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4 Benefits of Multiple Employer 401(k) Plan for Small Businesses

For small businesses, it is not always easy to offer competitive employee benefits. The main challenge lies in managing high costs and complex administrative tasks. A Multiple Employer 401(k) Plan (MEP) can efficiently handle such a challenge. It allows several small businesses to come together under one retirement plan. By pooling resources, these businesses then reduce their overall costs, simplify processes, and offer quality retirement employee benefits.

Let’s explore how MEPs can completely change retirement planning for small businesses.

1. Lower Costs Through Shared Expenses

One of the biggest advantages of an MEP is immediate cost savings. Small businesses that try to set up their own 401(k) plan typically face high startup fees. These costs can build up quickly and drain their resources. However, a MEP helps businesses share these costs across multiple participants. This drastically lowers administrative expenses, compliance costs, and investment management fees.

Consider a small business with around 10 employees. Setting up its own 401(k) plan might cost as much as $10,000 in initial fees. Then, ongoing administrative costs might take up 1% of total plan assets each year. By joining a MEP, this business can almost halve these expenses. The pooled resources give them stronger bargaining power with service providers. The end result is that all participants enjoy much lower costs.

Another crucial area where businesses save money is in compliance. Navigating the ever-changing federal regulations can be both time-consuming and costly. A solo 401(k) plan leaves small businesses to handle compliance on their own. This creates an ongoing burden. However, MEPs typically assign a lead sponsor or a third-party administrator (TPA) to handle compliance tasks. This reduces the need for small businesses to invest heavily in these areas.

2. Reduced Administrative Burden

Managing a retirement plan can feel overwhelming for small business owners. Especially for those without dedicated HR or financial teams. The daily tasks of plan administration include tracking employee contributions, managing compliance, and submitting mandatory filings. These tasks consume time and require specialized knowledge. But, with an MEP, the administrative burden is reduced almost entirely.

Most administrative tasks are shifted to the MEP sponsor or the TPA. These experts handle employee contributions. They also manage compliance, ensuring all deadlines are met without mistakes. For small business owners, this significantly reduces stress. They can shift their focus back to running their business while knowing that retirement plan tasks are taken care of.

Consider a local boutique with five employees. The owner wants to offer a 401(k) but cannot deal with the heavy workload involved. By joining a MEP, this business transfers all the complex administrative work to the MEP sponsor. The boutique can then offer a competitive retirement plan without worrying about day-to-day administration. This allows small businesses to enjoy the benefits of a 401(k) plan without the associated headaches.

3. Vastly Improved Access to High-Quality Investment Options

Small businesses frequently struggle to offer good investment options within their retirement plans. Due to their smaller asset size, they have limited choices. And the few options they do have are often too expensive. This restricts employees from accessing solid investment opportunities. However, by joining a MEP, small businesses benefit from improved access to quality investments.

When several businesses come together in a MEP, the pooled assets increase dramatically. This larger pool allows the MEP to negotiate better deals with fund managers. Employees can now access a wider range of affordable investment options. These choices are usually more diverse, including index funds and target-date funds.

For example, imagine a small construction company with 12 employees. On its own, this company might only offer costly investment options. However, by joining a MEP, employees are exposed to better-performing investments. They can select from a range of more affordable and diverse options. This gives employees a far greater chance of growing their retirement savings.

Improved access to top-tier investment options helps small businesses stay competitive in the job market. Offering a quality retirement plan attracts new talent and helps retain current employees. With a MEP, small businesses can offer benefits that rival larger corporations.

4. Reduced Fiduciary Liability

One of the biggest challenges for small business owners in offering a 401(k) plan is fiduciary responsibility. Employers who sponsor a 401(k) plan must act in their employees’ best interest. This means carefully selecting and monitoring investments. It also means ensuring that fees are reasonable and that the plan complies with regulations. Failing to do so can lead to personal liability.

A standalone 401(k) places all of this responsibility on the business owner. However, by joining a MEP, small businesses can reduce their fiduciary risk. The MEP sponsor or the TPA often acts as a co-fiduciary. They take on most of the responsibility for managing the plan. This reduces the legal exposure for small business owners.

For example, consider a small coffee shop. The owner might not have the expertise to manage the fiduciary duties of a 401(k). By joining a MEP, they can shift this responsibility to the MEP sponsor. The sponsor or TPA manages the plan's investments and compliance, ensuring everything is handled properly. This reduces the business owner’s liability and provides peace of mind.

Reducing fiduciary liability is particularly important for businesses without large HR departments. Many small business owners do not have the time or expertise to navigate these complex duties. By joining a MEP, they can offer a quality retirement plan without facing the full weight of fiduciary responsibility.

Conclusion

A Multiple Employer 401(k) Plan provide lower costs, reduced administrative burdens, better investment choices, and decreased fiduciary risk for small businesses. By joining a MEP, these businesses can gain fast access to cheap employee benefits. Such benefits are important in today’s competitive employment market, where it is quite a challenge to retain top talent in the organization.

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