Today, approximately 38 million private-sector employees in the United States lack access to a retirement savings plan through their employers. However, momentum is building in Washington, D.C., to remedy this situation by helping small employers take advantage of multiple employer defined contribution plans (MEPs).
Could a MEP work for you and your workers? If the federal government expands these retirement savings programs, small employers will need to carefully consider the pros and cons before jumping at the MEP opportunity.
Wheels of Change
In September, President Trump issued an executive order, asking the U.S. Department of Labor (DOL) to investigate ways to help employers expand access to MEPs and other retirement plan options for their workers. The order also aims to improve the effectiveness and reduce the cost of employee benefit plan notices and disclosures.
The DOL followed up by publishing proposed regulations that would expand eligibility for MEP participation. Those regulations are expected to be finalized in early 2019.
A MEP essentially acts as the sponsor of a defined contribution (DC) plan, on behalf of a group of employers under its administrative umbrella. “The employers would not be viewed as sponsoring their own plans under ERISA. Rather, the [MEP] would be treated as a single employee benefit plan for purposes of ERISA,” says the Society for Human Resource Management. The MEP’s sponsor “would generally be responsible, as plan administrator, for complying with ERISA’s reporting, disclosure and fiduciary obligations.”
In principle, the administrative efficiencies of participating in a MEP would lower the costs of providing employees with retirement savings plans. But there are additional factors to take into consideration in evaluating MEPs.
Current rules only provide for “closed” MEPs that are sponsored by an association whose principal purpose is something other than sponsoring the MEP, and whose members must also have a “commonality of interest.”
Under the DOL’s more relaxed proposal, membership in a MEP would open up to companies in the same geographic area or in the same trade, profession or industry. Also, sponsoring the MEP could be the association’s primary purpose, so long as it had at least one secondary “substantial business purpose.”
Several additional requirements for associations that sponsor MEPs were listed in the proposed regulations. Among them, the association must:
• Have a formal organizational structure with a governing body and bylaws,
• Be controlled by its employer members,
• Limit participation in the MEP to employees or former employees of MEP members, and
• Not be a financial institution, insurance company, broker-dealer, third party administrator or recordkeeper.
The regulations would allow PEOs (professional employer organizations) to sponsor MEPs, if the PEOs meet certain requirements, including to perform “substantial employment functions” on behalf of their employer clients. Also, self-employed individuals and sole proprietors would be eligible to participate in a MEP.
Even though the proposed DOL regs would ease current restrictions on MEPs, enough constraints would remain that could limit their expansion. A major issue that the proposed regulations fail to resolve is the so-called “bad apple” rule. That is, if one employer in a MEP fails to fulfill its administrative requirements, that failure, depending on its severity, could cause the entire MEP to be disqualified under the DOL proposal.
Fortunately, the House of Representatives has already passed a bill (the Family Savings Act) that addresses the bad apple issue. A similar measure (the Retirement Enhancement and Savings Act) is now pending in the Senate. The proposed legislation would clarify that the plans would separate noncompliant employers from other employers — or in essence “quarantine” the bad apples.
The bill also clarifies that employers’ fiduciary liability for the operation of the MEP is limited. But employers can’t avoid fiduciary liability altogether. That’s because they remain responsible for:
1.Selecting a MEP and its investment lineup, and
2.Ensuring that the MEP and the association that sponsors it adhere to the quality criteria the employer used when deciding to join the MEP.
The Senate version of the legislation would create a type of MEP known as a “pooled employer plan” (or PEP). PEP participants would interact with the plan electronically to help keep the plan’s administrative costs as low as possible.
Boom or Bust?
It’s unclear whether the new-and-improved MEPs will have a significant cost advantage — or whether that’s even a primary objective of employers that decide to join a MEP. Inexpensive Web-based 401(k) plan sponsorship platforms have emerged in recent years that help to address the cost issue.
Plus, there’s concern that some MEPs will lower costs by transferring fiduciary responsibilities to employers. But many employers may look beyond cost when deciding on a retirement plan. They may also value the simplicity of outsourcing plan administration and sharing fiduciary responsibilities with the plan sponsor.
Need more information about your situation? Your benefits advisor can help you select the retirement savings plan options that make the most sense for you and your employees.