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!?
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Good afternoon, everyone, and welcome to Office Hours with Michael Kitces. Of course, I'm not Michael Kitces. My name is Jeffrey Levine, director of advisor education for Kitces.com. And today, we're going to be talking a little bit about MEPs, or, multiple employer retirement plans, and the President Trump's recent executive order that was released last Friday, and how they impact one another.
So with that, let's first start with what is a MEP, right? What exactly is a MEP? So that we can get a framework for how the executive order may change that. In short, a MEP, again, is short for multiple employer retirement plan. Do not, I repeat, do not confuse multiple employer retirement plan with multiemployer plan. You might think that a multiemployer plan is a MEP because "M-E-P," multiemployer plan, but it's not. MEPs, again, are multiple employer retirement plans.
And there's a big difference. They're actually governed by different sections of the law, etc. The multiemployer plans are sometimes referred to as Taft-Hartley plans. Those are where you see the collective bargaining plans or union plans, where people can actually go from one company to another and never actually leave the plan or have an event. Whereas the MEP itself is a plan made up of two or more unrelated employers. So unrelated here means unrelated for tax purposes. And generally, the MEPs that you see today have separate accounts for each individual employer as part of that plan, and you can actually have different types of designs for each of those employers. A lot of times it's streamlined and they're still the same, but you can have different types of designs, and that makes MEPs fairly flexible.
Benefits Of Using MEPs [02:02]
Now, why do people use MEPs or why are they gaining some traction and what's the talk about them today? The biggest potential benefit of the MEP, and what's touted more than any other, is the potential for MEPs to reduce cost, right? Just like in many areas of business, when you get more scale, prices tend to come down on average. And so that's what we're really looking at with the MEP, both on an investment platform and on a record-keeping side of things. We'll talk about whether or not that's true in just a moment, but again, that's typically the primary benefit that's touted of a MEP.
One of the other benefits of MEPs that's often touted is the ability to shift some of the fiduciary liability on things like record-keeping, etc. out of the business and onto someone else. So there is some shifting potentially when you incorporate a MEP, but that's, again, overblown in a lot of cases.
One interesting aspect of MEPs, though, is that because they are employer plans and because we're talking here, again, about tax-deferred plans, you have plans that are actually looked at and governed by both the IRS as well, as well as the Department of Labor. So what's really interesting there and what's unique is that, for the IRS purposes, the IRS generally views MEPs as a single plan, okay? A single plan in the eyes of the IRS. Unfortunately, what that means is that if any single employer within the MEP does not meet its requirements in order to fulfill qualification under IRS standards then the entire plan can actually be disqualified. So that's a big issue with MEPs right now is that one bad apple, if you will, right? That's what it's called, the "one bad apple," rule and one bad apple can spoil the entire MEP for everyone. So that's an issue.
Now, on the other hand, the Department of Labor also has some jurisdiction over MEPs. And what's interesting here is that the Department of Labor does not automatically treat MEPs as a single-employer plan as the IRS does. In contrast, the Department of Labor under the Obama administration said MEPs can either be a single plan, meaning that only one Form 5500 has to be filed, auditing would be done at the plan level, or if there's no nexus, if there's no "nexus," if there's not a common employer or a common interest rule, sometimes it's referred, then you could actually have a scenario where this MEP would still have to file Form 5500 for each of the employers involved. And obviously, that significantly diminishes the economies of scale that are gained by using the MEP in the first place.
So for more information on that, you can check out Advisory Opinion 2012-04A that was put out by the Department of Labor back in 2012. Again, it's Advisory Opinion 2012-04A. And what that did is it set out the Department of Labor's guidance as to when the MEP should be considered for Department of Labor purposes one plan or whether each individual employer within the MEP would still have to file Form 5500, etc.
How President Trump's Executive Order Might Change MEP Features [05:19]
So having now taken some time to talk a little bit about the basics of a MEP, let's talk about where President Trump's executive order might change things. So the first thing that the executive order cites is that many employees today don't yet have access to a retirement plan. It's about one-quarter of full-time workers, and if you add in part-time workers, about a third of workers today still don't have access to a retirement plan. And the executive order cites a Pew research study that says it's particularly common in smaller employers, in part because of the cost. And so one of the things that president Trump's executive order does is it calls on the Department of Labor and Treasury to clarify and expand the circumstances under which an employer can adopt a MEP as its retirement plan. So again, right now, we're stuck with that advisory opinion from the Department of Labor back in 2012, which essentially has that common nexus rule.
Now, that's an opinion of the Department of Labor, and that can change. So the Department of Labor can change its stance on issues. Much like has happened recently with the fiduciary rule, etc., different administrations from the top down can have their departments view things differently. And so President Trump has called on the Department of Labor and the IRS to take another look at that. In addition, he's proposed that the IRS and Department of Labor look at putting forth new regulations to both clarify when a group of employers can be considered a single employer under ERISA, again, looking back at that Department of Labor issue where still today we could have multiple employers in a MEP that would each have to file their own Form 5500s, be subject to their own audit risk, etc., diminishing a lot of the value of the MEP itself.
