Do 401(k) plan sponsors really want to sponsor 401(k) plans? – Carosa

If you’re responsible for running a company, you have to do a lot of things you aren’t particularly interested in (and often not even good at doing). For example, someone’s got to clean the bathrooms. someone’s got to do the bookkeeping and file the taxes every year. Company executives often hire specialists for these functions.

It turns out among those uninteresting things you’ll also find the firm’s retirement plan. Pension and traditional profit-sharing plans are one thing. But 401(k) profit-sharing plans really set the bar high in terms of inconvenience.

It’s easy to understand when, given the choice between closing another sale and hosting a 401(k) enrollment meeting, you know which option the CEO prefers (see “Exclusive Interview: Pete Swisher Explains Why Companies Don’t Care About MEPs (or PEPs or Even 401k Plans),” FiduciaryNews.com, February 19, 2020). If it’s not generating revenue, then, whatever it is, it’s a distraction.

But it’s a necessary distraction. In order to compete for the best employees, companies need to offer attractive compensation packages. It’s not just that a company is expected to provide employees with 401(k) plans. They must also provide the best matching, the best performing, and the best features in those 401(k) plans.

In the worst of all possible situations (at least from the point of view of the plan sponsor), corporate executives must spend valuable time becoming and maintaining their status as retirement plan experts. Anything less and they’d unknowingly and unnecessarily expose themselves to fiduciary liability.

This is where 401(k) MEPs can please 401(k) plan sponsors.

The short answer to our headline is “yes.” Companies need 401(k) plans to entice superstar workers to stay working at their company. It’s even better if these 401(k) benefits are as close to “best in class” as possible.

When you think “best in class” of anything, you usually picture something that has a lot of money behind it. So, too, with “best in class” 401(k) plans. They’re usually found at the largest companies for one simple reason: large companies have the critical mass. Their 401(k) plans are large enough to generate enough raw dollars in fees as to afford the very best but at only a small fraction of the percentage paid by small plans for the same purpose.

What it really comes down to is value. In order for 401(k) plans to offer “best in class” value, those plans need to be of a certain size, otherwise it’s too expensive to be “best in class.”

n the face of it, 401(k) MEPs can seemingly solve this economy of scale challenge. And that may have been true – before the SECURE Act.

Prior to the SECURE Act, the only practical way to furnish a 401(k) MEP was through a business association. The SECURE Act, however, created a variant of the MEP called a PEP (“Pooled Employer Plan”). The PEP allows unrelated businesses (think “everybody”) to be placed in a single 401(k) plan.

In general, business associations, especially those covering national or large geographical footprints, already have the organic critical mass of membership required for their 401(k) MEPs to sustain a “best in class” rank. With PEPs, that’s not guaranteed. In fact, for the most part, all PEPs will begin with zero members.

Here’s the significance of that. Business Association MEPs need only convince existing members to join the MEP. These existing members have already made a positive decision to join the association in the first place. The threshold to join the associations MEP is therefore lower.

For PEPs, on the other hand, participating companies will, in effect, be required to make two leaps of faith. First, they’ll need to agree they want to join the club whose other members can be anyone. Second, they’ll have to agree to participate in that club’s PEP.

Remember what they say about selling online. The more clicks a prospective buyer has to make, the less likely the sale.

Prospective members of association MEPs only need to make one click. PEP prospects need to click twice.

You do the math.