Last week, President Trump signed an executive order, which directed both the IRS and DoL to review existing rules and limitations regarding how small businesses can team up to offer retirement plans to their employees through a shared (and hopefully more cost-effective) arrangement known as a Multiple Employer Plan (or “MEP” for short).
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1 PM EST broadcast via Periscope and guest hosted this week by Jeff Levine, we discuss what multiple employer retirement plans (MEPs) are and their current challenges, how President Trump’s recent executive order would change MEPs and at least potentially improve retirement plan access for employees of small businesses (or not) , and why these proposed changes might ultimately have some concerning unintended consequences.
A relatively lesser-known arrangement, a multiple employer retirement plan (MEP) is an agreement between two or more unrelated business to band together to offer a 401(k) plan to their employees. The big benefit of MEPs is the opportunity to achieve lower costs through the economies of scale of banding multiple small plans together into one larger one. As small businesses have long struggled to find a way to effectively offer retirement plans to their employees due to historically higher investment costs, potentially burdensome administrative costs, and concerns about fiduciary responsibilities and liability. By pooling their resources, a group of employers can ideally utilize a MEP to streamline plan administration, bring down costs, and shed (by shifting to the MEP provider) some of their fiduciary obligations.
Unfortunately, up until now, there have been some big downsides to MEPs that have prevented them from gaining wider adoption. Because they are tax-deferred plans, they fall under the purview of both the IRS and the DoL, and that, in turn, has created some unique regulatory challenges. For instance, the IRS views a MEP as a single plan, which means that if any single employer within the MEP fails to meet its requirements to qualify for the plan, then the entire plan can be disqualified, also known as the “bad apple” rule. Meanwhile, the DoL does not automatically treat every MEP as a single plan, particularly if there’s no “nexus” (or commonality between employers), which can necessitate each plan still filing its own Form 5500 and significantly increase related administration costs for each of the employers in the MEP.
It’s these regulatory headwinds that the President’s executive order seeks to mitigate, by calling on both the IRS and DoL to clarify and expand the circumstances under which an employer can adopt a MEP, to issue new regulations to clarify when a group of employers can be viewed as a single employer under ERISA, and (maybe most importantly) to issue new regulations to narrow or eliminate the so-called “bad apple” rule so that the plan can remain in effect even when individual employers fail to meet their individual-firm obligations.
Nominally, the purported goal of these efforts is to make it cheaper and easier for small businesses to offer 401(k) plans to their employees and increase access to employer retirement plans for the nearly 1/4th of full-time workers who don’t currently have one. Which should be feasible if MEPs really do become more attractive to small businesses, and the increased adoption even further reduces the administrative costs for the plans (especially if the DoL joins the IRS in treating participants in a MEP as a single employer for reporting purposes).
However, even if these changes happen, there are still some downsides to MEPs that employers must consider. For instance, under current law, it’s quite difficult for MEP participants to terminate their participation in the plan. Businesses that offer their own 401(k) plans are able to terminate that plan whenever they want, allowing employees to then roll their money into other tax-deferred vehicles (e.g., an IRA). However, while an employer can technically terminate their participation in a MEP, that termination does not create a distributable event for the employees, meaning that their money stays “stuck” in the MEP (and cannot be rolled over unless in-service distributions are permitted), while the employer continues to have a fiduciary responsibility as long as there is at least one employee still in that plan (even if the employer otherwise no longer offers it)!
Meanwhile, there is also the risk that when a large number of disparate small businesses come together into a shared plan, it becomes harder for any of them to individually negotiate for better terms, and that plan providers could ultimately be able to increase plan costs if they can gather enough MEPs under their umbrella, given the substantial burden on employers and their participants to switch providers. Also, paradoxically, by making MEPs a more viable option (if they really do end up being lower cost), it could make IRA rollovers a relatively less attractive option for employees (which benefits 401(k) plan providers but adversely impacts those who rely on IRA rollovers to build their businesses).
Ultimately, we should see some specific proposals from IRS and DoL within the next 6 months or so, and given the bipartisan support for these changes, it’s likely that we will see some changes to MEP rules that really do make them more feasible. But whether it actually leads to lower costs and greater access remains to be seen. Although at the least, it could eventually produce some interesting new opportunities for financial advisors to expand their services and offer their own multiple employer retirement plans as a service to their clients!?