“Multiple” Choice
An intriguing new use of a long-established concept is catching the attention of small to mid-size plan sponsors seeking a way to simplify 401(k) plan oversight: multiple employer plans (MEPs). By merging their plan into a properly structured MEP, employers cease to be a plan sponsor and effectively transfer many of the responsibilities and liabilities associated with being a named fiduciary to the MEP.
The MEP concept is exploding in popularity. Established under ERISA 413(c), MEPs historically have been used by companies that share a common industry or payroll provider, primarily association plans and professional employer organizations (employee leasing). However, as interest in outsourced fiduciary solutions has grown in recent years, a new generation of “open” MEPs for unrelated companies has sprung up. While MEPs can deliver tremendous benefit to many plan sponsors, an MEP is a solution in search of a problem for others. This article is written to help determine wether the MEP approach is a good fit for a plan sponsor’s organization.
An MEP (not to be confused with a multi-employer, or Taft-Hartley, plan) is a retirement plan established by one plan sponsor that is then adopted by one or more participating employers. When an employer merges its current single-employer plan into a properly structured MEP, the role of plan sponsor then transfers from the adopting employer to the plan sponsor of the MEP.
The MEP sets up a single plan that covers all adopting employers, with the plan document generally written to allow for variation in plan design among the participating companies. Fund selection and monitoring generally are handled by the MEP. Discrimination testing and plan design (with some limitations) generally remain with the adopting employer.
The shift in responsibility results in several potential benefits:
Elimination of annual plan audit. Plans that cover more than 100 employees typically are required to have an annual plan audit performed as part of their annual plan Form 5500 filing. Under the MEP arrangement, there is still a plan audit, but only one that is performed at the overall MEP level. The annual audit that is required by each employer (now known as an “adopter”) is eliminated, resulting in significant savings to the employer.
Mitigation of fiduciary risk. Independent fiduciary W. Michael Montgomery described the impact on fiduciary liabilities in Multiple Employer Plans as a Fiduciary Risk Mitigation Tool: “Employers adopting a sound Multiple Employer Plan…achieve a profound reduction in fiduciary risk exposure. The reason is a simple one: The adopting employer ceases to perform certain key roles that incur fiduciary status. When an employer merges its current single-employer plan into a properly structured MEP, it is no longer the sponsor of the plan. It also should cease to be a trustee, plan administrator, or any sort of named fiduciary. Those central roles move to the MEP, and the inherent fiduciary liability transfers with them.”
The relief offered by MEP participation is extensive but not total. Certain responsibilities generally remain with the adopting employer, and even this reduced role must be taken seriously.
Those responsibilities include:
• The need to make timely and accurate plan contributions.
• Plan design decisions, such as the level of match.
• The decision to adopt or de-adopt the MEP, including necessary due diligence and monitoring of the MEP.
• Distribution to participants of required notices and information, though this may at times be handled directly by the MEP plan sponsor.
• Communication and enrollment assistance for participants.
Streamlining of plan operations. In addition to the audit elimination, MEP adopting employers no longer file a Form 5500, maintain a fidelity bond, or shoulder the responsibility for 408(b)(2) compliance. These are handled by the plan sponsor that is associated with the MEP, not the adopting employer. For some employers, this benefit is inconsequential. For others, the desire to let outside experts run the plan can be more important than either the audit relief or fiduciary risk mitigation.
MEPs are not a good fit for every employer. Some plan sponsors already are mitigating their fiduciary exposure through a comprehensive, well-documented fiduciary process. Others don’t consider the cost or effort of an annual audit to be significant enough to justify making a change. Still others take satisfaction in staying engaged in plan oversight and fund monitoring. Simply put, if the advantages of an MEP appear to be solving a problem you don’t have, this approach is not for you.
An employer also should consider the potential limitations inherent in most MEPs. These may include the following:
• The adopting employer does not select its own fund menu. For many, this is a relief. Others want to have more involvement in investment decisions and consider this a takeaway.
• Loss of current providers. Though some MEPs offer a degree of flexibility, most are tied to a single recordkeeper or third-party administrator, so you will most likely have to leave behind your current providers to enjoy the benefits of adopting an MEP.
• “Bad apple” impact. Under ERISA, one adopting employer with serious compliance violations could cause the entire MEP to be disqualified, though a more likely scenario is that corrective measures will be taken. In the 20-plus years that I’ve been associated with multiple employer plan clients, I’ve yet to see this occur. It is important that employers confirm the availability of a “disgorgement provision” in any MEP that they may be considering. This important plan design feature allows the MEP to quickly eject and thereby isolate any noncompliant adopter from the plan.
If these features are appealing and the limitations are acceptable, you may want to look further into the multiple employer plan approach as a solution to your company’s retirement plan strategy.
I’ve been told by plan sponsors that they decided to join an MEP because these programs are handled the same way as their other employee benefit programs, where the benefit providers handle all the details. For example, while an employer could, at least in theory, negotiate with doctors, hospitals, MRI service providers, pharmacies, etc., for their employees’ medical coverage, most find it easier to outsource these micro-managed decisions to a third party—in that case, a health insurance provider that offers a group health-care policy.
There is a trade-off in control, options, etc., but there is also comfort in knowing that there are professionals at the helm and that they have a vested interest in making sure that their employees are taken care of in accordance with the terms of the arrangement.
Plan sponsors and their advisers will, of course, need to determine on a case-by-case basis whether these programs are a “fit” for their plans and their plan participants.
Terrance Power, CFP, QPA, ERPA, AIFA, APR, CLU, ChFC, is President, American Pension Services, Inc., an independent third-party retirement plan administration firm located in Clearwater, Florida. APS handles the compliance and testing associated with qualified retirement plans (primarily 401(k) plans) for small to medium-size employers, as well as for numerous Professional Employer Organizations (PEOs) located across the country.
Questions To Ask When Selecting a Multiple Employer Plan:
Will you have to change your existing plan features?
Who is handling the administration (TPA) work, fiduciary oversight, and plan operations?
What are the credentials and MEP expertise of the various parties involved with the MEP?
How long have the parties to the MEP been involved with MEPs?
Is there an ERISA attorney advising the MEP and maintaining the plan document? If so, what is their background specific to MEPs?
How are all of the parties paid? Are there potential conflicts of interest or prohibited transactions?
If you wish to retain your current adviser within an MEP arrangement, are they adviser-friendly, holding themselves accountable and transparent to the adopter’s adviser?
Is there a proper separation of the roles and ownership structure of the MEP’s plan sponsor, independent fiduciary, and contracted service providers?
What measures does the MEP take to screen out “bad apples” that could affect the entire MEP? Does the MEP contract allow them to unilaterally push out adopters with compliance problems?