Multiple Employer DC Plans: Safety in Numbers?
Smaller US defined contribution (DC) plans face a host of fee difficulties simply because of the size of their plans. This has led to a growing interest in multiple employer plans as a potential cost-effective solution.
A multiple employer plan (MEP), as described in section 413(c) of the Internal Revenue Code, is a retirement plan adopted by two or more unrelated employers. These plans should not be confused with multi-employer plans, which are union plans, or Taft-Hartley plans.
MEPs are often adopted by a group of employers with a common connection, such as membership in a trade or professional organization. The organization typically sponsors the MEP and makes it available to its members. Sometimes these plans allow the adopting employer to make a few elections in the adoption agreements—design decisions, such as employer matching contribution levels.
MEPs have attractive benefits for small plans, primarily bargaining clout gained by joining forces—and participant numbers—with other small plans. The MEP plan sponsor can bargain with service providers to get better share classes, lower costs for plan document design and lower recordkeeping fees, for example. The adopting employers sometimes get additional free benefits from participating in the MEP, such as any updating of plan documents. As part of the package, they also have no time or cost expenditure for acquiring recordkeepers and other service providers. And they avoid the expense of preparing and filing of their own Form 5500s, because typical MEPs have only one 5500 filing.
Employers adopting a MEP have the added benefit of reduced fiduciary responsibility. The sponsor of the MEP assumes the fiduciary responsibility for investment selection and monitoring. And typically, the sponsor of the MEP, or some service provider associated with the MEP, is the plan administrator—the so-called ERISA Section 3(16) administrator, the fiduciary who makes discretionary decisions about the operations of the plan. Importantly however, adopting employers still retain the fiduciary responsibility for actually selecting the MEP provider.
The “One Bad Apple” Rule
MEPs do, however, have an important regulatory issue. Because a MEP is a single plan, if one of the adopting employers violates some qualification requirements, like the top heavy rules or the coverage rules, that would technically disqualify the entire plan. But let’s take an example to see how this “one bad apple” rule works: Suppose a dentist adopts a MEP sponsored by her state dental association. The dentist and her three employees participate in the plan. If another dentist doesn’t include an eligible employee, there is a risk that the whole MEP could be disqualified.
Open MEPs: Not an Open and Shut Case
MEPs that have a commonality—a connection among the adopting employers such as a trade or professional organization—are closed MEPs. But there are other MEPs in which there is no relationship among the adopting employers, and these open MEPs have gained some popularity in recent years. The only commonality among the adopting employers is that they have all joined the same MEP.
The DOL has growing concerns about these open MEPs. One particular concern is that adopting employers may join an open MEP because the sponsor has promoted it as a way to avoid fiduciary responsibility by the adopting employer. For example, in a 2012 letter to the Government Accountability Office, Phyllis Borzi, DOL’s Assistant Secretary for the Employee Benefits Security Administration, wrote “Promoters are marketing [open MEPs] to small employers as a way for the employer to offer a low cost pension plan, and some are falsely claiming the employers will have no ERISA reporting or fiduciary obligations if they sign up for an open MEP.” Another part of the DOL’s concern seems to center around the potential for fraud on the part of open MEP sponsors. In one recent criminal case, the trustee and fiduciary for an open MEP was sentenced to 17½ years in jail for using MEP assets for personal expenses.
In addition, the DOL issued a ruling in 2012 that raised concerns about open MEPs.1 The DOL concluded that an open MEP is not a single plan under ERISA; rather, it is a collection of individual plans of the adopting employers. We believe this means that each employer must file its own 5500 and also undergo the requisite audit if an adopting employer has over a hundred employees—thereby eliminating some of the potential benefits of MEPs.
A Congressional Fix?
Two bills have been introduced in Congress that would provide a remedy for the one bad apple issue as well as address the issue2 of open MEPs, providing specific criteria that would preserve their viability. MEPs have been around for a long time. And given the bipartisan support for the MEP concept and the belief that they could be a cost-effective way for small employers to provide retirement plans for their employees, we believe that MEPs are likely to become more popular in the coming years.
1DOL Advisory Opinion 2012-04A.
2The SAFE Retirement Act, sponsored by Senator Orrin Hatch (R-Utah) and the Retirement Plan Simplification and Enhancement Act, sponsored by Representative Richard Neal (D-Massachusetts).
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Daniel A. Notto is Senior Retirement Plan Counsel at AllianceBernstein (NYSE: AB).