Reshaping Retirement: 3 Trends that Should Influence Your 2020’s Sales Strategy

By Ben Thomason and Fred Barstein

As legislation and technology drive change in the retirement plan market, we are seeing record-breaking rates of consolidation, impactful new regulation such as the SECURE Act, and shifting strategies including the growth of managed accounts. Moving into 2020, Fred Barstein and Ben Thomason are breaking down why these trends have taken flight and what they should mean for your retirement plan business strategy.

Trend #1 Changing Regulation Around Open MEPs/PEPs

There are 5.8 million businesses in the US with100 or fewer employees, and of those, 90% do not have a retirement plan. The SECURE Act was passed in an effort to close this retirement gap, with significant changes made to Open Multiple Employer Plans (Open MEPs), now referred to as Pooled Employer Plans (PEPs). Previously, “open” MEPs could cover multiple, unrelated employers, but all plans needed to file their own 5500s and were subject to the “one bad apple” rule which made them highly risky to sponsors. The SECURE Act introduced PEPs, which are essentially Open MEPs, but they can be offered to unrelated companies with only one 5500 filing and without the one bad apple rule. They must be serviced by a pooled plan provider (PPP). The PPP takes on the role of named fiduciary, plan administrator, and the organization responsible for performing all administrative duties.

PEPs also greatly reduce the plan administration lift through a single plan document, a single Form 5500 filing, and a single independent plan audit, all led by the PPP. They also have streamlined fiduciary oversight, minimizing the legal responsibilities a plan sponsor would need to manage. Finally, PEPs will likely appeal to those small employers who believe plans are too expensive and difficult to administer, and allow them to band with others to access an institutional quality infrastructure they’d otherwise have to build – and pay for – on their own.

What this means for advisors

Retirement plans are sold, not bought, so while new legislation was meant to address accessibility, that wasn’t necessarily the problem. Instead, the problem was around the complexity of plans and misinformation around the cost and time investment for small employers. That being said, just because the SECURE Act passed, does not mean companies are running to the gates – they need to be made aware of the improvements that were made. PEPs create an opportunity for advisors to market small plans in an entirely new way and alleviate concerns smaller companies have around the investment it takes to run a plan.

It’s also worth thinking about the opportunities PEPs create for those around you. This structure makes it easier for financial institutions outside of retirement – such as insurance and benefits providers, among others – to enter the market and cross-sell their existing services while gaining low priced access to the participant. To get a leg up, you may feel inclined to create your own offering, but standing up your own PEP is no small feat. It comes with significant expense and time. Partnering with a broker-dealer or recordkeeper, rather than trying to form your own, can be a more effective way to enter the market.

We also recommend thinking about other partnerships (payroll companies, associations, etc.) that offer marketing access to small businesses and still offer effective ways to scale through not only PEPs, but also traditional MEPs and even your own non-MEP solution. Check out our previous Vestwell U webinar on associations for help on how to tap into this market or our session on traditional MEPs if you’re looking for more information on how they operate.

That being said, just because PEPs are now easier, doesn’t mean they’re always the right option. You can often replicate the same benefits around price and administrative lift elsewhere. There are already a number of recordkeepers offering similar low cost, institutional pricing, and in some senses, you can provide the same value without waiting for 2021 or putting in the investment of standing up a new initiative.

Trend #2: Continued Industry Consolidation 

It’s no secret there has been major consolidation across the retirement industry, from recordkeepers, to TPAs, to advisory firms and beyond. Just last year the RIA industry underwent record M&A activity for the 7th year straight and recordkeepers have consolidated  from more than 400 just a decade ago to about 160 in 2018. We anticipate this continuing since recordkeeping is a relatively undifferentiated product in an industry with high barriers of entry. Consolidation also helps providers combat the significant drop in participant fees over the past 10-15 years. As recordkeepers take advantage of economies of scale, they can invest in better technology, cut costs, and drive additional revenue through other products such as managed accounts.

What this means for advisors

Consolidation is helping RIAs and recordkeepers not only build out their offerings, but it’s also putting them in more direct competition with one another. For example, large RIAs such as Pensionmark now have participant call centers, among other services, that were traditionally only offered by the recordkeeper. Recordkeepers, on the other hand, are encroaching upon core competencies of the advisor by becoming more participant focused, often in the hopes of competing for the wealth business on the back end.

To combat the heightened competition, advisors should consider the long term nature of their recordkeeper partnerships. There is already a growing fear among advisors that occurs when they move clients to a recordkeeper whose competencies overlap with their own or who is competing with them for wealth business on the back end. There is also increasing frustration around recordkeepers refusing access to participant level data, so it’s important to take your own business plan into consideration when determining where to place your clients’ plans.

Trend # 3: Increased Attention on Managed Accounts

401(k) managed accounts have become more and more popular over the past 5-10 years with the amount of money in these accounts increasing from about $100 billion in 2012 to over $270 billion in 2017. The trend of managed accounts is likely driven by two currents: 1)  Fee compression, as these products are a way for advisors to charge (and justify) higher fees and 2) Growing frustration around the stagnant nature, and ongoing conflicts, in current offerings including target date funds.

