How do we get a flat 401(k) market moving again? It’s a question asked and answered by global research and consulting firm Cerulli Associates. The firm is looking hard at open MEPs as a catalyst for DC development, a space it says is mature and experiencing flat to negative growth.
As of year-end 2018, MEP assets totaled $211 billion, which represents a 21% increase from 2015.
As Cerulli notes, MEPs have existed in “closed” form for many decades.
Under current rules, businesses must share a pre-existing organizational relation or “common nexus” to pool resources and plan assets within a MEP structure.
However, current legislative proposals (namely RESA and the SECURE Act), aimed at expanding retirement plan access for small business employees, will reduce or eliminate the common nexus requirement with their support of open MEPs.
“If this provision is implemented, businesses will no longer be restricted by industry or operational relationships and MEPs will be ‘opened’ to unrelated employers,” Dan Cook, research analyst at Cerulli, said in a statement. “The creation of open MEPs will likely impact the business strategy of recordkeepers, asset managers, and advisors operating in the retirement market.”
Small business advantage
For small businesses (including those with and without a retirement plan), principal advantages of a MEP structure are the purchasing power afforded by pooled assets and increased scale and the implicit cost savings for small business owners of reducing administrative and fiduciary responsibilities.
Unlike state-sponsored initiatives, which mandate small businesses to either offer their own retirement plan or enroll in the state plan, employer participation in open MEPs is voluntary.
Therefore, employers will need to be educated regarding the benefits of an open MEP and motivated to act by either offering a retirement plan for the first time or closing their current retirement plan option and switching to an open MEP.
“The necessity to motivate each individual small business to make this change will act as a headwind to MEP asset growth,” Cook added. “If firms are serious about pursuing opportunities in the open MEP market, it behooves them to make a strategic commitment and establish best practices for engaging employers. While there is still uncertainty regarding the future of open MEPs, Cerulli contends that early movers in this market can realize long-term benefits.”