Now trending: what plan fiduciaries need to know about Multiple Employer Plans (MEPs)
Multiple Employer Plans (MEPs) describe an arrangement in which two or more unrelated employers come together to leverage a single retirement plan (considered a single plan under ERISA and the federal tax code) for their separate employee bases. MEPs have traditionally been qualified 401(a)/(k) retirement plans, and governed by the rules in 413(c) of the Internal Revenue Code. Recently, 403(b) MEPs have also emerged in the market place.
MEPs aren’t new to defined contribution plans, but they’re generating a fresh new buzz thanks to a flurry of activity in Washington. President Trump issued an executive order in August 2018 that directed the Department of Labor (DOL) to revisit employers’ abilities to use MEPs. The DOL responded with a rule proposal in October 2018 that would help but not quite solve the issues, and Congress is considering bipartisan proposals that would expand the use of MEPs further. Why all the attention? MEPs have the potential to expand retirement coverage in this country by making employer-sponsored defined contribution plans more accessible, partially shifting fiduciary responsibilities away from participating employers and offering the possibility of lower costs.
What’s the catch? It’s important for plan fiduciaries to understand what policy changes are being proposed and why, as well as how it could impact plan design, service provider selection and ultimately, their participants.
The profile picture
While employer plans of any size may leverage MEPs, they are often most appealing to small and mid-size employers. That’s because MEPs can provide benefits like greater economies of scale, limited fiduciary liability, a simplified administration process and access to plan features and services traditionally available only to large employers. These benefits address some of the major challenges employers may face when considering whether to offer a retirement plan to their employees.
The retirement industry often categorizes MEPs in two ways: “Open” or “Closed.” Here’s the difference:
- Available only to employers that belong to “bona-fide group or association.” Participating employers must share a common interest, such as belonging to the same trade association or professional employee organization (PEO).
- Are considered a single plan under ERISA and the Internal Revenue Code.
Open MEPs (not currently permitted under ERISA)
- Would permit unaffiliated employers to combine plans and adopt a single MEP for their employees.
- Would be considered a single plan under ERISA and the Internal Revenue Code.
Currently, only Closed MEP structures are permitted in the DC market. All the recent excitement is mainly about moving toward Open MEP structures and making MEPs more user-friendly. But getting there requires making two major changes:
- Removing the requirement that employers must be a bona-fide group or association, often referred to as the “commonality” requirement.
- Eliminating the “one bad apple” rule, which says that if one employer participating in a MEP violates the applicable rules, the entire plan can be negatively affected, triggering liability for all participating employers.
The following points have also been raised in the context of the Open MEP proposals:
- Limiting participating employers’ fiduciary responsibility to prudent selection and monitoring of the MEP sponsor (similar to selecting an investment manager under ERISA).
- Allowing service providers (i.e., recordkeepers and advisors) to sponsor MEPs.
So the natural question is, if Open MEPs may narrow the coverage gap for participants and provide benefits of scale, savings and simplicity to plan sponsors, what’s stopping the industry from making them a reality now?
Relationship status: it’s complicated
Both the DOL and the Treasury Department have jurisdiction over MEP regulations. The DOL is responsible for enforcing the commonality requirement, while the Treasury handles the “one bad apple” rule. So, if these two main MEP issues were to be addressed solely by regulators, both agencies would need to work together to prioritize and execute timelines that fully address these concerns.
But, that may be a lot to ask from two distinct entities. This is where Congress can provide the solution. Instead of leaving it to the DOL and Treasury to collaborate on prioritization, execution strategy and timing, Congress can pass legislation that clearly directs both agencies to execute with authority, within specified deadlines. Furthermore, retirement legislation is one of the few areas in which action is possible in a divided Congress. One example of such legislation worth noting is the Retirement Enhancement and Savings Act (RESA), which was introduced with strong bipartisan support in both the House and the Senate. RESA takes a number of steps to improve the U.S. retirement system, including establishing Open MEPs and making it easier for smaller employers to adopt them by eliminating the requirement that the employers must be in the same industry or sector. The bill also aims to simplify the process for auto-enrolling participants into the plan, and increasing the size of the federal tax credit for setting up retirement plans. While RESA was not ultimately enacted in the last Congress, it’s likely that policy makers will take it up again this year.
Fiduciary likes and dislikes
Given the recent increased activity in bipartisan retirement reform, changes to current MEP laws and regulations could occur in the near future. Fiduciaries will want to weigh their options to determine what structure and solutions will provide the best value to their participants. For example, the employer could offer (or maintain) a single DC plan, maintain a single plan while leveraging a bundled recordkeeping solution developed for smaller plans or join a MEP. Here are some of the key considerations to evaluate the evolving market:
The prospect of limited fiduciary liability is a very appealing aspect of the Open MEP legislation for plan sponsors across all market segments. The MEP sponsor would be required to be the named fiduciary, assuming primary responsibility for managing the fiduciary and administrative obligations of running the MEP plan. Individual plan sponsors would retain limited fiduciary responsibility, but will still be accountable for selecting and monitoring their service providers, including the MEP sponsor.
While MEPs can bring scale to plans that otherwise may not have it, leveraging this structure may not always bring cost savings. According to data from BrightScope, the administrative cost for plans participating in a MEP today compared to single plans averages four basis points higher (or 4 cents per every $100). It’s important for sponsors to understand what the dispersion of fees would be for their specific plan from an administrative standpoint. It’s also important to consider the fees of the underlying investments across each solution.
For some plan fiduciaries, relinquishing control over plan design and investment selection may be a deterrent when considering a MEP. To others, it’s a benefit. We note that today, MEP sponsors have typically been trade associations, professional employer organizations or a large employer with numerous investment specialists. Proposed legislation for Open MEPs may permit financial services institutions and recordkeepers to become MEP providers. It’s important to understand exactly who is the fiduciary and in what capacity, or capacities, they serve.
MEPs can certainly streamline administrative responsibilities and reporting for plan sponsors, but they can add levels of complexity to service providers when compared to a single plan administration. This may become particularly apparent if Open MEPs are passed. For example, not all participating plans have identical payroll cycles, deferral amounts or match formulas. MEPs also come with some additional administrative rules, such as the requirement to track participation and vesting across multiple employers. It’s critical to have confidence that both the MEP provider and service provider have the ability to manage all of these functions.
Improving participant retirement outcomes is the ultimate goal of 401(k) and 403(b) plans, and effective participant engagement is critical to their success. Plan sponsors may be reluctant to relinquish control of the participant experience when adopting a MEP because they may be concerned that it won’t match their expectations. While it’s possible that joining a MEP can provide more participant services than a plan sponsor could otherwise achieve on its own, we recommend that plan sponsors understand the MEP’s communications strategy and participant experience.
Taking the next step
While we continue to monitor the progress in Washington, we encourage plan sponsors to talk to their service providers about their views on these types of solutions, if they are in development and how they may support plan design going forward. We also suggest that plan sponsors examine their retirement plan, services, features and outcomes to help them decide what is in the best interest for them and their participants.