DOL Final Rule Opens Up Association-Run Multiple-Employer 401(k)s

Association retirement plans let unrelated employers reduce 401(k) costs, paperwork

Stephen Miller, CEBS By Stephen Miller, CEBS July 30, 2019
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A final rule issued by the U.S. Department of Labor (DOL) will make joining a single defined contribution retirement plan easier for unrelated employers, reducing costs and administrative duties—such as IRS filings—that each employer would otherwise bear alone. Meanwhile, Congress continues to consider legislation to further ease the use of defined contribution multiple-employer plans (MEPs).

The DOL final rule, made public July 29 and published in the July 31 Federal Register, could help small businesses provide employees with a retirement plan, specialists said. Among the advantages of MEPs, more dollars under management by a plan lowers fees, which allows for greater growth of employees' assets over time. Regarding administration, a MEP files a single 5500 with a single audit.

The DOL rule authorizes 401(k) or similar defined contribution MEPs through two approaches:

  • Association retirement plans (ARPs), which can be offered by existing organizations such as local chambers of commerce or associations formed to administer the MEP. The final rule "takes a plan type that has been around for many decades—MEPs—and expands access to that plan type," wrote Pete Swisher, national practice leader for Pentegra Retirement Services. "ARPs are therefore are not a new type of plan. They are a new pathway to an old type of plan."
  • Professional employer organizations (PEOs), which contractually assume many employment responsibilities for their client employers. While some PEOs have been administering MEPs for their clients, the final rule provides clear authorization for them to do so by creating a new safe harbor under the Employee Retirement Income Security Act (ERISA), which governs employer-sponsored retirement plans.

The new regulation takes effect Sept. 30, 2019.

"Expanding the availability of association retirement plans is a positive step," said Nancy Hammer, vice president for regulatory affairs and judicial counsel at the Society for Human Resource Management. "More workers will have access to a retirement savings vehicle and more employers, especially smaller employers that could not otherwise afford the administrative costs, will be able to provide this key benefit."

Approximately 38 million private-sector employees in the U.S. do not have access to a retirement savings plan through their employers, according to the DOL, which cited administrative costs and compliance requirements as the chief reasons why small businesses don't offer a retirement-savings benefit.

Moving Toward 'Open' MEPs

Before the final rule was issued, the DOL permitted only "closed" MEPs in which participating employers shared "a nexus of interests" or common relationships, such as being members of an established trade association. Under the new rule, employers can join an ARP as long as they meet one of the following criteria:

  • Operate in a common city, county or state—or in a multistate metropolitan area—regardless of their trade, industry or profession.
  • Operate in the same trade, industry or profession, regardless of where they are located.

Dominic DeMatties, a partner in the Washington, D.C., office of law firm Alston & Bird, described the new DOL rule as "pretty close to as far as the DOL could go" to interpret ERISA's definition of a plan sponsor.

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

IRS Proposed MEP Rule

The IRS recently issued for comment a proposed rule addressing the risk posed to a MEP by one member's bad actions, such as failing to funnel employee contributions to the plan on schedule. That proposal, published July 3 in the Federal Register, would apply to existing closed MEPs and now to ARPs and PEO-sponsored plans.

The "one bad apple" liability risk that a negligent member can pose to an entire plan has been a major stumbling block for MEPs that the DOL lacked the authority to address in its own rule.

"The new guidance from the DOL and the proposed compliance relief from the IRS have the potential to increase both the availability and the attractiveness of MEPs as an opportunity for small employers to pool retirement plan resources and collectively negotiate for better fees and services," wrote attorneys at law firm Smith, Gambrell & Russell.

The DOL’s regulation can be seen as "a small step away from a strictly employer-based retirement plan system," noted Mike Barry, a senior consultant with October Three, a retirement plan advisory firm. "It remains to be seen whether associations (e.g., state and municipal Chambers of Commerce) will adopt this new model."

MEP Legislation Before Congress

In May, the U.S. House of Representatives passed legislation—the Setting Every Community Up for Retirement Enhancement (SECURE) Act—that would, among other actions, "go further than the DOL rule in opening MEPs to unrelated employers. The Senate has yet to act on the legislation.

During a July 29 conference call, senior DOL officials explained that the SECURE Act would allow businesses that aren't located in a common geographic area and don't share a common trade, industry or profession, to join a MEP. In addition, the SECURE Act would allow MEPs to be administered by what the legislation calls a pooled plan provider, such as a financial services firm, in addition to associations or PEOs.

"The SECURE Act would create an entirely new kind of retirement plan that could go beyond what we've done" by interpreting existing law, DOL officials said. "We're not sure we could go that far."

Similar to the proposed IRS rule, the SECURE Act insulates companies in MEPs from penalties if other members violate fiduciary rules.

Although the SECURE Act was passed by the House by a broadly bipartisan vote of 417-3, it has not advanced in the Senate. Supporters hope that the upper chamber will vote on the bill before the end of the year.

Request for Information

To weigh the feasibility of using its rulemaking authority to allow different types of open MEPs other than ARPs and PEO-sponsored plans, including MEPs offered by financial services firms as would be permitted under the SECURE Act, the DOL issued a request for information (RFI) seeking comments regarding open MEPs and the definition of "employer" under ERISA.

In still another regulatory action affecting MEPs, the DOL issued Field Assistance Bulletin 2019-01 on July 24, providing temporary penalty relief to MEPs that filed an incorrect Form 5500 by not including a good-faith estimated of the total contributions made by each listed participating employer during the plan year, a requirement added to MEP filings by a 2014 DOL interim final rule.

Skeptics Remain

Not everyone is a fan of MEPs, and critics point out that MEPs can still involve liability risks, such as the responsibility for participating employers to oversee service providers, said Allison Brecher, general counsel of Vestwell, which makes software for administering retirement plans. Alternatively, "technology [can] make it easier for small businesses to offer and administer retirement plans that fit their individual needs" by going it alone, she said.

Index funds and technology have made high-quality 401(k) investments and administration services accessible to employers of any size for very low fees, wrote Eric Droblyen, president and CEO of Employee Fiduciary, a provider of 401(k) services for small businesses. "These highly efficient 401(k) plans can cost much less than a MEP."


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