Multiple Employer 401k Plans: An Option for Small Businesses?

Mar 3

For small businesses, multiple employer 401k plans (MEPs) are often promoted as a cost-effective and simplified solution for offering retirement benefits. While MEPs can offer some notable advantages, they’re not always the best fit for every business. Understanding the pros and cons of these plans can help small business owners make an informed decision.

The Advantages of MEPs

The two main benefits of MEPs are potential cost savings and reduced administrative burden. Here’s how they deliver on these advantages:

Ease of Administration: MEPs consolidate administrative tasks, which can save small businesses significant time and effort. Employers in an MEP share administrative responsibilities, often with the plan provider acting as the primary fiduciary.
Cost Savings: By pooling resources with other participating employers, MEPs often negotiate lower fees for recordkeeping and administration services. Additionally, for businesses subject to annual audits, MEPs eliminate the need for individual plan audits, which can be both time-consuming and expensive.

Potential Drawbacks of MEPs

While MEPs offer some clear benefits, they come with limitations that may not suit every business:

Lack of Fund Flexibility: MEPs typically restrict investment options to a pre-selected menu of funds. Employers seeking more variety or specific investment types, such as a self-directed brokerage account, may find MEPs too limiting.
No Self-Directed Brokerage Accounts: Many MEPs don’t allow participants to allocate funds into brokerage accounts, reducing opportunities for customized investment strategies.
Cost Comparisons: While MEPs can be cost-effective, some low-cost 401k providers offer pricing and services that rival or even outperform MEPs. Features like 3(16) fiduciary services and 360 payroll integration can simplify administration without requiring participation in an MEP.

Fund Monitoring and Advisory Services

One advantage of the restricted fund options in MEPs is that they usually are professionally monitored. Small businesses that participate in MEPs may not need to hire a financial advisor to select and oversee the funds. However, an advisor can still provide valuable services such as employee investment education and guidance.

Audit Considerations

For small businesses with plans that require an annual audit, joining an MEP can be particularly advantageous. Since the MEP plan as a whole undergoes a single audit, individual employers are relieved of this costly and complex requirement. For businesses with fewer than 100 participants with balances, the audit won’t apply, but for larger small businesses, the savings in audit costs can be substantial.

Is an MEP Right for Your Business?

Deciding whether an MEP is a good fit depends on your business's priorities:

If avoiding an annual audit and reducing administrative complexity are your primary goals, an MEP can be a great option.
If your business values a wide range of investment options and greater plan customization, a traditional 401k with a low-cost provider may offer more flexibility.

Ultimately, small business owners should carefully evaluate the trade-offs between cost savings, administrative ease, and investment flexibility when considering an MEP.