New Push Seen for 401(k) Multiple Employer Plans

Bipartisan interest spurs new legislation for 'open MEPs'

By Stephen Miller, CEBS May 23, 2017
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Proponents of allowing unrelated employers to participate in a common 401(k) plan—with a shared administrator and a single Form 5500 filing—made their case at the U.S. House of Representatives subcommittee hearing on May 18. Unlike other retirement savings initiatives, past efforts to enable defined contribution multiple employer plans (MEPs) have enjoyed broad bipartisan support.

Federal law now requires commonality among employers in a shared 401(k) or similar plan, usually meaning that the employers must be in the same line of business, such as with MEPs formed among auto dealerships. Open MEPs would not require employers to demonstrate a common interest before partnering in a pooled plan.

Other topics were up for debate during the House Subcommittee on Health, Employment, Labor, and Pensions hearing, too. Among these:

  • Democrats and Republicans took opposing sides on the Obama administration's controversial fiduciary rule, which requires that financial advisors giving investment advice to retirement plan participants comply with the Employee Retirement Income Security Act's (ERISA's) fiduciary or "best interest" standard. The rule goes into partial effect on June 9 with full implementation on Jan. 1, 2018. Labor Secretary Alexander Acosta has said that the Department of Labor (DOL) won't further delay the rule but will seek public input on subsequently revising it.

  • Hearing participants also squared off on efforts by states to launch salary-deferral retirement plans for private-sector workers who lack access to a 401(k) or similar plan. The same day as the hearing, President Donald Trump signed a measure to repeal an Obama administration rule that provided an ERISA safe harbor for these state-run plans. But several states intend to go ahead with their programs anyway, contending that the plans are exempt from ERISA—even without a formal safe harbor—because they don't accept employer contributions.

"California says it doesn't care if there's no ERISA exemption, it's moving forward with its much criticized state-run retirement plan for private employees initiative," blogged FiduciaryNews.com's Chris Carosa. "Meanwhile, a committee hearing on MEPs—the true 'next generation' of retirement policy–goes virtually unnoticed."

The Case for MEPs

"What we should be doing is making it easier for small businesses to offer retirement plans to their employees," said Rep. Tim Walberg, R-Mich., the subcommittee chairman, as he kicked off the hearing. Many small businesses cite set-up expenses as the key reason for not offering retirement benefits, he said, while MEPs would allow them to provide retirement plans to workers at a more affordable cost. "These plans are currently restricted by the federal government," Walberg noted. "With roughly 58 million American small business employees, it's time to change that."

Removing Barriers

In his testimony to the committee, James Kais, managing director at Transamerica, a benefits provider, cited findings from a 2016 study by the firm's research affiliate:

  • While 92 percent of large companies with 500 or more employees offer a 401(k) or similar plan, only 72 percent of companies with 10 to 99 employees do so. The smaller the employer, the less likely it is to offer a retirement plan.

  • Workers who are offered a 401(k) or similar plan are more likely to save and invest for retirement (90 percent of workers with employer-sponsored plans said they do so) compared to those who do not have access to such plans (of which 48 percent said they're saving for retirement), a finding that is consistent by company size.

  • Among companies that do not offer a 401(k) or similar plan, only 27 percent say that they are likely to begin sponsoring a plan in the next two years. Among those not planning to do so, the most frequently cited reasons were that the company isn't large enough and they were concerned about cost.

  • 22 percent of those not likely to offer a plan indicate that they would consider joining a MEP offered by a vendor who handles many of the fiduciary and administrative duties at a reasonable cost.

To encourage small employers to provide retirement plans, Congress must pass "reforms that address … costs, complexity and concerns about fiduciary liabilities," Kais said. "Under a multiple employer plan, many small businesses can join together to achieve economies of scale and avoid the administrative burden and liability of running the plan."

While MEPs have one overarching tax filing and an overarching audit, "everything would still be reportable to the various regulatory agencies for enforcement and for review," Kais said.

To aid the adoption of MEPs, he urged two legislative reforms:

  • Eliminate the requirement that only employers with a common nexus can join in a MEP. "If you're not a client of a professional employer organization that does HR outsourcing, or not part of a trade association or cooperative, why shouldn't you be afforded the same opportunity to band together with other employers?" Kais said.

  • Protect employers in a MEP who are compliant with regulatory requirements from the liability created by a noncompliant employer and the resulting disqualification of the entire plan. "The so-called bad apple rule has been a deterrent [to participating in the current closed MEP model] because employers are afraid of what might happen with a rogue employer in the plan," Kais said. He advocated other steps to mitigate the risk posed by a noncompliant employer.

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

MEPs vs. State-Run Plans

"For those people who work for an employer that offers a 401(k), automatic enrollment results in a 50-percentage-point increase in plan participation," said Jason Furman, senior fellow at the Peterson Institute for International Economics in Washington, D.C., and formerly a member of President Barack Obama's Council of Economic Advisors. "For people who don't have a plan offered through their employer, a number of states are moving forward" with auto-enrollment plans for private-sector employees.

Furman defended rules promulgated by the Obama administration's DOL, now repealed, that were intended to help states provide retirement plans to employees of small businesses. "Preventing [the states] from doing so will not just interfere with the retirement security of those [workers'] households, it will also interfere with our ability to learn from the experience of those states, which could help guide federal legislation in the future," Furman said.

However, "small business workers … are best served by saving for retirement in an ERISA plan," said Bradford P. Campbell, a partner at Drinker Biddle & Reath in Washington, D.C., who spoke for himself, not the firm. "We can reduce the regulatory burden without sacrificing those worker protections [under ERISA] by using MEPs."

Legislation in the Wings

Last September, the U.S. Senate's Finance Committee gave unanimous approval to a bipartisan bill—the Retirement Enhancement and Savings Act (RESA)—that would, among other provisions, permit open MEPs. The bill referred to these as pooled employer plans (PEPs) to avoid confusing defined contribution MEPs with union-administered defined benefit multiemployer pension plans. Although RESA was not brought to a vote by the House or Senate before Congress adjourned last December, its sponsors plan to reintroduce the measure in the future.

Separate bipartisan legislation, which could be dubbed "MEPs lite," was introduced in March by Sen. Susan Collins, R-Maine, and Sen. Mark Warner, D-Va., with a companion measure introduced in the House by Rep. Linda Sánchez, D-Calif., and Rep. Phil Roe, R-Tenn.

The Warner-Collins Retirement Plans Bill directs the DOL and the Treasury Department to allow employers and sole-proprietors participating in retirement plans with a common administrative framework to file a single aggregated Form 5500 for annual plan reporting. To file an aggregated Form 5500, the retirement plans would need to have the same trustee, fiduciary, plan administrator, plan year and investment menu.

"This legislation could fundamentally change the MEP landscape and even lessen the contention over state-run MEPs," explained benefits attorney Robert Toth, principal at Toth Law and Toth Consulting in Fort Wayne, Ind. "It would do this by opening the market for the advantageous pooling of the resources of small employers, which would have otherwise been reserved to the state programs. It also could minimize any need for new federal MEP legislation, and promote models which are a lot less risky than the MEP."

"There is hope that the open-MEP provision can be attached to tax reform or some 'must pass' legislation," said Michael A. Webb, vice president at consultancy Cammack Retirement in New York City.

Related SHRM Articles:

Bill Could Add 'PEP' to 401(k) Multiple Employer Plans, SHRM Online Benefits, November 2016

Under Trump, Retirement Benefits to Be Tweaked, Not Transformed, SHRM Online Benefits, November 2016

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