What this means for advisors

If you don’t have a point-of-view or an articulated solution for a more customized investment structure for participants (ie. a managed account), it’s important to start thinking about one. Aside from fiduciary risk, which leaves you and your plan sponsor vulnerable, it creates a real opportunity to get closer to the participant. That being said, while managed accounts give advisors a better tool to assess appropriate risk for clients, that doesn’t mean they are right for everyone. Target dates funds (TDFs) will likely suffice for most participants under the age of 50 unless they have a lot of investable assets. For those over the age of 50, we recommend implementing a “QDIA 2.0,” to auto-enroll clients into managed accounts which will offer them a more customized approach as they near retirement. Without making managed accounts a QDIA, adoption will be tough.

Looking ahead

For a notoriously slow-moving industry, these trends signal that changes are underway. Better yet, several of the trends are aimed at improving things for sponsors and participants. With PEPs, reduced administration and liability make balancing a plan while running a business more manageable. When it comes to industry consolidation, lower fees and better technology mean participants have more money going into their accounts while gaining access to a better experience. As for managed accounts, greater access to a customized approach can help those nearing retirement feel more comfortable with their investments. In turn, these trends help advisors to more strategically align with their client’s needs and market around them. As you build your 2020 plan, it’s important to maintain a pulse on the direction of the market and continue to flex your strategy in a way that best aligns your vision to the needs of your clients.

 

 

Putting MEPs on the Map

By Benjamin Thomason, Vestwell

As we all know, the Department of Labor recently unveiled a new final rule that will make it easier to form and manage Multiple Employer Plans (MEPs). So it’s no wonder that many advisors in the industry are thinking about the best ways to incorporate them into their business strategies.

For retirement plan advisors, in particular, new MEP rules are changing the game—especially in the small plan market. Thanks to recent regulations, employers that have little or no business-related connection to each other are now able to join a closed MEP, creating an opportunity for advisors to service smaller clients as a 3(38) fiduciary in a way that’s both scalable and cost-effective.

Where should an advisor start? Although advisors cannot sponsor closed MEPs, they can leverage relationships to put the right MEPs in place. Most advisors have spent their careers developing centers of influence. A MEP allows them to turn those relationships into partnerships by working together to create really efficient offerings.

While the MEP would be sponsored by a lead employer that takes on the bulk of the fiduciary responsibility and administrative oversight, advisors and partners can make it easier to craft and manage, while also delivering superior brand and value.

Two relationships, in particular, that bring significant opportunities are employer groups and associations, both of which can act as the “lead employer” of a closed MEP.

Since recent regulation now allows for unrelated employers with at least some commonality to create cost-effective group retirement plans, employer groups and associations are a perfect place to start. Both have access to a significant base of employers with common denominators such as a common geographic location, which the Department of Labor said is a sufficient nexus to join a closed MEP.

By sponsoring a MEP, association or employer groups can enhance their benefits, better support their members, increase engagement, and even boost membership.

The value in one payroll provider

Another relationship that’s highly relevant in the MEP universe is payroll providers. Having a number of disparate payroll providers in a MEP can be an administrative nightmare.

Since accurate payroll files are critical to administering the plan, some MEPs engage a separate data aggregator to process those files, which adds time and cost while making the plan more vulnerable to mistakes just by virtue of having another third-party provider involved in plan administration.

Therefore, having one central payroll system in a closed MEP is a huge value-add, and triangulating the payroll relationship with an employer group or association is an even stronger offering. Forward-thinking advisors will try to connect associations and payroll providers in a MEP structure for maximum efficiency with optimal cost designs.

Start the MEP discussion

Overall, advisors should be thinking about MEPs not just as they relate to their clients, but as they relate to their own business models as well. And while the future of MEPs may currently be in limbo, they are still a worthwhile discussion point for advisors in the small plan market.

If nothing else, conversations about MEPs give us all an opportunity to have transparent discussions around the future of retirement for companies of all sizes. And once the passage of open MEPs comes into play, advisors who take steps now to make changes to their business strategy will already be ahead of the game.

Ben Thomason is the Executive Vice President, Revenue at Vestwell, a digital platform that makes it easier to offer and administer retirement plans. Thompson leads the sales and service operations with a focus on expanding the firm’s current advisor relationships, building new strategic institutional partnerships, and overseeing plan sponsor support. 

