On Aug. 31, 2018, President Donald Trump signed a well-publicized executive order about strengthening retirement security in America, directing the federal government to expand access to workplace retirement plans for American workers through a new “MEP rule.”
The executive order, in outlining the problem of too many workers lacking access to a company-sponsored retirement plan, noted that small businesses in particular face high costs and regulatory burdens that deter them from offering workplace retirement plans.
To overcome this key problem, the executive order directed officials at the departments of Labor and Treasury to revise or eliminate rules and regulations that impose unnecessary costs and burdens on businesses, especially small businesses, and that hinder formation of workplace retirement plans.
Straight from the executive order:
“Expanding access to multiple employer plans (MEPs), under which employees of different private-sector employers may participate in a single retirement plan, is an efficient way to reduce administrative costs of retirement plan establishment and maintenance and would encourage more plan formation and broader availability of workplace retirement plans, especially among small employers.”
That call to action from the top got the ball rolling toward a significant expansion in the use of MEPs, and prompted the entire retirement industry to begin devising strategies and product ideas in expectation of receiving new guidance from Washington about MEPs.
A variety of milestones have since been passed, marking significant progress toward meaningful expansion in the use of MEPs to help more Americans gain access to employer-sponsored plans and better save for a secure retirement.
The Department of Labor was first to move, publishing much-anticipated proposed regulations on “association retirement plans” (“Closed” MEPs) on Oct. 23, 2018, to make joining a single defined contribution retirement plan easier for unrelated employers, reducing costs and administrative duties—such as IRS filings—that each employer would otherwise bear alone.
The DOL final rule on association retirement plans was published in the July 31, 2019 Federal Register, and was set to take effect on Sept. 30.
The new guidance is expected to help small businesses—associations, trade groups, chambers of commerce, PEOs, and others—provide employees with a retirement plan by lowering fees (thanks to more dollars under management in a plan), and simplifying administration (a MEP files a single 5500 with a single audit and has only one ERISA bond for the entire MEP).
MEPs work by pooling expense, labor, and responsibility, yet retaining the ability of each participating employer to tailor plan features to its own needs.
“The MEP structure can reduce the employer’s cost of sponsoring a benefit plan and effectively transfer substantial legal risk to professional fiduciaries responsible for the management of the plan,” the DOL said in its new guidance. “Because MEPs facilitate the pooling of plan participants and assets in one large plan, rather than many small plans, they enable small businesses to give their employees access to the same low-cost funds as large employers offer.”
True widespread expansion on tap?
While the DOL’s new association retirement plan guidance marks a significant step toward broader usage of MEPs, with the conditions a group or association must meet to be permitted to sponsor a plan, it actually provides a somewhat narrow expansion for “Closed” MEPs.
As Pentegra Retirement Services SVP and National Practice Leader Pete Swisher, a specialist in multiple employer plan administration and fiduciary governance, said in a July 31 post on 401kSpecialist.com, a large portion of the decade-long wrangling in Washington over MEPs has been about making “Open” MEPs more broadly available.
Swisher noted “Open” MEPs are loosely defined as a MEP that anyone can join—any business, no matter what type, and regardless of whether they have a pre-existing relationship or “nexus” with other employers in the MEP.
Guidance from the DOL back in 2012 said that Open MEPs are not single plans for ERISA purposes, with the practical effect that such plans must file a separate Form 5500 (with separate audit, if the employer is a large plan filer) and have its own ERISA bond.
“One way of looking at the existing 2012 guidance is therefore that it levied compliance requirements on Open MEPs that add burdens and discourage adoption of new MEPs,” Swisher said.
So a greater expansion of the MEP market—specifically the Open MEP market—will require the passage of additional laws or regulations. This could very well happen sooner rather than later, if the SECURE Act and its MEP provision is passed or if the DOL proposes another rule to allow different types of Open MEPs other than ARPs and PEO-sponsored plans.
At the same time the DOL’s final ARP rule was published, the agency also issued a request for information (RFI) soliciting public comments on whether to amend regulations to facilitate the sponsorship of Open MEPs.
The DOL said the Open MEPs request for information, which came from Preston Rutledge, Assistant Secretary, Employee Benefits Security Administration, stemmed from the approximately 60 comments it received in connection with the ARP final rule.
