Many Americans tend to think that a 401(k) plan is an auxiliary benefit, much like taking vitamins to stay healthy. So, when it comes to actual “serious” benefits it’s lower on the list of absolute necessity. This might be attributed to the converging views of cost versus value. If you add in the ingredient of complexity and time along with that overall cost the value decreases even more. That same group of Americans may hear the noise of other investment opportunities that provide for far better returns. The perspective could also come from dissenting voices within the retirement industry itself after having been “behind enemy lines” and seen the amount of waste, cost, complexity, inefficiency, and nay we say it, greed.
Regardless, the stigma of superfluous or unnecessary exists and is very much attached to what would appear to be the primary retirement vehicle in the United States today. How did we get here? The “Father of the 401(k) Plan,” Ted Benna, has long been outspoken about what has happened to the 401(k) plan since its emergence in the 80s. He said: “I’ve been quoted saying I would wipe out the whole thing. Really, what I was referring to was the investment structure, not the 401(k) entirely. I’ve documented the history of these and how participants have been impacted, and it’s not a pretty picture. It went from all fees being paid by the employer to everything getting bundled and dumped on employees.” Essentially, the investment options have gone out of control with way too many choices for the sake of diversification, and then the costs have been historically shifted from employer-paid to employee-paid.
The primary goal of a 401(k) plan is to save for retirement (whatever that may look like differs by individual but the purpose is the same), and instead of that plan and path being straightforward and clear, it has been riddled with obstacles, exceptions, and distractions. Obstacles such as cost and lack of technology create roadblocks, as well as other “more important” benefits taking the focus away from a business keeping retirement and a 401(k) plan on the essential benefit list. However, even when you get past those things, you then face the biggest hurdle, the amount of time. Those gearing up to start on such a metaphorical and also literal journey may not realize how much they will need to pack for the trip. Like the traveling King Arthur in Monty Python and the Holy Grail in search of a crew and crusade, never realized that he’s been the butt of the joke to the viewers, the employer taking steps to sponsor a 401(k) plan may indeed feel the inadequacy of navigating that quest. Imagine if the journey was in a straight line with plenty of signs and alerts along the way, no detours or “side quests,” how much more appealing would the 401(k) plan be? This is where technology comes in and this is where things change. Technology will be the savior of the 401(k) plan, and the results will be quite evident.
Technology changes an industry, and in a very real way normalizes simplicity. When have you ever heard someone say, “You know, I used this tool to make things harder and more complex?” Never. Unless of course it’s for a workout, then it would still be providing for desired results from the user (better physical shape). Technology is the “king of the hill” in every fight for the top. It just may take a little longer for it to make it up there for some of these battles. The change that technology provides takes longer because of a couple reasons: fear of change and cost. The “If I pay that much doesn’t that mean it’s better quality?” or “I’ve done it this way a 1,000 times, why would I change it?” questions also pop up.
There are many examples of how technology has upended an industry and created an uncomfortable disturbance, but in most cases it is for the benefit of the consumer and longevity of that industry.
Let’s take, for example, buying a car. How has that industry changed? There are so many different services and apps available to us to buy a car. You can see all of the options clearly and do side-by-side comparisons, as well as pull up reviews and comments from the millions of others doing the same thing. You can order a car and have it delivered to you! No more of the sitting at a dealership with the back-and-forth negotiation on price and options. Technology has made it simple so you can see what you’re getting and knowing what it costs. Transparency and efficiency.
That same principle should be applied to a 401(k) plan.
The amount of time that goes into the creation of a 401(k) plan can be sluggish and somewhat archaic if you compare it to any other industry in which they’ve accepted the transition to new technology. Checklists and manual reviews of forms and documents to determine what a company wants for a 401(k) plan just shows how far we’ve strayed from the Ted Benna vision. How much paperwork do you have to go through before the plan has officially started?
It’s imperative that you incorporate automation to the retirement industry and more specifically 401(k) plans. If this is going to be prevalent, affordable—which it should be—it is only through technological advances and methods to get there.
Let’s automate the plan design options for immediate setup of the 401(k) plan. Let’s automate the enrollment process so the manual hours used to set it up and sit down and go back and forth is eliminated. Let’s automate the nondiscrimination testing, the annual notices, and lastly the tax filing. Automation is the time saver and in the end the equalizer for pricing and accessibility.
With automation in place it leaves much more time for the important elements that shouldn’t be snuffed out. Connecting with people and reinforcing the importance of saving and setting goals. Let the other “complicated” stuff turn and move like the cogs in a watch. Keep the time, serve its purpose, but not be a distracting contraption strapped to your wrist.
It is said that the multiple employer plan (MEP) was created to help small businesses. This type of arrangement is designed so you can group many employers under one 401(k) plan managed by experts. This would hopefully take the burden off the small business with fiduciary responsibilities assisted and costs being aggregated in one place.
There is a closed MEP and an open MEP (which will eventually change January 1, 2021).
The closed MEP can be sponsored by many types of organizations, more specifically associations, professional employer organizations (PEOs), chambers of commerce, and other type of employer groups. In other words there has to be a level of commonality connecting these type of employers under a closed MEP. The purpose of an MEP is to provide a one-size fits all solution for those businesses joining it. Not to mention the single Form 5500 filing.
One simplifying example of an MEP is buying products in bulk. You buy multiple items to get a discounted price. That discounted price should then carry into the overall cost. Therefore, an MEP should have better investment options, lower cost, and overall level of services rendered. At least, that is how they are advertised and promoted.
An open MEP does not have the commonality component to join employers together. There is still a plan document for each employer, and separate tax filings with the Form 5500. The idea is to have enough employers grouped together to demand pricing (see bulk buying example above) that is lower and additional have better access to high quality investments.
