By the time you read this, the IRS may have already finalized its Unified Plan Rule. This is expected to remove the biggest reason business associations have been reluctant to offer a 401(k) MEP to their member companies.
What’s that you say? You’ve never heard of a 401(k) MEP?
Don’t worry. You’re not alone. Most people don’t know anything about this powerful retirement savings vehicle.
How powerful is it? Assuming the retirement plan industry embraces it, the 401(k) MEP has the capacity to reduce our country’s retirement savings challenges. Not only will it make retirement plans available to more workers, including those who currently don’t have access to them, but it will likely produce better results.
Unfortunately, up to now, you can’t save in one.
That’s all about to change.
In July, the Department of Labor issued a rule clarifying the ability of business associations to offer “closed” MEPs. This rule became effective on September 30, 2019. It is an affinity relationship (for example, by being in the same industry or within a shared geographic region) that defines the “closed” of a closed MEP. Now, any trade association, chamber of commerce or other kind of affinity group, can clearly offer 401(k) MEPs to its company members.
But they won’t. Not until the IRS repeals the “one-bad-apple” rule. This rule causes all member companies within a 401(k) MEP to be liable should one member fail to meet its fiduciary obligation. It is expected the IRS, through the forthcoming Unified Plan Rule, will limit this liability to the offending company. This will effectively eliminate the one-bad-apple rule; thus, open the floodgates to the 401(k) MEP.
In a way, the 401(k) MEP represents the Holy Grail for business associations. “A properly structured MEP can provide association members with a tangible benefit that will help keep them tied to the association,” says Terrance Power, founder of American Pension Services, LLC in Clearwater, Florida. “It also serves as a way to attract new members.”
Your local chamber of commerce will see the 401(k) MEP as a way to attract and keep members. And if they don’t, your trade association will. Just like group insurance, a 401(k) MEP will become a necessary offering for any serious business association.
But that’s not all a 401(k) MEP can offer associations.
“I’ve worked on almost a dozen of these plans and the purpose is for the association to show value in membership, along with any other program they may offer,” says Ary Rosenbaum of The Rosenbaum Law Firm P.C. in Garden City, New York. “There is also a potential for a revenue stream as well.”
Think of a 401(k) MEP as a vehicle that pools the employee retirement assets of many different companies under the umbrella of a single 401(k) sponsored by a business association. What would attract individual member companies to forgo their stand-alone 401(k) in favor of their association’s 401(k) MEP? The answer is simple. It’s in their employee’s best interests.
“The basic benefit is economy of scale,” says Dr. Guy Baker, Managing Director at BTA Advisory Group in Irvine, California. “A 401(k) MEP should offer a broader range of investment options at a lower overall cost.”
Association members are often looking for a discount on necessary services. That’s why businesses will join the association in the first place.
“The advantage to business associations who create their own 401(k) MEP is increasing value-added services for their membership,” says Jackie Reeves, Managing Director at Bell Rock Capital, LLC in Boca Raton, Florida. “In general, business associations are comprised of small and medium-sized businesses. Many of these businesses struggle to gain economies of scale across their expenses and business associations often assist this base.”
By offering a 401(k) MEP, business associations can provide employees of member companies with less expensive retirement plans. Less expensive retirement plans mean more savings for employees. This, in turn, means a bigger nest egg when it comes time for retirement.
“Associations must show value to their constituent members,” says Dan Gallagher of Charlotte, North Carolina, a recently retired financial planner and author of The Secrets of Successful Financial Planning. “Reaching the economies of scale in one large and inexpensive 401(k) or other qualified retirement plan enables members to offer employees lower cost retirement plans than if each individual member established its own. This helps with both member retention and recruitment.”
Ultimately, a 401(k) MEP becomes a win-win-win scenario. It’s a win for the association, which now has a compellingly attractive benefit. It’s a win for the member company, which now can devote more time towards its core business and not a normally time-consuming benefit. It’s a win for you, the employee, as you will now have access to a lower cost higher quality retirement plan.
Because of this, those associations that take the lead on offering a 401(k) MEP have the most to gain.
“This could become a powerful addition or development for an association affinity program,” says Chris Lawson, Broker & Insurance Advisor at Insuraty Inc. in Bowie, Maryland. “I think whichever organization gets out of the box the fastest for its members will win. There are many perk plans and soft dollar benefits that associations offer, but this in and of itself can increase membership especially if there is some type of auto-enrollment ability.”