It's back to the 1980s with 401(k) MEPs and PEPs - Carosa

Many think the Apple II and Radio Shack’s TRS-80 represent the beginning of the personal computer era. Indeed, Byte Magazine labeled these two microcomputers, along with Commodore’s PET, all of which debuted in the same year, as the “1977 Trinity.” So it’s not unusual for the casual observer to cite those units as “the first.”

But that’s wrong. Those in the field generally recognize the Altair 8800 as the first actual personal computer. Coming out in 1974, its use of an Intel microprocessor, the S-100 computer bus, and Microsoft’s founding product (Altair BASIC) became the template upon which a future industry thrived.

In a similar way, some look at the SECURE Act’s authorization of pooled retirement plan vehicles known as 401(k) PEPs as a new beginning. While 2021 (the year these plans can start being offered) may be similar to the year 1977 for the personal computer industry, it in no way represents the “first” for this kind of retirement plan.

Nor, as some might suggest, does it even hint at something akin to the broad deregulation of the retirement industry without the benefit of a single beta test (in keeping with our high-tech metaphor).

In fact, the SECURE Act is nothing more than an open multiple employer plan (Open MEP) with a twist. (Don’t worry if you’re afraid you need to learn more abut this. Things don’t begin in earnest until January of 2021, see “How Best to Prepare Yourself to Go from Zero to MEP/PEP in Four Months,” FiduciaryNews.com, July 28, 2020).

Closed 401(k) MEPs have been around for a while, but only available to the rare few. Used many by trade associations and other business groups, they represent the beta test for what’s about to happen.

In fact, retirement savings advocates have been trying to make 401(k) MEPs more generally available to everyone for years. At this point, the new form of open 401(k) MEP (called a pooled employer plan or PEP in the SECURE Act) appears to be the private counterpart to state-sponsored pool retirement vehicles for private businesses.

Don’t get me wrong. MEPs/PEPs have the potential to change the retirement plan industry. Companies find them easier to implement than stand-alone plans. They’re certainly not for everyone, but my gut tells me they’ll be enough for most.

But don’t confuse the coming change with a waterfall. It’ll probably start as a trickle.

At this point, it’s only the more sophisticated service providers that understand the utility of this vehicle. Smaller advisers – the ones who only have a handful of 401(k) clients (and that’s mostly because the companies are owned by their private clients) – generally aren’t as studied in the retirement plan arena. It’s not that they are ignorant, it’s just that their business model prioritizes personalized individualized management services, not corporate management services.

Based on my field experience (disclosure, for many years I used to act as a 3(38) adviser for a business association 401(k) MEP), I can predict two things:

1. Many of the owners of these small plans demand customized plans that cater to their specific individual needs. They see the plan as very related to their personal investment/financial planning needs. They probably won’t want to give up control necessitated in joining a MEP/PEP. For them, control is more important than cost and, since their assets represent the bulk of the plan, they aren’t concerned with fiduciary liability, so another attraction of the MEP/PEP is diminished.

2. Many more small business owners – the majority of which do not currently offer 401(k) plans because of their cost, time commitment, and liability downside – will for the first time be introduced to the MEP/PEP solution. Those that currently have plans but don’t fall into category #1 above, will immediately see the advantages of the pooled vehicle and jump at the opportunity to join. Those without plans? Ah, there’s where the hypothesis is tested to the fullest. My guess is MEPs/PEPs will be seriously considered in states which require companies – no matter how small – to offer retirement plans. This is where the MEP/PEP becomes serious competition against state-sponsored plans.

It’s not all upside.

There is one thing that even MEP veterans fear – that large firms like Fidelity and Vanguard (et al) would monopolize the MEP/PEP market. This could lead to a return of the “bundled” service provider concept that plagued the industry up until about a decade ago. These big firms have the advantage of logistics, which will create immediate cost benefits that even MEP veterans can’t summon quickly.

Of course, this assumes the MEP/PEP market will continue as merely an extension of the existing stand-alone 401(k) service provider infrastructure. The MEP/PEP vehicle, however, is tailor-made for a new way of envisioning the array of 401(k)  service providers. By adopting a multi-dimensional business model, MEP/PEPs can avoid bundling, keep service local, and incorporate a broader range of professionals without undue costs.

The unfolding of the MEP/PEP market will be fascinating. It will be pure unadulterated competition – much like when personal computers first came out in the 1980s – dozens of competitors, a couple of big ones, a couple of unknowns that will become big ones. Mind you, in the personal computer industry, IBM didn’t win (although their model did). It was the nimbler newbies that won (Compaq and Dell) the early rounds.

The more interesting question is this: Who will the lone-wolf Apple be in the burgeoning MEP/PEP industry?