JULY’s CEO, John Humphrey, contributed an insightful article to the Summer 2020 issue of Plan Consultant Magazine. The SECURE Act is a significant piece of legislation that clears the way for broader use of MEPs, but it could also be the catalyst for significant market disruption over the next decade.
Creating SECURE Act Solutions
Change is afoot—and with change comes both opportunity and risk
BY JOHN HUMPHREY
While the future is never certain, the SECURE Act1 could end up being one of the most
significant pieces of legislation to shape the U.S. retirement plan landscape over the next decade. The full weight of the retirement plan industry is hard at work studying the legislation, awaiting regulations, and deciding how to go to market with SECURE Act solutions.
Over the next few years, providers will create or participate in varying flavors of multiple employer plan (MEP) products. These new solutions will have several goals, including reducing the retirement coverage and savings gaps, simplifying processes, lowering costs and fees, and, just maybe, shifting true fiduciary responsibility from the employer to the provider.
Now is the time for providers to seek answers, create solutions, take risks and define how they will participate in this changing retirement plan landscape.
JUST ANOTHER PLAN DESIGN?
In some ways, the emergence of MEPs is just a new plan design—like crosstested plans back in the early 1990s. Under this premise, providers need to know the rules and be ready to handle their specialties.
TPAs must be able to provide consulting and administration, recordkeepers need to retool systems and be ready to efficiently manage recordkeeping for MEPs, and advisory firms and asset managers must identify and align with vendors and platforms to take advantage of the new rules.
If a provider sees MEPs as just another new plan design, they simply need to learn the rules and align with other providers to assist them.
…OR A RETIREMENT PLAN MARKET MAKEOVER?
Looking through another lens, however, one can see a more disruptive picture. It is quite possible that MEPs could result in wholesale changes to both sales and servicing models for the qualified plan market. Through this lens, we might see a significant acceleration of trends from the past decade where providers began accepting some responsibility (i.e., 3(16) fiduciary, 3(38) fiduciary, etc.) to a marketplace where firms across the industry accept top-level fiduciary responsibility, and finally shift the real risk and administrative burden from employers who lack both the knowledge and resources to fulfill their roles.
While there are some vendors that were pioneers in offering fiduciarycentric service models, most still operate under a ”third party” model designed in the early 1980s to shield providers from liability (and real responsibility).
While a solid argument can be made that 401(k) plans really are the responsibility of employers offering them, a different chorus seems to be growing. If more vendors embrace
true fiduciary responsibility, a complete makeover of the retirement plan marketplace could occur.
Through this lens, providers would be advised to take a more aggressive, proactive approach to creating SECURE Act strategies to remain relevant and be positioned for future success.
WHO OWNS THE CLIENT?
An interesting question gaining momentum that could add fuel to the market makeover theory is: Who owns the client under these new arrangements? Will it be advisors, recordkeepers, TPAs, or asset managers? While this issue has been around for years, the SECURE Act is bringing it to the forefront.
Firms seeking to strengthen their positions may become sponsoring organizations of MEP products, including serving as creators of group programs under the Association Retirement Plan rules2 or ”group of plans” (GOP) rules,3 or as Pooled Plan
Providers (PPPs) of PEPs.
Pete Swisher, President of Waypoint Fiduciary, LLC, an industry expert on MEPs, provides consulting services to firms building SECURE Act solutions. In his practice, Pete confirms seeing product development work across the industry to allow providers to gain
”Now is the time for providers to seek answers,
create solutions, take risks and define how they will
participate in this changing retirement plan landscape.”
better control over client relationships. He states, ”Most of the retirement industry is focused on helping clients and co-workers through the COVID-19 crisis, but the irst movers on group solutions are still moving, innovators both inside and outside the U.S. are crafting responses, and the first PEPs are likely to launch, on schedule, on Jan. 1, 2021. After that you can expect a rolling series of announcements as an increasing number of vendors introduce SECURE-influenced changes to their product lineups.”
WHAT STEPS SHOULD PROVIDERS TAKE?
Here’s a look at how some organizations may be approaching SECURE Act product development and steps other firms may need to consider as they look ahead.