The next option, which is a version of an open MEP, is an Exchange Plan. Typically you have a third-party administrator that manages the Exchange for the administration and tax filing purposes, but all the employers are separate other than assets grouped together on one record-keeper. These are simply the precursor to a pooled employer plan.
These types of plans do, however, give a false sense of separation for the employer to the MEP in regard to fiduciary responsibility and costs—I would even say investments as well. All of the service providers in place come with a certain cost to managing the MEP, and it should be examined how these type of setups can ostracize businesses of a certain size. Furthermore, if the goal is to display the 401(k) as a benefit that should be simple and available to all, it’s not doing a good job of that in terms of leveraging technology over bulk pricing.
Think of it this way, if you can produce something without having to expend a lot of manual labor and the process is automated, it will be more affordable without the need to buy bulk. Another good example of this comes from the automobile industry again. The technology behind the assembly line and the ability to more easily make the automobile is what led to affordability.
So, what changes have happened in the retirement industry to allow for technology to dramatically reduce cost and raise saving potential?
The last couple decades we have seen an increase in contribution limits, auto-enrollment, and more recently with the SECURE Act the re-birth of what will be lovingly referred to as the “PEP” or Pooled Employer Plan.
The PEP is not new, but will certainly be in a new “form,” effective January 1, 2021 and will give opportunities for anyone to sponsor an MEP. No more commonality requirement, increased size for the MEP without a required audit (if none of the employers are over 120 participants), and a benefit group that can be established by financial organizations and business groups instead of just the expected PEOs, chambers of commerce, associations, and other employer groups.
These changes, however, do not again resolve the massive gap of Americans not saving for retirement or having a saving mindset at all. More than anything it does create a clamor of 401(k) industry professionals looking forward to how they can focus and bolster their own business by accommodating a new version of an MEP.
The traditional or legacy 401(k) providers would offer a multiple employer plan (MEP) or pooled employer plan (PEP) to solve the problem of affordable options for the small businesses, even though they know that that offering is certainly not on par for cost and efficiency.
Why buy in bulk for services that in comparison are going to cost your business less if you buy direct?
In most cases, the MEP option can be overkill for a small business. Overkill on price, overkill on services, and overkill on what is needed. So, the original statement about an MEP being made for the small business isn’t exactly true if you look at the prior examples of what technology does. Is it what a small business needs? In my opinion, no. The technology is out there to produce a competitively priced and meaningful 401(k) plan without the buying in bulk option.
Keep in mind, it will be the same organizations of service providers looking for the opportunity to promote an MEP that have been doing it for years. The PEP will be a new face and may help close the retirement gap by a very small percentage.
Now there have been a roll out over the years of Fintech companies offering “simplified” solutions for the 401(k), each having a different approach whether on pricing or what their technology can do. Make no mistake, these companies are trailblazers. They have made the path much easier to travel, but we are still left with a real dilemma on market saturation. There are still millions of Americans not saving for retirement and businesses not making the step to sponsor a 401(k) plan.
The old verses new tug-of-war is happening. Those most to benefit in this exchange, however, is the small business. The new Fintech wave of 401(k) providers is gathering to come crashing down (in a good way) on the small business, and the small business doesn’t even realize it. Also, it may seem odd as previously the small business was the least pursued by industry providers for the less than blatant reason of expense and time it takes to manage these smaller-sized plans and the ultimate payout for them.
But what if you could have a 401(k) group, a syndication, that allows all business sizes in with pricing and options that larger organizations command? A 401(k) Syndicate is a group of employers (mostly small businesses) that create a 401(k) plan on a Fintech solution, such as the platform 401GO offers. This platform is the perfect stage for every type of organization, including the financial advisors, PEOs, chambers of commerce, associations, medical groups, manufacturing groups, CPAs, payroll companies, etc.
The 401(k) Syndicate is a simplified version of the MEP. Think, MEP Lite. For example, imagine an association having a 401(k) offering, branded with their group, an automated structure in regard to administration, testing, notices, and annual filing, and the association holds no fiduciary burden nor a required expertise to offer such benefit. The automation makes plan setup fast, administration simple, integration with the flip of a switch, and most importantly, costs so low that the old or legacy service providers can’t fathom how something like that can be offered and remain in business.
This is what technology does. It simplifies, and it makes any industry adjust the baseline costs of an offering. Everyone can be ready for retirement; everyone can have access to a 401(k) plan. Instead of sponsoring an MEP or PEP as is predictably advertised, organizations should think about creating a 401(k) Syndicate. There now becomes the freedom of choice instead of the lack thereof.
A financial advisor can establish his or her own 3(38) investment lineup and provide their own models for a guided portfolio Robo-Advisor for their very own co-branded 401(k) Syndicate, and feel comfortable knowing these things are in place for businesses of all sizes to join.
The other more miraculous feature of a 401(k) Syndicate is that it can be set up in hours and not months. Also, there isn’t the locked-in mechanism that is so discretely masked with sponsoring an MEP. Furthermore, it can be a game changer for groups looking to provide a 401(k) benefit to member businesses—especially the small business!
In addition to the speed and efficiency of setting up this type of plan group is the transparent pricing. For 401GO the employer fees of $9 per participating employee a month (PEPM) are affordable for even the smallest business. Why charge a setup fee or a document fee when automation handles it? The manual steps, the data input, the process has all been simplified. As it should be! From the plan setup to the annual administration, the funnel into a 401(k) Syndicate is consistent and co-branded for the employer to have the look and feel of an MEP, but not all the extra expense.
Ultimately, there is no “release date” for a 401(k) Syndicate because it’s available now. No waiting until a legislative session. The technology is currently in place at 401GO, and more importantly will only make things easier, more affordable, and commonplace for a small business to have a 401(k) plan.