Some employers would like to offer their workers a retirement plan, but they’re discouraged by high administrative costs and cumbersome compliance requirements. This is especially true for small businesses that don’t have the financial and administrative resources of larger firms.
As a result, about 38 million private-sector U.S. employees don’t have a retirement plan through their employer, according to the Department of Labor (DOL).
To overcome these challenges, some small businesses have partnered to form multiple employer plans, or MEPs. This is an ERISA-protected, 401(k)-type retirement plan in which multiple small employers share a core plan administrator, lowering the costs and administrative duties for each participating employer.
Obstacles to Widespread MEP Adoption
Unfortunately, there’s a rule that has made it hard for many small businesses to offer MEPs to their employees. Employers participating in an MEP must have some kind of connection, like a common profession or membership in an industry trade association. MEPs are common in the medical profession for this reason.
Last fall, President Trump signed an executive order (EO)—the Executive Order on Strengthening Retirement Security in America—to loosen the requirements for businesses that want to participate in MEPs. More specifically, this EO would allow unrelated businesses to partner so they can offer an MEP to their workers.
In response, the DOL published a proposed rule that would make it easier for small employers in different industries to offer MEPs. This rule would allow groups of employers in a geographic region or a specific industry nationwide to offer MEPs and association retirement plans (ARPs).
Sole proprietors and their families would also be allowed to join these plans, “which give employers a simple and less-burdensome way to offer valuable retirement benefits to their employees,” stated Labor Secretary Alexander Acosta.
An important distinction with MEPs and ARPs is that employers are not viewed as sponsoring their own plans under ERISA. Instead, the plan is treated as a single employee benefit plan.
SECURE Act Would Allow Open MEPs
More recently, a retirement plan reform bill making its way through Congress—the SECURE Act—includes a similar provision that would allow “open MEPs.”
This provision would also make tax credits available to businesses that offer MEPs to their employees. And it would exempt employers from penalties if other MEP members violate fiduciary rules. This potential problem, referred to as the “one bad apple” liability risk, has previously kept some small businesses from participating in MEPs.
Not a Silver Bullet
While there is excitement in the retirement plan community about how these changes could enable more Americans to participate in a plan, there’s also some caution that MEPs aren’t a silver bullet. For example, while a single Form 5500 filing and plan audit are performed at the MEP level, participating employers still retain some level of fiduciary liability. This includes selecting the MEP and monitoring the lead employer’s activities.
Also, it may be necessary to limit the fund menu and investment choices when designing the plan to streamline processes and keep costs affordable for small businesses.
We will keep you updated in future issues on the progress of the proposed DOL rule and pending legislation affecting MEPs.
Please contact our office if you have questions about multiple employer plans and association retirement plans.