeeping industry is consolidating now, wait a few more years.
So, which recordkeepers will survive and thrive? Not necessarily today's major players. MEPs will require much more flexible recordkeeping systems. Today, recordkeepers can isolate systems with individual stand-alone plans. Under the MEP model, those isolated systems will need to merge to accommodate many more players acting in concert with one another.
Recordkeepers that try to proceed with a hodge-podge system will quickly discover breakdowns in their ability to handle MEPs. Or, rather, the member companies will experience these breakdowns. And as those companies will be more sensitive to breakdowns during the early transition period from stand-alone 401(k)s to 401(k) MEPs, early recordkeeping errors may not be forgivable.
Part of the challenge for recordkeepers will be the need to integrate another component of the 401(k) MEP: the payroll processor. You might think, as the payroll processor, they would hold the keys here. Well, some already offer 401(k) administration, so there's a chance they'll want to sponsor 401(k) MEPs, but that will have to wait for Phase II, when open MEPs are officially a thing.
Right now, they're not. We're in the preliminary round. That's the domain of the closed MEP, which leaves payroll processors on the outside looking in. That's what gives the edge to today's recordkeepers.
But it doesn't diminish the historic role of payroll processors. Chances are, member companies will only join MEPs that permit them to keep their current payroll processors. This is where the primary pressure for integrating systems comes from, as MEP recordkeeping systems must account for many payroll processors participating in a single MEP.
Expect a lot of finger pointing as a result. At least initially. That's what we saw in the early days of the 401(k). So don't be surprised to see it again in the early days of the MEP.
Finally, we have the investment adviser. You might think their role will also be consolidated as there will be fewer stand-alone 401(k) plans with the rise of MEPs.
Not necessarily. In fact, MEPs may create a need for more RIA involvement, not less.
Sure, there will be fewer opportunities as there will be fewer MEP plan sponsors to work with. On the other hand – and we're only beginning to see this, albeit rarely, in stand-alone 401(k) plans – MEPs may finally usher in the reality of multiple RIAs working within the umbrella of a single (MEP) plan.
Here's how this would work.
You'd still have the primary fiduciary. This is the RIA that works directly with the plan sponsor, designing the plan option menu, selecting and monitoring the underlying investment options, and otherwise performing the same services provided to plan sponsors today.
But there will develop a need for a secondary investment adviser. In fact, many of them. While there may be only one primary RIA, there will potentially be one secondary RIA for every member company.
Just as a member company may want to keep its payroll processor, so too may it desire to retain a "favorite son/daughter" RIA to work with its employees. MEPs will be able to meet this need, as long as the secondary RIA works within the investment framework designed by the primary RIA.
There you have it. The component of the 401(k) future. Keep in mind that extrapolating today rarely gives you a clear indication of what tomorrow will look like.
The question remains, however, "Where do you see yourself fitting in this future?"
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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).
