Will association fear hold back 401(k) MEPs? – Carosa
There’s a pot of MEP gold at the end of the rainbow for all parties, but trade associations must take that brave first step to get it.
“Take your medicine, you’ll feel better.” “Eat your peas, you’ll get stronger.” “Use this new shortcut, you’ll get there faster.” Sometimes getting ahead means venturing through a forest of unknowns. That’s where we’re at – or soon will be – when it comes to 401(k) MEPs.
Once the IRS finalizes its fix for the “one bad apple problem,” it’ll be open season for trade associations, Chambers of Commerce, and other affinity groups to offer 401(k) MEPs to their member companies. Of course, to do this, they’ll need to become the plan sponsor.
Aye, there’s the rub.
How many association leaders have sponsored stand-alone 401(k) plans, let alone the MEP variety of these retirement savings vehicles? MEPs, more so than traditional 401(k) plans, are fraught with fiduciary landmines.
Yet, this shouldn’t dissuade trade associations from participating in what no doubt is the next evolution of worker retirement plans (see “How to Address Top Fiduciary Issues for Trade Associations Sponsoring 401k MEPs,” FiduciaryNews.com, November 5, 2019).
Business associations exist to promote the best interests of their member companies. This concept – this purpose – melds nicely into the theme of fiduciary. So the concept is not foreign to trade associations. Only the application is different.
Still, adding a 401(k) MEP to the menu of member benefits isn’t like the usual Chamber of Commerce offering. For example, in most cases business associations offer benefits through a third-party. The member receives a discount and the association may receive an affiliation fee. Sure, there may be a liability associated with offering these types of benefits, but it’s the kind of liability that reasonable care and caution can reduce.
With a 401(k) MEP, although third-party vendors are hired, the association acts as the plan sponsor. There’s actually a pretty big advantage for the association doing this. Acting as the plan sponsor allows the association to collect a fee. The actual dollars collected would grow as the plan grows, making the 401(k) MEP option a potentially lucrative revenue-generating vehicle for the association.
On the other hand, there’s a down side. For most associations, that down side is shrouded in unknowns. That can make the down side appear worse than it really is.
In effect, the liability is comparable to a plan sponsor of a stand-alone 401(k) . There’s good news and bad news in this. The bad news: It most certainly represents far greater liability than you’d find with a typical association benefit.
The good news: The liability is a known quantity and we already have working models that can dramatically mitigate this liability.
Associations seriously interested in sponsoring a 401(k) MEP have a ready and willing source to access in their due diligence process. Associations are likely to have member companies, including those that may serve on the association’s board of directors, that already offer stand-alone 401(k) plans. These members will be familiar with both the liabilities associated with sponsoring a 401(k) plan and the methods employed to mitigate those liabilities.
One of the most reliable methods is to hire industry professionals. This has the effect of outsourcing the bulk of the administrative duties as well as a good chunk (but not all) of the attendant liability.
Here’s where a word of caution comes in. Many members will have their favorite 401(k) vendors. These vendors may be excellent at servicing stand-alone 401(k) plans. But, remember, a 401(k) MEP is not the same as a stand-alone 401(k) plan.
Associations will need to make sure the vendors they work with know the MEP space and not merely the usual 401(k) space. Because MEPs are relatively rare (right now), there aren’t a lot of vendors with MEP experience.
Until associations can feel confident that the vendors available to them come with the necessary experience, the fear of the unknown may keep them from offering 401(k) MEPs to their members.
And that’s not good news for their members.
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