In addition, he's proposed that the IRS propose new amendments or regulations regarding the tax qualification of the plan when one or more employers does not fulfill its requirements. As I mentioned before, today, you have that "one bad apple" rule where if you have 50 companies that are involved in a MEP and one of them isn't doing what it's supposed to do and it fails, and now all of a sudden the entire plan loses qualification because of that one bad employer. That's another reason that employers may not want to adopt a retirement plan like a MEP, because why would you want to put your own employees, potentially your own retirement savings at risk for a company where you don't even know anything about them, they just happen to join the same plan as you? And so changing that would be a significant improvement to MEPs. That would be a big deal.
How These Changes May Affect Advisors And Their Clients [08:15]
So what happens and what's the impact going forward for advisors and clients? There are a few things. First off, if we get a more uptake of MEPs, it's possible that we could see a further decreasing of cost. One thing that's interesting, though, is that one of the big costs associated with 401(k)s and retirement savings, in general, has historically been the cost of the investments themselves within the plan. Today, that's not nearly as much of an issue as it was in years past. Today, even small plans can get access to high-quality, low-cost investments. Years ago, if you weren't a large plan or you weren't pooling together with other individuals, you typically weren't going to get those same benefit and scale there. Similarly, you could decrease the record-keeping costs. And that would be the potential biggest benefit of this executive order if everything comes to pass, is if, again, more companies can pull together and they can have the one single plan for not only IRS purposes, but for Department of Labor purposes, that could be a huge benefit there.
But there are also individuals that look at this from the flip side and they say, "Hey, wait a second, if we create more plans or MEPs, if we allow more individuals, individual employers that is, to belong to these MEPs and we end up with fewer plans than we have today, doesn't that potentially skew the ability of these larger MEPs now to have a bigger control over the market? What if they, for instance, gather up a bunch of employers and then jack the prices up? Are those employers then going to have the freedom to go elsewhere?" Maybe, maybe not. It's a big deal to change your plan.
And there are also other disadvantages associated with MEPs in the first place. For instance, in general, if your company sponsors a retirement plan like a 401(k) and you want to terminate that plan, you want to end the 401(k), there are a few things that happen. First off, it's a distributable event, in general, for those employees. So they can take the money that was in the 401(k) and they can roll it over to an IRA or a Roth IRA or another retirement account of their choosing. In addition, one of the other key benefits is that once you terminate that plan, you generally end your liability. You're not subject to ongoing fiduciary requirements because there's no more plan, right? So after the statute of limitation ends, that's it.
In contrast, when you terminate participation in a MEP, when you say, "Our company is no longer going to be involved in your MEP," it's not the same thing as terminating the plan. You're not terminating the plan, you're just terminating your company's involvement in that MEP plan. And so in those cases, typically it's not a distributable event for employees, so they cannot take their money and roll it over to an IRA, they're generally stuck still with their money in the MEP until they either retire or they have some sort of in-service distribution event like reaching 59 and a half, etc. And on top of that, the employer is still subject to fiduciary oversight of the MEP itself as long as it has employees still enrolled in that plan. So it's not an efficient way of terminating assets when you have this multiple employer retirement plan arrangement.
So what can you do? Are there workarounds? Yeah, there are. For instance, you could create your own company plan, just like a lot of businesses have today, move the assets, essentially spin out the assets for your company from the MEP into your own retirement plan, and then terminate that plan. That would work, but obviously, that's a lot of work, it's going to add more cost, etc., so not great compared to the typical plan termination process.
And so, you know, we have to look at these things. We could also look in terms of scenarios where we could see, although more people might have access to retirement plans, we might see a paradoxical decrease in the amount of rollovers from those plans to IRAs if everything happens the way President Trump believes it will under this executive order. If we did see decreases in cost, etc. and these plans were just so good, well, obviously, it would diminish the value of those rolling over to an IRA.
So where do we go from here? Still yet to be seen. We should expect to see some sort of proposed regulations within the next 6 months, 180 days, based on what the executive order calls for. It is likely, again, that we will see some changes in this area. And there is bipartisan support for expanding MEPs. Back in 2016, for instance, a bill that would expand MEPs did unanimously pass the Senate Finance Committee. And in addition to that, we have seen a bill earlier this year, I believe it's the Retirement Enhancement and Savings Act, also be reintroduced that would expand MEP availability and kind of diminish that current DOL requirement of the nexus rule, the common interest rule, allowing employers from different professions like a doctor's office and a lawyer's office and a financial advisor's office all to pull together under one plan.
And again, that could create a lot of other interesting opportunities for advisors. Imagine going out and marketing your own plan, the ABC Financial Advisor multiple employer retirement plan, where you can now pool those individuals under a single plan that you have, that you give advice for. So it could totally change the 401(k) marketplace if these things happen, but we're a long way away from that happening. We've got a lot of steps in between.
That's all the time we have for today on Office Hours with Michael Kitces. Again, I'm not Michael Kitces, but join us again next week for the next Office Hours. And this information and some links to the documents and advisory opinions I mentioned will be in the written article which will be posted to the Nerd's Eye View blog tomorrow, September 6th. Thanks, everyone, and have a great day. Bye-bye.