Experts Sound Off on DOL’s 401k MEP Advisory Opinion
While many across America spent the Friday before Memorial Day with visions of American flags, honored veterans and backyard barbeques dancing in their heads, the folks at the Department of Labor (DOL) were busy rocking the fastest growing segment of the retirement plan industry – the money-saving Multiple Employer Plan (MEP) market. In two separate opinions, the DOL zigged in the face of the regulatory zag by Congress and at least two states. These opinions may have shattered the hopes of small businesses seeking to reduce retirement plan expenses, leaving them alone and stranded just as the turbulent seas of Fee Disclosure loom forebodingly close.
MEPs have been a legal construct since the 1950s, according to Terrance Power, president of American Pension Services in Tampa, Florida. Power recently spoke at a free webinar with three other experts on matters pertaining to DOL Advisory Opinion 2012-04A. This particular opinion addressed a question posed by attorney Robert J. Toth, Jr., whose firm is located in Fort Wayne, Indiana. Toth, who also participated in the webinar, asked the DOL to issue an opinion on the status of an “open” MEP called 401k Advantage and administered by TAG Resources, LCC, a registered investment adviser in Knoxville, Tennessee. Although not formally defined, an “open” MEP is one where unrelated employers join together to form a single retirement plan for all companies. In doing so, employees of these companies can take advantage of lower retirement costs resulting from economies of scale. The DOL typically defines an MEP as a “closed” entity as employers within a common “association.”
MEPs themselves are promulgated under Section 413(c) of the Internal Revenue Code. Previous to Advisory Opinion 2012-04A (the “TAG Opinion”), the DOL had not formally issued guidelines pertaining to MEPs. As part of a court disclosure in a breach of fiduciary duty case regarding a real estate transaction the DOL is currently involved with, a DOL lawyer independently offered a concern about MEPs. It is not known if the timing of the release of the TAG Opinion was related to this earlier comment. It should be noted the DOL issued Advisory Opinion 2012-03A on the same day (May 25, 2012) as the TAG Opinion and both releases (of the three that day) dealt with MEPs or MEP-like plans.
We can summarize the TAG Opinion as follows: The DOL does not recognize “open” MEPs. All MEPs follow the same rules – they are only recognized within a legitimate association of employers and that association cannot be constructed for the sole purpose of provided an MEP. For MEPs operating outside this definition, which includes the TAG MEP, the DOL considers all constituent companies as having individual plans, meaning these companies are still required to file their annual 5500 reports and, if applicable based on their size, conduct an annual audit for their individual plan. In the webinar, Toth concluded the DOL now requires both “commonality” and “control” as prerequisites to forming an MEP.
Previous to the TAG Opinion, one of the primary attractions of MEPs for smaller companies was the elimination of the 5500 filing and the removal of the costly audit requirement. These two factors had the dual impact of taking these companies “off the grid” (i.e., eliminating those annoying cold calls from solicitors based on the information contained in the 5500 report) and reducing the cost of operating the plan (i.e., by sharing the audit cost with many firms).
The TAG Opinion caught many industry professionals by surprise since it appears to be a giant step backwards for regulators. Power said in the webinar that recent legislation in Massachusetts and California as well as a bipartisan bill offered in the Senate this past March all seem to be going in the direction of open MEPs. Power still believes legislation will ultimately remove the commonality provision. The Senate plan as currently drafted does this, but still leaves some fiduciary liability with the employer. Power says his MEP will follow the new guidelines of the TAG Opinion, with individual plans filing separate 5500s and larger plans with conduct annual audits. He does feel their remain a few hanging issues that he hopes the DOL will address sooner rather than later.
Toth also said the MEP he’s involved with will apply the rules issued in the TAG Opinion. In the webinar, he referred to previously issued guidance on commonality. Afterwards, Toth gave FiduciaryNews.com some specifics. “Under Advisory Opinion 81-44A,” he said, “the DOL recognized the various local YWCA organizations as an example of having commonality through its national association. Advisory Opinion 95-29 is an example of an employee leasing company was not viewed as having sufficient commonality.”
As far as guidelines for creating future MEPs, Toth said the TAG Opinion clearly set forth the criteria regarding control by citing this quote from its text: “The employers that participate in a benefit program must, either directly or indirectly, exercise control over the program, both in form and in substance, in order to act as a bona fide employer group or association with respect to the program.”
