Generally speaking, retirement plan experts believe that open multiple employer plans (MEPs) offer several benefits to plan sponsors, particularly small business employers.
However, these experts caution that there are some downsides that sponsors should consider as well before deciding to enter into an open MEP, should the SECURE Act get passed to permit these types of retirement plans to exist for plan sponsors without a common nexus.
Closed MEPs permit plan sponsors to join into this type of pooled retirement plan as long as they have a common nexus—such as industry. Unlike with pension plans, “closed” does not mean it is not open to new entrants, it means not all plan sponsors can join the MEP. The new legislation would allow plan sponsors without a common nexus to join MEPs, called open MEPs. Probably the biggest upside for sponsors would be “limited fiduciary liability,” says Christine Stokes, head of DCIO strategy at Nuveen in New York. “As a plan sponsor, you are never fully absolved from this liability, but it introduces limited liability.”
Deb Rubin, vice president and managing director of TPA and specialty markets at Transamerica in Washington, D.C., adds: “The benefit to plan sponsors of pooled arrangements and open MEPs is that they are structured with a tremendous amount of support, with a third-party administrator handing the 3(16) administrative component—the day-to-day arrangements, on top of signing off on Form 5500. Plus, there is a 3(38) fiduciary handing the investment decisions. Together, that is a structure for a small plan to get maximum fiduciary support.”
That said, the SECURE Act does not make it clear as to how much fiduciary responsibility will shift to a third party, notes Tom Reese, an investment adviser with Conrad Siegel in Harrisburg, Pennsylvania.
That’s why it would be important for a sponsor in an open MEP to closely read the contracts and service agreements of providers to see what it is taking on, Rubin says.
Chad Parks, founder and CEO of Ubiquity Retirement + Savings in San Francisco, fears that “MEPs add more layers of legal complexity, which leads to higher plan costs. With more attention on fees and reasonable costs these days, we think open MEPs could go in the opposite direction and add more costs.”
In fact, Stokes says, BrightScope—a sister company of PLANSPONSOR—did a study of open MEP costs and found that they could be four basis points higher because of these administrative costs. “So, open MEPs are not a guarantee of lower fees because there are still operational complexities of combining plans of various companies,” she says. “So, before joining an open MEP, a sponsor needs to explore whether or not there is a financial benefit to doing so.”
Employers would also still be on the hook for “nondiscrimination testing and service crediting for eligibility and vesting as individual employers,” says Barb Van Zomeren, senior vice president of ERISA at Ascensus in Dresher, Pennsylvania. “As a result, each employer will still be required to gather and submit data to a MEP provider responsible for administration.”
Open MEPs might be a better choice for smaller plans, Parks says, because larger plan sponsors may not like how they seek to reduce costs with limited investment menus that are offered to all the companies in the plan, along with minimal plan design.
Stokes agrees: “Especially as you move up market, sponsors already benefit from scale, and they like to control the participant experience. For some plan sponsors, relinquishing control and investment selection might not be viewed as a good thing. Some are paternalistic about their participant demographics and want more of a hands-on approach. With an open MEP, you lose any customized communications and oversight of the call center experience. Thus, it is important for sponsors to assess whether or not an open MEP is in the best interest of their company.”
That said, a plan sponsor in an open MEP always has the option of moving into a single employer plan, Rubin says. However, Parks says, if a sponsor has been in an open MEP for a long period of time, “after offloading the majority of their fiduciary responsibility, it would be difficult for them to keep up with developments in defined contribution plans, which could make leaving the MEP somewhat problematic.”
In addition, sponsors still need to ensure that the open MEP plan administrator, as a prudent fiduciary, is thorough about its process for selecting the plan’s providers and documents that process in great detail, adds Nasrin Mazooji, vice president of compliance and regulatory affairs at Ubiquity Retirement + Savings. “Keeping ahead of those and making sure the processes are consistently being carried out is important,” she adds.
However, open MEPs might convince more small employers that heretofore have not offered a retirement plan to join these pooled arrangements, Parks says. “I think it will help with the perception that these retirement plans are not so intimidating, costly and burdensome, and that by joining a MEP and signing off, it should make it easier for businesses to put retirement plans in place,” he says.
Another factor for sponsors to consider is that the SECURE Act would raise the $500 tax credit that businesses receive for three years for offering a retirement plan to $5,000 a year, Parks adds. “In essence, the government will be paying companies to put these plans in place, and I would expect more adoption if we educate the audience.”
In addition, the SECURE Act would eliminate the “one-bad-apple” rule that would nullify the entire plan if just one company in an open MEP is noncompliant, Rubin says. “The elimination of that rule should create more comfort among employers to join open MEPs,” she says.