Survival of the thrifty: Small businesses and retirement plans

Sean Jordan

By Sean Jordan
Sean Jordan is Head of Emerging Client Management for the Workplace Solutions unit of MassMutual.
Posted on May 20, 2020

In the wake of the coronavirus, many small businesses have a singular focus in common: Survival.

As the federal and state governments battle the pandemic, small businesses are looking for local economies to reopen as soon as possible, employees to return and revenues to begin flowing. Many businesses will be reducing their overhead and other costs as part of getting back to profitability.

One new opportunity to trim expenses may be available to some businesses that sponsor or are contemplating offering a 401(k) or other retirement savings plan. With the start of the new year, it’s now easier than ever for small businesses to join or form Pooled Employer Plans (PEPs) – sometimes referred to as Multiple Employer Plans (MEPs) – to reduce the costs of providing a retirement savings plan.

Passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act at the end of last year allows unrelated employers to participate in a single PEP as opposed to creating separate plans for each business. The resulting economies of scale, centralized compliance, and reduced fiduciary responsibilities may be particularly attractive to small employers, many of which don’t currently sponsor retirement plans.

MEPs, similar to the new PEPs, have existed for a long time. But participation has generally been limited to employers that shared a common economic or representational interest, such as membership in a professional association.

The promise of cost savings and reduced administrative burdens from SECURE is worth examination by small businesses, especially if they do not currently have a retirement plan or are looking to reduce the relative costs or administrative burdens of their existing plan. However, some of the advantages promised by PEPs and MEPs may prove more appealing to some employers than others, according to a recent white paper published by MassMutual.

The white paper, “Open Multiple Employer Plans: What Open MEPs May Mean for Your Business,” explains the potential benefits of PEPs but also notes that whether they are attractive to an employer will depend upon the specific needs and preferences of the employer as well as the services and features offered by the Plan. Employers and their financial advisors need to carefully consider what they want to achieve and how when deciding whether to participate in a PEP.

MassMutual has been serving MEPs for clients in the association, franchise and Professional Employer Organization (PEO) markets since 1989, with more than 4,000 adopting employers and $4 billion in assets under management. That experience prompted our firm to publish its white paper to raise issues employers and advisors should consider when evaluating a PEP:

Selecting the plan design. Plan design, including eligibility and vesting, auto-features and matching contributions and others, can play a significant role in how effective a plan may be in enrolling participants, encouraging savings, and preparing workers to retire on their own terms. Because PEPs are intended to streamline the process of offering and maintaining a retirement plan, participating employers may have limited choices when it comes to plan design. Employers are urged to carefully consider the plan provisions and whether they are a good fit for their specific plan goals and workforce demographics.

Deciding on hands-on vs. hands-off plan administration. The time and costs of administering a retirement plan can sometimes discourage small businesses from offering one. By joining a PEP, employers may have the opportunity to both ease the burden of plan administration and reduce costs by taking advantage of economies of scale. However, partnering with an experienced third-party administrator (TPA) can be crucial to achieving these benefits and in helping participating employers handle administrative responsibilities outside the PEP umbrella, such as IRS nondiscrimination testing and contribution limits, allocating employer contributions and forfeitures, calculating participant vesting percentages, and preparing loan paperwork. In addition, it’s important to understand what support a TPA provides in helping to assess the needs of the business to minimize plan expenses and maximize successful retirement outcomes.

Choosing limited vs. customized investment menu. The investment options available within a PEP are obviously a top consideration for an employer considering participation in the plan. The ability to combine assets under a single plan may give PEPs the ability to offer access to lower-cost funds typically available only to larger plans with greater assets and more purchasing power. However, for ease of administration, some PEPs might require participating employers to choose from more limited options.

PEPs may require participating employers to use pre-selected investment menus, limiting employers’ ability to tailor an investment lineup to meet all their preferences. Here again, employers and their advisors would need to carefully consider how a PEP limits investment choices and what level of customization may be available.

Determining fiduciary oversight. One of the anticipated benefits of PEPs is that they may provide employers a significant amount of support. This includes the ability to reduce their fiduciary responsibilities, particularly as it relates to handing over control of selecting and monitoring investment options for their plan to a so-called 3(38) investment manager. This is in contrast to 3(21) fiduciary services, where an advisor recommends investment options while the employer retains discretion, authority and fiduciary liability for fund selection.

PEPs will very likely expand access to retirement plans significantly but it ultimately pays to understand how to make the most of the available opportunities. Congress has done its part to clear a wider path to secure retirements for millions more American workers. Now, it’s up to employers, their financial professionals, and the retirement plan industry to assess and make the most of the new retirement savings opportunity.

Hopefully, the expanded availability of PEPs will help reduce the cost of offering a retirement plan for many small businesses and help the thrifty not only survive but thrive.

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The information provided is not written or intended as specific tax or legal advice. MassMutual, its subsidiaries, employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.