In Practice September 19, 2011

PANC 2011: What’s an MEP?

Multiple employer plans (MEPs) can offer a cost-effective solution for companies that want to offer a retirement plan for their employees. How can you incorporate this growing plan into your practice?
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One of the first points made by the panelists was that a MEP—like any retirement plan design—is not a “one size fits” all solution. While it may be the perfect solution for one plan sponsor, it would not be appropriate for another. Therefore, understanding the structure, benefits, and possible detriments are critical before pitching a MEP to a client.

The panel was moderated by James Sampson, Managing Principal, Cornerstone Retirement Advisors, and included Terrance P. Power, President, American Pension Services, Inc., and Keith J. Gredys, CEO & President, Kidder Benefits Consultants, Inc.   

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Power’s firm sells the Platinum 401(k) (see “New Multiple-Employer DC Plan Coming to Market”) and Gredys’ firm consists of consultants and advisers for approximately 1,000 retirement plans ranging from traditional defined contribution, employee stock ownership plans, and defined benefit cash balance plans.

The Structure  

Power first explained the structure of a traditional employer-sponsored retirement plan in order to compare it to a multiple employer plan. In the traditional plan, there is a single plan sponsor from one company. This sponsor has to take care of trustee liability, form 5500, document fees, an annual audit, investment monitoring, and 408(b)(2) compliance. Of course, all of this is usually done with the help of an adviser, and in tandem with the investment provider, an ERISA attorney, and a third-party administrator (TPA). Oftentimes, the sponsor can become overwhelmed by juggling all of these responsibilities, and is simultaneously getting nerve-racking cold calls from people offering to lessen their “fiduciary risk.”

In a MEP, the single plan sponsor becomes one of many “plan adopters” with the bulk of responsibilities falling to the MEP. The sponsor no longer has trustee liability, does not have to file a form 5500, does not have to prepare for an audit, the investments are taken control of by a 3(38) investment manager, and because they didn’t file an individual 5500, the sponsor won’t receive any more cold calls. Each adopting plan sponsor can still have his own adviser to ensure the MEP is functioning properly—this fiduciary responsibility remains with the sponsor.

Gray areas 

Not every small-business owner should jump right into a MEP, even though it may seem tempting. Typically, there is some commonality between employers in a MEP (physician’s practices, law firms, etc). However, it’s not a requirement in section 413(c), said Power, it actually says “unrelated employers” can form a MEP. But because of plan design needs, the adopting sponsors tend to be from the same industry. “Commonality” is still unclear though—does association membership matter? Or what about geographical regions, questioned Power; these things vary from MEP to MEP (and there are about 3,000 currently in existence, he said).

Also, if the plan sponsor has some very specific plan design aspirations in mind, a MEP probably won’t be a great fit.  The master document is at the MEP level, and sponsors only sign an adoption agreement—the flexibility of the master document can vary.   

One adviser in attendance asked the panel what would happen if an adopting member is involved in a prohibited transaction and becomes disqualified. Gredys said this is a risk, but there are remedies around it. The IRS doesn’t want to disqualify a plan, he said, and as long as someone brings the problem to light as soon as possible, it can usually be remedied.

The Bright Side 

As for advisers working with sponsors who are members of a MEP, they are allowed to solicit IRA rollovers, since the fiduciary liability is at the MEP level and is no longer a prohibited transaction.  Also, since their client hasn’t filed a form 5500 and has “fallen off the grid” so to speak, said Power, competitors will stop calling.   

It can be thought of as “another tool to have in your tool box,” said Gredys, and the more possible solutions you can present to a prospect, the more valuable you will appear.  This “tool” allows you to maintain a relationship with your client, while offering real cost savings for them and you since everything is “offloaded” to a third party. Your role is to help the sponsor monitor the fiduciary governance of the plan; the question remains—is this the best solution for the participants?

 

IMHO September 19, 2011

IMHO: Working “Outs”?

Last week the Senate Finance Committee held a hearing on “promoting retirement security.” 

 

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While options were presented to improve things (see “Industry Groups Urge No Changes to Retirement Savings Tax Advantages”, the discussion quickly veered toward a debate on whether and how well—or poorly—the current system is working. 

