Multiple Employer Plans—an enticing alternative for plan sponsors
|Terrance Power: CFP, QPA, ERPA, AIFA, APR, CLU, ChFC; President, American Pension Services, Inc. |
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 plan sponsors determine if this approach is a good fit for their organization.
An MEP (not to be confused with a multiemployer, 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.