Ary Rosenbaum of the Rosenbaum Law Firm in Garden City, New York, who also took part in the webinar, sees the TAG Opinion as less clear-cut than Toth does. He said it’s not clear what is meant by “commonality” or “control” and hopes the DOL offers clearer guidance. He does believe MEPs following the TAG model need to comply with the TAG Opinion, but that MEPs following a different model don’t really have any guidance. He does, however, agree the DOL does not recognize the difference between an “open” MEP and an “association” MEP. He says, “The advisory opinion is applicable to any MEP.”
On the other hand, Rosenbaum does see the TAG Opinion’s value in terms of creating future MEPs. “I think the DOL gave some guidance on how to operate a MEP going forward,” he recently told FiduciaryNews.com. “There has been a lot of providers shifting quite quickly to an ERISA 3(16)/multiple 5500 model (which causes the plan to no longer be a MEP) because their structure mimics that of the TAG case. Many MEP sponsors can’t change their structure at this stage of the game. Going forward, I think there will still be open MEPs that mimic the structure that the TAG Opinion will allow.”
The difference may lie in the primary objective of the MEP’s plan sponsor, predicts Rosenbaum. “The issue was the fact that being a plan sponsor really shouldn’t be a for profit business. Based on the fees that people were charging for operating MEPs, these plan sponsors had no other business than making money from their plan. It’s clear that from the TAG Opinion, a plan sponsor needs to stand on their own as either an employer, an employer benefits association, or have commonality with the adopting employers. There has to be something there more for the employer to exist than just operating the plan.”
Attorney Herbert Whitehouse of Public Employee Fiduciary Services in Orlando Florida completed the panel of experts in the webinar. He pointed out the creation of a retirement plan, by itself, did not constitute a fiduciary act. Rather, he said, the fiduciary duty comes into play once the plan sponsor hires and names other fiduciaries and money starts changing hands. He believes the key thing is the MEP plan sponsor should be acting for the benefit of the employers.
After the webinar Whitehouse elaborated on his point. He told FiduciaryNews.com, “In general, if a small employer can gain administrative, investment, and a sophisticated outcome oriented management through economies of scale, those advantages go into the plus column” when it comes to acting for the benefit of the employers.
In March 2012, appearing before the Senate Subcommittee on Aging, Phyllis Borzi, Assistant Secretary of Labor for the Employee Benefits Security Administration, testified “There are six million businesses with fewer than 100 employees employing 42 million workers. Less than half of these businesses offer a retirement plan.” She expressed concern about the need to make it easier to encourage more of these smaller companies to offer retirement plans to employees. She said, “Employer-sponsored plans are the best way for most workers to accumulate savings for a financially secure retirement. It is not easy for workers to save and invest so that they will be able to maintain their current standard of living in retirement. According to experts, workers will need to replace 70 to 90 percent of pre-retirement income. Therefore, we need to do all we can to assist small employers in establishing and operating retirement plans.”
In her testimony, Borzi admitted, “ERISA expressly recognizes the idea of a ‘multiple employer plan’ by including in the definition of ‘employer’ any ‘person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity.’” In addition, she told Congress “We have also heard about this ‘open MEP’ development from regulated financial institutions, including insurance companies and other financial service providers, who currently are allowed under Internal Revenue Code rules to offer ‘prototype’ plan products to employers. These prototype plans are another way to reduce legal and administrative costs of offering employees a tax qualified pension plan.” She expressed concern about MEP products with hidden fees and said that there were some financial service providers who had advised the DOL against the idea of open MEPs. She did not name who those institutions were.
It’s evident the TAG Opinion has addressed some of the concerns the DOL may have had about open MEPs, but, if we are to believe Borzi’s statement, it’s incomplete. As it stands, the TAG Opinion increases the hurdle for small businesses wishing to provide their employees with a low-cost retirement plan. With the DOL’s own new Fee Disclosure Rule set to go effective in only a couple weeks, it is expected it is precisely this market – small plans with less than 100 employees – that will most likely discover the need to reduce retirement plan fees. As it stands, the DOL, through the TAG Opinion, while it may stave off high-fee products masquerading as MEPs, it may have also just made it harder for those employers to find a legitimate and suitable low-cost alternative to their current plan.