In its examination of the outsourcing of employee benefit plan services with a particular focus on functions that historically have been handled by employers, such as “named fiduciary” responsibilities, the 2014 ERISA Advisory Council also looked at multiple employer plans (MEPs) and their potential role in outsourcing.
In its report, the Council notes that through outsourcing, plan sponsors can gain access to expertise and technology, achieve economies of scale, and reduce costs. Outsourcing also permits a plan sponsor to focus on its core business rather than managing its employee benefit plans. However, most outsourcing arrangements also involve a transfer of responsibility and liability, either by operation of law or by contract, from the plan fiduciary to the outsourced service provider. This transfer has important consequences for plan fiduciaries and participants, but its implications are not always well defined or understood, the Council says.
The Council formulated several recommendations for the DOL, grouped into five overall categories:
- educate plan sponsors about current practices with respect to outsourced services;
- clarify the legal framework under the Employee Retirement Income Security Act (ERISA) for delegating responsibility to service providers;
- provide additional guidance on the duty to select and monitor service providers;
- facilitate the use of multiple employer plans and similar arrangements as a means of encouraging plan formation and easing administrative burdens; and
- update and provide additional guidance about insurance coverage and ERISA bonding of outsourced service providers.
An MEP is a retirement plan in which two or more unaffiliated employers participate. In one kind of MEP, the sponsor is a group or association of employers, acting on behalf of its employer members, that establishes the plan. In another type, commonly referred to as an “open MEP,” the sponsor is an entity that forms the plan strictly for the purpose of providing the plan to the participating employers. The Council explains that the MEP is “open” because the participating employers do not need to be members of a group or association of employers in order to participate.
Where a MEP is treated as a single plan for purposes of ERISA, there are certain advantages to the participating employers. Most of the functions (both settlor and fiduciary in nature) are carried out by the group, association or lead sponsor. In addition, the sponsor or a party (or parties) designated by the sponsor acts as the named fiduciary (or fiduciaries) to the plan. The named fiduciary is then responsible for plan administration, plan investments, and selection of service providers. A single Internal Revenue Service (IRS) Form 5500 is filed on behalf of the plan, and the plan is subject to a single audit by a certified public accountant (assuming that the plan has more than 100 participants and therefore is subject to the audit requirement).
The Council notes that the role of the participating employers is limited to determining whether or not to become a participating employer, and to provide data and contributions to the named fiduciary and plan trustee—in effect, the participating employer has outsourced the provision of retirement benefits.
However, witnesses involved in the MEP industry testified to the Council that the DOL’s Advisory Opinion 2012-04A prohibits the use of open MEPs to the disadvantage of small businesses and their employees. In Advisory Opinion 2012-04A, the DOL said, in order to have a single multiple employer plan, there must be an “employment based common nexus or other genuine organizational relationship that is unrelated to the provision of benefits” between the lead sponsor of “the employers of employees that benefit from the plan, or among the different groups of employees that participate in the plan.”
Applying the nexus requirement in this manner means that any arrangement intended to be organized as an “open MEP” cannot be treated as a single plan but is instead an aggregation of many single plans, each with its own plan sponsor. The lead sponsor and the named fiduciaries are either non-fiduciary or fiduciary service providers. Under this structure, to at least some extent, the economies of scale offered by the MEP are lost, the Council notes. Each plan must file its own IRS Form 5500 and, if the plan has more than 100 participants, it must retain an auditor to conduct its own audit.
The Council said it believes MEPs, including open MEPs, may prove helpful in increasing retirement plan coverage of employees who work for small businesses. The Council recommends that the DOL take several actions with respect to MEPs, including: consider the benefits of multiple employer arrangements in facilitating plan formation in rulings and interpretations; consider developing a sample structure for MEPs that will help ensure that conflicts of interest, prohibited transactions, and fiduciary independence and disclosure are in place; and develop safe harbors for MEP sponsors and adopting employers that would not expose them to liability from acts of non-compliant adopting employers.
The ERISA Advisory Council’s report on Outsourcing Employee Benefit Plan Services is here.