Multiple Employer Plans: DOL Ruling May Provide U.S. Workers with Greater Access to Retirement Plans

Employer-sponsored retirement savings plans are a proven means for helping working Americans meet their financial needs after they exit the workforce. Some employers would like to offer their workers a retirement plan, but they’re discouraged by concerns related to costs, administrative complexity and fiduciary liability. This retirement coverage gap is huge among employees of small companies that don’t have the financial and administrative resources of larger firms.

As a result, about 38 million private-sector U.S. employees don’t have access to a retirement plan through their employer, according to the Department of Labor (DOL).

To overcome these challenges and narrow the retirement coverage gap, some small businesses have partnered to form “Multiple Employer Plans,” or MEPs. This is an ERISA-protected, 401(k)-type retirement plan in which two or more employers participate in a single, professionally administered plan, offering cost advantages and lowering the administrative duties for each participating employer.

Barriers to Adoption

Unfortunately, there’s a rule that has made it difficult for many small businesses to offer MEPs to their employees. Current tax law and ERISA rules limit MEP sponsorship primarily to employers whose members share a commonality of interest, like a common profession or membership in an industry trade association.

Last year, President Trump signed an executive order (EO)—the Executive Order on Strengthening Retirement Security in America—directing the Department of Labor (DOL) to consider issuing regulations or other guidance to make it easier for small and mid-size businesses to participate in MEPs. More specifically, this EO would allow unrelated businesses to band together and solve the issue of small business employer access to retirement plans.

The DOL responded by proposing a rule that would allow groups of employers in a geographic region or a specific industry nationwide to offer MEPs and association retirement plans (ARPs). Sole proprietors and certain family members would also be allowed to join these plans.

Potential Solution

The House of Representatives recently passed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), a retirement plan reform bill. The bill still requires passing by the Senate, which if it passes, open MEPs may become a reality.

This provision is intended to make it more economical for smaller employers to join a pool and offer an open MEP to its employees and would allow tax credits. This provision would protect small employers in open MEPs from penalties if other MEP members violate fiduciary rules, also known as the “one bad apple” liability risk, that has long been a stumbling block for MEPs.

Observations

While there is excitement in the retirement plan community about this opportunity, there’s also some uncertainty about how effective open MEPs would actually be in narrowing the retirement coverage gap. For example, while a single Form 5500 filing and plan audit is performed at the MEP level, participating employers still retain an obligation for choosing and monitoring the arrangement, monitoring the activities of the group and other fiduciaries of the MEP.

It may also be necessary to limit the fund menu and investment choices – which means if you are going to delegate your fiduciary responsibility, be prepared to delegate the decision-making that goes with it.  You would need to assess whether you are willing to make that trade-off on costs and give a little on plan customization and fund choices.

We will keep you updated in future issues on the progress of the proposed DOL rule and pending legislation affecting MEPs. We can help with any questions you have about multiple employer plans and association retirement plans.