Strength in Numbers
By participating in a multiple-employer retirement-savings plan, small- and medium-sized organizations can utilize economies of scale to save their employees from some burdensome fees. But that option comes with its own set of challenges.
By Carol Patton
Could your employees use an additional $100,000 in their retirement accounts?
According to Bankrate.com, employees' retirement balances could differ by that much, maybe even more, depending on the size of their employer.
Bankrate used 2011 plan data from Brightscope, a retirement-plan-consulting and benchmarking organization, to better understand the impact of retirement fees on account balances over time.
"Our chief financial analyst ran the numbers, looking at somebody who starts [contributing to a retirement account] at age 25, with a salary of $30,000 per year, gets a 3-percent pay raise every year, then extrapolated that over 35 years," says Sheyna Steiner, investing analyst at Bankrate.com in North Palm Beach, Fla.
She says the fictitious employee at the large organization paid 49 basis points (a basis point represents 1/100 of a percent) and would retire with $675,000. However, an employee at a small business earning the identical salary and raises would typically pay 141 basis points and wind up with $562,000.
"It doesn't sound like a lot, but when you add up [the fees] over 35 years, it turns out to be quite a difference, of over $100,000," she says, adding that Brightscope obtained its benchmarking data from 3,470 large employers and 29,549 small employers nationwide.
Employees at small companies are not condemned to a lifetime of paying higher fees, however.
Retirement experts suggest their organizations join forces by participating in a multiple-employer plan. Unlike a multi-employer plan in which employees in the same industry pay into one retirement plan, a multiple-employer plan enables those in different industries to do the same.
While the practice is legal, MEPs are considered controversial by some, which is slowing their growth and demand. For example, the U.S. Department of Labor has taken a dim view of them, citing several concerns, including that there must be commonality between the plan sponsor and participating employees in order to satisfy ERISA requirements.
Despite the DOL's consistent push back on MEPs, they were still "anticipated, contemplated and addressed" by ERISA back in 1974, says Francis Vitagliano, visiting scholar at the Center for Retirement Research at Boston College in Chestnut Hill, Mass.
"What's happened is that there has been, for 35 years or more, a back and forth on this approach," he says, adding that the precise wording of ERISA does not necessarily require a connection. "If you were to Google MEPs, you would find a few companies attempting to do this. It's open for interpretation."
Or, at the very least, open for further discussion with the DOL, says Bruce Ashton, partner at Drinker Biddle & Reath, a Los Angeles-based law firm.
"It's not a question of whether MEPs are legal or not, it's a question of whether they're an individual plan or aggregation of a whole bunch of plans," he says, adding that, if the latter, each participating employer must file the Form 5500 Series to satisfy annual ERISA and IRS reporting and disclosure requirements.
Keeping employees' money in safe hands is yet another red flag. Over the years, Ashton says he recalls problems among vendors of multiple-employer-welfare arrangements, which are similar to MEPs, except they basically involved health plans. In some cases, the vendors simply stole the money.
"Unless there is a bona fide association and the participating employers have some degree of authority, control and responsibility of oversight of [the vendor], there is a concern that [the vendor] will somehow abscond with the money," he says. "That's what the DOL is spooked about."
Despite these risks, Ashton says he believes such plans make sense, especially because many smaller employers lack the knowledge, time and inclination to oversee a retirement plan themselves.
When approaching MEP vendors, he says HR needs to ask a variety of questions. What is their industry reputation? What are their credentials? What is their experience in dealing with retirement plans?
And don't forget exit strategy. Considering that the entire plan can be disqualified if just one participating company fails to observe the plan's requirements, is there a mechanism for kicking out such employers? Or, if an employer gets a better deal and wants to leave the plan, how does it get out? What penalties are involved?
"Understand what you're buying, understand what services you're getting and understand what the cost is going to be," Ashton says.
Meanwhile, he says MEPs are not exactly a growth industry, mainly because of the DOL's advisory opinion. He says some vendors have backed off from establishing them, while others are operating with mirror MEPs, which are an aggregation of separate plans, requiring each employer to file Form 5500.
Still, there are alternatives. To reduce fees, Steiner suggests scaling back on plan features that may not be needed or rarely used, such as investment advice; benchmarking its plan against other employers of the same size and in the same industry to see where its plan fees fall; and scrutinizing revenue sharing fees.
Sometimes, retirement-plan fees such as administrative or record-keeping costs are embedded into the cost of the mutual fund.
"You should definitely know who you're paying, what you're paying and how much you're paying," says Steiner.
If a company's 401(k) assets are under $1 million, says Vitagliano, HR can also explore multiple-employer plans that already exist or are being formed. They can also locate a vendor that provides index funds at the lowest expense ratio for a plan your size, or Google "commingled trust funds, small 401(k) plans," which may offer the lowest cost structure for investments.
"If I were a small employer," he says, "I would look at a local trade group of small employers in your area. Look at [their] benefits...These [groups] all share the same problems, issues and challenges."