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Multiple Employer Plans: A Solution for Managing 401(k)s?
MEPs are treated as a single plan for negotiating fees

By Joanne Sammer  12/2/2011
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updated 6/4/12


DOL Rules a MEP Isn't a Single Plan Under ERISA

On May 25, 2012, the U.S. Department of Labor (DOL) issued Advisory Opinion 2012-04A regarding a multiple employer plan (MEP). The DOL ruled that a so-called "open MEP"—in which there was no common bond between the employers other than sharing a service provider—was not a single plan under the Employee Retirement Income Security Act (ERISA). Instead, the MEP was a series of separate ERISA plans, one for each adopting employer.

The adviosry opinion "relates solely to the application of Title I of ERISA to the arrangement that is the subject of [the] request...."  However, according to an analysis by Sunguard Relius, a provider of benefit plan administrative services, the most immediate implication of the ruling is that "arguably, open MEPs must file separate Forms 5500 (or 5500-SF or –EZ) for each adopting employer. If an employer has more than 100 participants, there would need to be a separate audit. This takes away two of the benefits open MEP promoters have long claimed for their arrangement."

Similarly, Advisory Opinion 2012-03A, also issued by the DOL on May 25, addresses a proposal to merge abandoned defined contribution plans of unrelated employers into a single arrangement to be established by National Retirement Plan Inc. (NRP), offering plan administration and investments for participants who choose to remain in the plan.

The DOL ruled that "Although the NRP Plan will provide retirement benefits described in ERISA section 3(2), to be an employee pension benefit plan under ERISA, the plan must also, among other criteria, be established or maintained by an employer, an employee organization, or both. ... NRP does not appear to be an employee organization within the meaning of section 3(4) of ERISA. Nothing in the documents we reviewed indicates that NRP exists '... for the purpose, in whole or in part, of dealing with employers ...' "

"As it stands, [the opinion] increases the hurdle for small businesses wishing to provide their employees with a low-cost retirement plan," commented Christopher Carosa, CTFA, writing in Fiduciary News (see "Experts Sound Off on DOL’s 401(k) MEP Advisory Opinion, Fiduciary News, June 2012).           

In September 2012, the Government Accountability Office issued a study on Multiple Employer Plans (also see MEP Reflections Following the GOA Report, Business of Benefits Blog, October 2012).

American employers looking for a way out of the compliance and administrative headaches associated with 401(k)s and other defined contribution retirement plans might find multiple employer plans (MEPs) worth a look. But don’t confuse MEPs with multiemployer "Taft Hartley" defined benefit pensions, which are co-managed by management and union representatives. Instead, defined contribution MEPs provide a way for employers that sponsor 401(k) plans to band together to reduce administrative costs, gain access to a wider array of investment options and ease compliance burdens.

A way for different 401(k) plan sponsors  to band together,
reducing administrative costs and compliance burdens.

MEPs are not a panacea, however. These plans have definite pros and cons, including regulatory questions, and each plan sponsor needs to consider carefully whether a MEP will meet its needs and those of plan participants.

What's a MEP?

A MEP can be any defined contribution retirement plan that is established by one plan sponsor and then adopted by other participating employers. The first MEPs were established by parent organizations for the benefit of their affiliates, such as trade associations with regional partners and corporate parents with franchises. “In these cases, there is some affiliation between the satellites and the mother ship, but there is not enough common ownership for them to be considered under common control,” said Adam C. Pozek, a partner with DWC ERISA Consultants LLC in Salem, N.H.

More recently, vendors have established MEPs for otherwise unaffiliated companies that have no shared connection beyond their participation in the same retirement plan. However, when there is no commonality among the plan sponsors aside from participating in the MEP, there is some uncertainty about the regulatory status of the MEPs themselves.

Although the Internal Revenue Service (IRS) has shown that it has no problem with MEPs in these situations, the U.S. Department of Labor (DOL), which has regulatory authority over retirement plans, has not given the green light to MEPs specifically for plan sponsors with no other commonality. “The Department of Labor has not answered this question directly, so the industry is left to review existing advisory opinions to try to extrapolate what the appropriate answer might be,” said Pozek. “Some plan sponsors have decided to hold off on joining a MEP until there is a clear answer, but some are going forward.”

Without an advisory opinion clearly stating that unaffiliated organizations in a MEP constitute a single plan, the DOL could take the position that the participating plan sponsors have individual plans and must comply individually with DOL regulations regarding the annual Form 5500 filing and any required plan audit (instead of allowing the MEP to fulfill these requirements as a single plan). If the 401(k) plans in a MEP are considered individual plans by the DOL, each plan sponsor involved in the MEP could face penalties for not complying with the DOL’s filing and disclosure requirements.

Some plan sponsors are counting on the DOL lacking the time, resources or impetus to track down all potential employers in a MEP and assess fines. In addition, there is an assumption that, if the DOL came out against unaffiliated organizations participating in a MEP, the DOL would allow for some sort of transition period to allow these plans to unwind without penalty, said Pozek.

Pros and Cons

Why would unaffiliated plan sponsors join a MEP if questions remained about the regulatory treatment of some of these plans? One key driver is plan costs. A single 401(k) plan must pay administration, compliance and audit fees on its own. As part of a MEP, all plans are treated like a single plan when it comes to negotiating administrative fees and dealing with compliance and audit requirements. A MEP with 100 plan sponsors would require its participating plan sponsors to pay only 1/100th of the cost of its required audit and compliance, while those individual plans outside the MEP would have to pay the full cost on their own.

Moreover, because many 401(k) plan fees are based on plan size, with large plans generally leveraging their economies of scale to get lower fees, joining a MEP can help small plans reduce overall administrative and investment management expenses. In addition, pooling plan assets provides greater access to better investment options with lower fees. “Any plan with, say, $3 million in assets is not going to get very good pricing on asset management fees,” said Robert J. Toth Jr., an attorney in Ft. Wayne, Ind. “Plans with larger asset bases tend to gain access to better pricing and better investments.”

While MEPs can be attractive to many plan sponsors, “you have to be careful of being oversold,” Toth cautioned. “When choosing a MEP, it's important to avoid those offering the world.” This is particularly true for MEPs that suggest that participating plan sponsors would retain no liability or responsibility for the plan. “Plan sponsors still have some residual obligation to the plan,” said Toth. Significantly, plan sponsors must exercise the same due diligence when choosing a MEP as they would for any other plan vendor.

Perhaps the biggest negative surrounding MEPs is the one-bad-apple rule under which all of the plans in a MEP could be disqualified if one plan sponsor fails to comply with IRS requirements for qualified retirement plans. Some of this risk can be addressed in the plan document by requiring all plans in the MEP to self-correct any mistakes voluntarily and to assume any liability arising from those mistakes, Pozek noted.

Overall, while a MEP can be a good choice for some employers, it is not right for every organization. “Plan sponsors need to ask themselves whether they need what the MEP is offering,” advised Pozek. “If I don't need it, it should not matter how cheap I can get it.”

Joanne Sammer is a New Jersey-based freelance writer.

Related Articles—External:

Multiple Employer Plans, Revisited, Morningstar Advisor, October 2011

Strength in Numbers: As fiduciary concerns grow, multiple employer plans look compelling to some companies, Plan Sponsor, October 2011

"Multiple" Choice: What to Know About Multiple Employer Plans, Plan Adviser, September 2011

The Smaller the 401(k) Plan, the Bigger the Problems, The Rosenbaum Law Firm P.C., 2011

Quick Links:

SHRM Online Benefits Discipline

SHRM Online Retirement Plans Resource Page 


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