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On January 1, 2021, the 401(k) world as you know it will be reborn. It may start out slowly at first, but ultimately the popular retirement savings vehicle will change.
And you should be happy.
It’s very possible, if not likely, the new and improved “401(k) 2.0” will allow you to benefit from broader opportunities, more flexibility and lower costs. Best of all, it will make this millionaire-maker savings plan accessible to more people.
When Congress passed the SECURE Act last year and President Trump signed it into law, it allowed a rarely used form of the 401(k) plan to become more universally available. Called “Multiple Employer Plans” or “MEPs,” prior to the SECURE Act their use was restricted generally to business associations. Beginning January 1, 2021, any company can pool their 401(k) plan with any other company.
These “Pooled Employer Plans” (“PEPs”) operate much like MEPs. The main difference is, unlike MEPs, PEPs do not require member businesses to share some form of commonality. And while this portion of the law doesn’t become effective until next year, that doesn’t mean the process of moving from stand-alone plans to PEPs hasn’t started.
“The transition has already begun,” says David N. Levine, Principal at Groom Law Group. “I’m involved in a number of PEPs where some small plan sponsors have already begun to plan the transition with their advisors. The impact on participants is likely in 2021 though.”
Even if your 401(k) plan is destined to joined a PEP come January, you won’t be able to tell just yet. In fact, depending on how the new plan operates and how often you look at your 401(k) account, you may not see anything at all.
“One of the main reasons why a company chooses to use a MEP/PEP is to transfer responsibilities and authority to someone else,” says Ilene H. Ferenczy, Managing Partner of Ferenczy Benefits Law Center. “So, probably the best way to ensure a good transition from the single employer plan to a MEP is for the company to let the MEP representatives do their job by following their directions carefully. The company’s staff should get as much information as it can about what the MEP representatives need, both initially and on an ongoing basis, and then set up internal systems to make that happen as easily as possible.”
There is a good chance, however, that moving from a stand-alone company plan to a PEP will bring wholesale changes in the financial professionals serving the plan. This also means changes in the investment options.
“Some 401(k) plan participants may be attached to their current plan advisor or investment funds, and many people are a little suspicious of change,” says W. Michael Montgomery, Managing Principal of Montgomery Retirement Plan Advisors. “However, this concern generally passes quickly if the benefits of expert, independent investment oversight is communicated clearly.”
On the bright side, if you (like many others) invest solely in a target date fund, while the name of the fund may change, the underlying investment strategy likely won’t change.
Even if the service providers remain the same and the fund line-up is retained, you may experience a slight hiccup in your 401(k)—but only if you’re paying close attention.
Normally, when a company plan undergoes a change, you’re notified that there will be a short “blackout” period while the old plan converts into the new plan. If you’re one of those “set it and forget it” types who prefers to let their 401(k) run on auto-pilot, you might not even notice this.
“The merging of a single employer plan into a MEP/PEP solution may or may not require a change of recordkeepers,” says Terrance Power, President of Platinum 401K, Inc. “Retention of the existing recordkeeper could likely eliminate the need for a ‘blackout’ of the plan, by the way. Most of the PEP solutions being proposed won’t require significant (if any) changes in plan design (eligibility, vesting, etc.). It is likely that there would be a shakeup in the investment fund lineup as a new 3(38) Investment Manager steps in to select and monitor the investment options. And depending on the structure of the new program, there could be a significant cost savings that could be passed on to the participants.”
You may think of your 401(k) as an investment tool, and, to some extent, it is. But it is the plan recordkeeper that makes sure all the trains run on time. This service provider is the hub which connects all other service providers. They keep track of all the accounts and the money flowing into and out of those accounts, including investment purchases and sales. When there’s a problem with your 401(k) account, it’s usually not a problem with the investment adviser, but with the recordkeeper.
This will often be where 401(k) MEPs and PEPs have their greatest challenges. Not only do these pooled plans introduce more complex logistics than stand-alone plans, but they also present the opportunity to streamline archaic processes. That may sound good, but it usually takes a few tries before you can be confident all the bugs are worked out.
“Be careful with 360 payroll integration,” says Troy Tisue, President of TAG Resources, LLC. “360 integration means a participant change on the recordkeeper’s site automatically adjusts at the payroll provider level. It’s a lofty goal and when this works, life is good. But bad data hitting a recordkeeper platform remains one of the biggest problems in this industry. 360 integration often just makes bad data hit the recordkeeper firms faster. Tracking eligibility across employers is unique to MEPs/PEPs—when an employee leaves one employer for another inside of a PEP, their eligibility goes with them. Pooled structures don’t just ‘plug-and-play’ with 360 integration—this takes a lot of planning.”
One area where you might benefit the most pertains to your own financial literacy. With stand-alone plans, companies can’t always afford the latest and greatest in employee financial education programs. It’s not unusual for smaller companies to use the same 401(k) vendor for multiple services.
Large companies with huge 401(k) plans can afford to hire specialists. By pooling their 401(k) plans together into a MEP/PEP, smaller companies’ retirement plans will now enjoy economies of scale similar to larger companies. That means they can hire skilled specialists that concentrate solely on employee education.
“Adopters within a MEP/PEP are able to utilize the service providers and fiduciary experts who focus on their vertical,” says Philip S. Scott, Registered Representative at Strategic Capital Advisers. “Participant education is one of these services, which are enhanced as a result of the Adviser(s) being focused solely on participant education and not being pulled into other operations of the Plan.”
Finally, there are some who view the new 401(k) MEP/PEP as a competitive alternative to state-sponsored retirement plans. Though in some sense this is true, it’s just as accurate to think of them as complimentary components on a similar spectrum.
“It’s interesting to me to see how naturally MEPs and PEPs fit into the retirement ecosystem alongside state-facilitated retirement savings programs like OregonSaves, Illinois Secure Choice, and CalSavers,” says Lisa A. Massena of Massena Associates LLC. “State Auto-IRAs give employers a reason to look at MEP/PEP, and MEP/PEP give employers a place to ‘graduate to’ when they’re ready to invest in a retirement program. By then they’ve also mastered the art of payroll deduction into retirement accounts, and they have a workforce savings track record that makes them a good customer.”
Because 401(k) MEPs/PEPs are more robust than state-sponsored plans, employees who have access to MEPs/PEPs will be able to save more. This increases the chances they can retire in comfort without undue reliance on government or their former company.
Financial independence is a goal you should have. The advent of the new 401(k) MEP/PEP will make this goal easier to attain for more and more people.