How Small Businesses Benefit from the SECURE Act

 

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By Allison Brecher, General Counsel, Vestwell

Congress is close to passing legislation that will be a big win for small business owners thinking of offering retirement plans to their employees. The Setting Every Community Up for Retirement Enhancement (SECURE) Act has a number of provisions centered around improving the nation’s retirement system, but small businesses in particular stand to benefit in many ways. Most notably, the Act would:

  • Increase the business tax credit for plan startup costs to make setting up retirement plans more affordable for small businesses. The tax credit would increase from the current cap of $500 to up to $5,000 in certain circumstances.
  • Encourage small-business owners to adopt automatic enrollment by providing an additional $500 tax credit for three years for plans that add auto enrollment of new employees.
  • Simplify rules and notice requirements related to qualified nonelective contributions in safe harbor 401(k) plans, a particularly common plan design amongst small businesses because the plan automatically passes certain compliance tests.
  • Offer a consolidated Form 5500 for certain defined contribution plans to reduce costs.

Additionally, the SECURE Act allows unrelated small businesses to get together in an “open” 401(k) multiple employer plan (MEP), which could also reduce costs and administrative responsibilities. Currently, only so-called “closed” MEPs are permissible, which require employers participating in it to have some kind of connection between them, such as membership in the same industry or an established trade association, and each business bears liability in the event any employer in the plan fails to comply with legal or regulatory requirements.  “Open” MEPs eliminate those rules.

The SECURE Act would also increase plan flexibility, which is a big benefit for small plan sponsors. First off, it would permit employers to add a safe harbor feature to their existing 401(k) plans even after the plan year has started as long as they make at least a 4% of pay contribution to employees, instead of the regular 3%. Second, it would extend the period of time for companies to adopt new plans beyond the end of the year to the due date for filing the company tax return.

There are other benefits that focus on helping employees save more for retirement. For example, it’s been proven that automatic enrollment and automatic escalation features encourage long-term savings, and the SECURE Act permits safe harbor 401(k) plans to increase the auto enrollment cap from 10% to 15% of an employee’s paycheck.  And since employees are working and living longer, the bill also benefits older workers by letting them continue to contribute to their plan until age 72, up from the current age of 70 ½. Lastly, it would provide penalty-free withdrawals from retirement plans of up to $5,000 within a year of the birth or adoption of a child to cover associated expenses.

The SECURE Act’s companion bill, the Retirement Enhancement Savings Act (RESA), is now moving forward through the Senate. RESA includes many of these same beneficial provisions and also has bi-partisan support. Many industry experts expect a compromise version of the two bills to become law before the end of 2019, making it the perfect time for small businesses to take action. If an employer wants to offer a safe harbor plan, plan documents need to be signed by late summer. This way, they’ll meet the October deadline for distributing legally required notices, be able to go January, and take advantage of the full tax benefits for the year.

Newly Proposed Bills May Help Your Plan Sponsors

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Tax reform isn’t the only newsworthy event affecting the benefits industry–several bills were introduced in Congress at the end of 2017 that could dramatically impact certain kinds of retirement plans. While these new proposals have an uncertain future, they all signal Congressional interest in improving retirement security. Here are some common trends news that you may see affecting your retirement plans soon.

Increase access to multiple employer plans (MEPs)

The Small Businesses Add Value for Employees Act (SAVE Act, HR 4637) removes the “common bond” requirement, thereby making it easier for small businesses to pool together, regardless of industry, and offer retirement plans to their employees while alleviating some burdens of plan administration.

The Retirement Security Act of 2017 (SB 1383) offers employers a tax credit and protects employees from losing their tax benefiits if one employer in a MEP fails to meet the participation criteria. Similarly, the Auto401k Act (HR 4523) provides relief from the “one bad apple” rule of MEPs so that all participating employers are not penalized when one employer violates the qualification rules.

Incentivize small businesses to offer retirement benefits

Through tax credits and other incentives, Congress is attempting to make retirement plans more accessible and promoting lifetime income solutions.The Retirement Plan Simplification and Enhancement Act (RPSEA; HR 4524) would increase the current automatic enrollment safe harbor cap and encourage employers to defer more than the automatic deferral floor of 3% of salary in the first year. It would also exempt retirement savings below $250,000 from complicated required minimum distribution rules and make it easier to take advantage of the saver’s credit. The SAVE Act increases the limit on elective deferrals under a simple IRA and permitting employers to make non-elective contributions for their employees of up to 10% of pay.

Reduce administrative burdens for plan sponsors

Congress is also addressing some of the lesser-known, but equally painful administrative burdens of sponsoring retirement plans. Access to a Secure Retirement Act (HR 4604) corrects some of the confusing regulations that often stop employers from including a guaranteed lifetime income product in their benefits package.

The Receiving Electronic Statements to Improve Retiree Earnings Act (RETIRE Act HR 4610) allows plan sponsors to use electronic delivery as the default distribution method for retirement plan notices and documents. A companion Senate bill is expected soon and the timing coincides with an effort by the Employee Benefits Security Administration’s project to address electronic delivery.

Staying on top of these bills can help eliminate the often confusing world of government. As Congress continues to takes steps to help plan sponsors, we will keep you updated on the way new legislation is affecting your clients. That way, as client questions come about surrounding what they hear in the news – their trusted advisor has the answers.