By Carol Buckmann
We need incentives for more smaller employers to adopt 401k plans for their employees. However, the current structure puts obstacles in their way. Running a plan well takes time away from running the business and requires expert outside advice. Running a plan can also make you a litigation target. We know that all of these factors can deter plan adoption.
The “open MEP”, a plan in which unrelated employers can be pooled in a plan run by professionals, seems to be a solution to these problems. However, we need changes in the law to make these plans a workable reality, and the recent proposal by the Labor Department falls short of what we need. Legislation is sitting before Congress that can move these plans forward to allow smaller employers to enjoy professional fiduciary management of their plans and the cost savings of pooled investments. Congress has been considering more than one piece of legislation to ease the rules for open MEPs and should act soon to make these plans a reality.
Why Do We Need New Rules?
Current law requires commonality of employers for a true MEP; that is, one that is treated as a single plan that files one Form 5500 and has one combined plan audit. Commonality is strictly defined to mean that there must be a business nexus other than wanting to adopt the plan. Related employers who do not have sufficient common ownership to be part of the same controlled group and associations such as YMCAs in different locations can satisfy this commonality requirement, but most potential MEP adopters would not. In addition, under the “one bad apple” rule, a qualification problem in one employer’s plan can disqualify the entire arrangement, even if the other employers are compliant.
What Did the DOL Propose?
The DOL proposal disappointed those who want plan service providers such as recordkeepers and advisers to be able to provide open MEPs to their clients. This would be the easiest way to make such plans widely available, but the DOL would still require either an associational or geographic connection among employers. In fact, the DOL proposal specifically prevents service providers from offering to all of their clients MEPs that would be treated as a single plan. The DOL proposal does have some special rules for professional service organizations, but it still requires them to perform substantial employer functions in order to maintain a MEP treated as a single plan. The DOL proposal does not repeal the “one bad apple” rule (this appears to require IRS or Congressional action) and would leave adopting employers with a not clearly defined fiduciary responsibility to prudently select and monitor the MEP provider and transmit contributions.
What More Do We Need?
In addition to permitting service providers to sponsor these plans and eliminating the one bad apple rule, we need clear rules regarding the fiduciary responsibilities of the various parties involved in running the MEP. Bills before Congress now, the Retirement Enhancement and Savings Act (RESA) and the Family Savings Act of 2018, which has been passed by the House, would help by requiring that the person running the MEP, called a “pooled plan provider”, be a Named Fiduciary for plan administration, an ERISA concept that formally transfers as much fiduciary responsibility as possible to the managing sponsor of the MEP. (There is presumably still a residual responsibility to prudently select and monitor the named fiduciary.) The law could also explicitly require the appointment of a named fiduciary, which need not be the pooled plan provider, responsible for selecting the investment menu and other investment fiduciaries (such as investment advisers and managers). Fear of fiduciary responsibilities relating to plan investments and being sued for violating them is a deterrent to plan adoption by smaller employers, but right now, these bills could leave adopting employers with some of that responsibility. These or similar provisions governing multiple employer plans could be easily incorporated into any year-end tax legislation, as could net worth and minimum insurance requirements for MEP sponsors if they are thought to be necessary.
Now Is the Time to Act.
We keep reading about how our employees are not saving enough live on in retirement. The open MEP concept is an easy way to encourage savings that would also give smaller plans access to professional management usually unavailable to them in the marketplace. There is time to file comments with the DOL urging it to expand the scope of its proposal, but a surer route to change would be through Congress, which has authority to amend both ERISA and the Internal Revenue Code. There seems to be broad support for the open MEP concept there, and this support needs to be turned into new law as soon as possible.