Per the RFI:
“After reviewing the comments, the Department is persuaded that Open MEPs deserve further consideration. The Department does not believe that it has acquired a sufficient public record on, or a thorough understanding of, the complete range of issues presented by the topic.
“In light of this and the conflict in the comments about whether and how to permit Open MEPs, as well as legislation pending in the 116th Congress [specifically the SECURE Act], the Department has decided to stimulate further debate and to further develop the public record by soliciting comments on a broad range of issues relating to Open MEPs…”
Comments in response to the RFI are due by Oct. 29, 2019.
SECURE Act key to Open MEPs?
By the time the DOL’s comment period on open MEPs ends, that RFI may become obsolete.
That would be the case if the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which of course contains a key provision that would create Open MEPs, somehow gets (got?) through the Senate in the interim.
The two most likely ways this would occur:
1) it gets approved via unanimous consent by the Senate (an unlikely scenario given the “holds” placed on the bill by a trio of senators) and signed into law by President Trump; or 2) the SECURE Act ends up being attached to must-pass appropriations legislation, thus circumventing the “holds” in the Senate (more likely, given a bipartisan appetite to approve the landmark retirement reform legislation).
A September priority for the Senate upon its return from August recess was moving 12 spending bills to fund the government for fiscal year 2020 by the end of September.
While that workload and other pressing issues (gun background checks?) had the potential to push retirement reform legislation to the back burner, many supporters of the bill expressed optimism that the SECURE Act would find its way onto the back of one of those 12 spending bills.
The SECURE Act’s Open MEP provision is intended to make it easier and more economical for smaller employers to offer retirement plans by allowing for the creation of pooled retirement plan providers. It would remove the common nexus requirements and allow Open MEPs for employers that don’t share common traits to be administered by the pooled plan provider.
The provision would also protect small employers in Open MEPs from penalties if other members violate fiduciary rules, also known as the “one bad apple” liability risk that a non-conforming member can pose to an entire plan. That issue has long been a stumbling block for MEPs.
Bad apple won’t spoil the bunch
Speaking of that “one bad apple” risk, back on July 3, the Internal Revenue Service issued for comment a proposed rule addressing the risk posed to a MEP by one member’s bad actions.
Currently, if one of the employers in a MEP screws up by providing bad or no data to a plan administrator, the entire plan can be disqualified, causing all of the MEP’s participants to lose the tax benefits associated with 401k plans.
The MEP rule proposal would apply to existing Closed MEPs and now to ARPs and PEO-sponsored plans.
The exception generally would be available if the participating employer in a MEP is responsible for a qualification failure that the employer is unable or unwilling to correct. It would also be available if the participating employer fails to comply with section 413(c) plan administrator’s request for information about a qualification failure that the section 413(c) plan administrator reasonably believes might exist.
For the exception to the unified plan rule to apply, certain actions are required to be taken, including, in certain circumstances, a spinoff of the assets and account balances attributable to participants who are employees of such an employer to a separate plan and a termination of that plan.
The notice was especially timely in light of the SECURE Act’s potential to greatly expand the use of MEPs.
Time to prepare is now
So what should 401k advisors expect to see as the MEP expansion ramps up and alters the small business retirement plan landscape?
Be aware that the MEP rules and legislation leave room for providers to innovate, so there will likely be more than one way Open MEPs will be structured.
Pentegra’s Swisher says cost will not be the primary driver of product design. “It will be, and must be, fiduciary compliance—getting it right. That said, the marketplace tends to get what it wants, and it wants cheap MEPs, so cost will play a significant role in new MEP launches,” Swisher said.
He also noted there is pent-up demand for associations to sponsor multiple employer retirement plans, and the final regulations are expected to increase activity across the country among associations, trade groups, chambers of commerce, PEOs, payroll companies, HR consultancies, and others.
Advisors should be on the lookout for new business opportunities from these markets, particularly ones that want a simple, outsourced fiduciary structure and are not seeking significant customization.
Advisors should also research technology options, as they will play a key role in helping manage Form 5500s, ERISA bonds and compliance audits.
MEP expansion is coming. Advisors who do their homework will be in the best position to capitalize on it.
Brian Anderson is the Managing Editor of 401k Specialist. You can reach him at banderson@401kspecialist.com.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