That said, listening to the witnesses,1 one might well have thought they were discussing completely different systems—from one that is striking a good balance between incentivizing employers and encouraging participants to one that is all about providing tax benefits for saving to those who don’t require such enticements; from one that is putting too much responsibility on individual savers to one that has managed to, on a voluntary basis, draw the support of roughly eight in 10 workers.  One that has failed, and seems unlikely to ever deliver a real retirement income solution—or one that has the potential to make that a reality.

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Metrics Systems

As always, the devil is in the details—and perhaps in the definitions underlying those details.  As the Employee Benefit Research Institute’s (EBRI) Dr. Jack VanDerhei pointed out in testimony submitted for the hearing, “Unfortunately, the ‘success’ of these plans issometimes measured by metrics that are not at all relevant to the potential for defined contribution plans to provide a significant portion of a worker’s pre‐retirement income.”  Among those metrics, VanDerhei cited such things as the “average” 401(k) balance and what it would provide in retirement income (with no adjustment for the reality that many, if not most, of the participants in the denominator of that calculation are years, if not decades, away from retirement age), and even the focus on what the average balance is for workers nearing retirement age—but only applying that calculation to the 401(k) balance with the employee’s current employer.2 

Judy Miller, Chief of Actuarial Issues/Director of Retirement Policy, American Society of Pension Professionals and Actuaries, outlined several “myths” in her testimony, including the notion that the current tax incentives are dramatically tilted toward upper-income workers,3 that those incentives cost the government money (there is a cost to the government’s deferral of taxation, of course, but the government does get its money eventually, albeit generally outside the government’s projection windows), and that only about half of working Americans have access to a workplace retirement plan.  Miller noted the Bureau of Labor Statistics (BLS) found that 78% of all full-time civilian workers had access to retirement benefits at work, with 84% of those workers participating in these arrangements—a far cry from the “common wisdom” that too many in our industry still parrot.4 

In fact, the devil in that particular statistic depends on whom you want to include as the “relevant” workforce—or perhaps the point you want to make. 

There are some things we do know. First, given the opportunity, the vast majority of workers save for retirement via their workplace retirement plan, and that, outside those structures, they don’t.  We know that the vast majority of workers that are automatically enrolled in such programs stay enrolled, that most who have their rate of savings automatically increased leave those increases in place.  We know that workers whose deferral rates are set by default don’t change those defaults.  We know that workers tend to save at the level of the employer match, when a matching contribution is available.  We also have, thanks to EBRI, an emerging body of evidence that the current structures can produce, alongside Social Security, reasonable levels of retirement income.

We also know that most employers that offer a workplace retirement plan contribute something of value to those plans: an employer contribution, a matching contribution, and/or the time/expense of running the plan—or more than one of the foregoing.  Moreover, there is strong anecdotal evidence that, lacking the incentives of the current tax structures, fewer employers will offer—or support—those programs than do at present. 

Therefore, based on what we do know, it would seem that we should (1) to continue to encourage the establishment of defaults high enough to better ensure a satisfying outcome without undermining participation, and (2) to provide for systems that will move those default savings thresholds higher over time. 

More importantly, IMHO, we should do everything we can to encourage more employers to offer, and to continue to offer, these programs. 

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 1 Arguably, the best days of our current voluntary savings structures are ahead of us, but the sheer data on retirement savings accumulations in defined contribution plans and individual retirement accounts are impressive. During the hearing, Senator Orrin Hatch (R-Utah) noted that “more money has been set aside for retirement in defined contribution plans and IRAs than in Social Security.” Hatch said, “The Social Security Trust Fund holds $2.6 trillion in Treasury securities. But private, employer-based defined contribution plans hold $4.7 trillion. And IRAs hold even more: $4.9 trillion.”

2 For a broader discussion on this topic, see also “IMHO: Comparison ‘Points’

3 In her testimony, ASPPA’s Miller noted that households with incomes of less than $50,000 pay only about 8% of all income taxes, but receive 30% of the defined contribution plan tax incentives. Households with less than $100,000 in AGI pay about 26% of income taxes, but receive about 62% of the defined contribution plan tax incentives.

4 EBRI’s Jack VanDerhei offers an insightful analysis of these numbers in Appendix B of his testimony. I commend it to your review.

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