Advisors are the driving force for retirement plan sales. They play vital roles in relationship management, building investment lineups, and enrolling and educating participants. Some advisory firms are studying the SECURE Act with a keen eye and see the opportunity as a final step toward finishing the ”who-owns-the-client”
These firms may create solutions where they serve as top-level fiduciary by becoming the sponsoring organization of multiple employer programs. In these ”advisor first”
solutions, firms may create or enhance in-house platforms, or look to recordkeepers and TPAs to assist them in building and managing their solutions.
Other advisory firms may seek ”off-the-shelf” options or get help from other vendors in creating their own SECURE Act products to allow advisors to adapt and compete. In either scenario, advisory firms will be a driving force for the creation of SECURE Act solutions.
Recordkeepers are the technology hubs that bring together the retirement plan parties (participants, employers, advisors, TPAs, and asset managers).
They provide sales support to advisors, offer broad-based payroll integration critical to fulfilling fiduciary responsibilities, and offer bundled plan administration and 3(16) fiduciary services or partner with outside TPAs for these functions.
Some recordkeepers may decide to create their own SECURE Act solutions, including serving as toplevel fiduciaries and distributing their products as off-the-shelf options
through advisory firms who decide not to create their own products. Others may seek to enhance their technology and capabilities to help other providers create and manage white-labeled solutions.
Regardless of their strategy, recordkeepers may need to expand their capabilities to be fully prepared, including offering in-house 3(38) investment fiduciary services or
enhancing partnerships with outside vendors, expanding payroll integration solutions, and partnering with TPAs or creating their own 3(16) fiduciary capabilities.
Third Party Administrators
TPAs are compliance experts. They are critical to designing plans and providing plan administration. They play vital roles in sales and servicing, and TPAs willing to take some risks could have interesting opportunities for SECURE Act solutions.
One obvious approach TPAs firms may consider is serving as delegated 3(16) plan administrators in vendors’ SECURE Act solutions. A growing number of TPAs now offer 3(16) services, and it is likely others are considering doing so.
Some TPAs may take a more proactive approach in creating their own MEP and pooled employer plan (PEP) products. This approach may be well-suited to larger TPAs with regional sales teams, in-house technology and product development capabilities, and solid distribution networks. These TPAs will need to identify product partners, including recordkeepers and 3(38) investment fiduciaries to help them round out services.
Asset managers have played a significant role in spurring growth and capitalizing on the 401(k) opportunity over the past four decades, starting with the creation of bundled mutual fund and insurance company group annuity products in the mid-1990s. According to the Investment Company Institute,
total assets in 401(k) plans were $6.2 trillion as of Dec. 31, 2019, and about 65% of these assets were in mutual funds.
Because of the significant stake asset managers have in the 401(k) market, many are studying the SECURE Act and see it as an opportunity for furthering assets under management.
If forthcoming regulations are favorable and include the necessary fiduciary exceptions for including their products in investment lineups, asset managers could reinvent their bundled 401(k) platforms and create products serving as top-level fiduciaries. Because many of these firms already have national distribution networks, they could play a key role in disrupting the market. Some firms may offer advisor-friendly solutions, and others may expand their ”direct-to-sponsor” approach.
The SECURE Act is a significant piece of legislation that clears the way for broader use of MEPs, but it could also be the catalyst for significant market disruption over the next decade. It is quite possible that the SECURE Act could turn the current ”third party” service model into a ”first party” model, in which vendors
across the industry embrace being true fiduciaries to reduce employers’ liability and administrative burdens.
Vendors should take notice, study the legislation and upcoming regulations carefully, and begin modifying their service models and capabilities to remain relevant.
And as for the question of & who owns the client”—while the issue is clearly being brought to the forefront, given the complexity of our market and the need to make strides in improving the overall retirement system, now is the time for our industry to work together, leverage vendor strengths, and build the retirement system of tomorrow.
John Humphrey cofounded July Business Services in 1994, where he now serves as President and CEO. Previously he was a CPA with several national accounting firms, including
Ernst & Young in Dallas.
©2020, American Society of Pension Professionals & Actuaries (ASPPA). Reprinted with permission from the Summer 2020 issue of Plan Consultant magazine.