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What Every Company 401k Plan Fiduciary Needs to Know about MEPs

What Every Company 401k Plan Fiduciary Needs to Know about MEPs
September 25
00:03 2018

As we inch closer to a reality of a universal 401k MEP, companies are no doubt interested in knowing more about them. What are they? How might they benefit employers and employees? What are some important questions to ask about them? What are some common misconceptions about them?

For the purposes of this article, we are going to be limiting our discussion to true 401k MEPs as they exist under current DOL guidelines. “A Multiple Employer Plan (MEP) is a single qualified plan that covers two or more unrelated companies,” says Joni Jennings, Principal at DWC – The 401(k) Experts in Atlanta, Georgia. “Although unrelated generally means there is not enough common ownership for the companies to be considered legally related, they must still have some commonality of business purpose in order to be part of the same retirement plan.”

“Commonality” is the key factor in determining the legal standing of a 401k MEP. “The DOL has ruled on numerous occasions that simply using a common service provider or signing on to identically worded documents is not enough to create the necessary commonality,” says Jennings. Unrelated companies can still aggregate their plans, but this is called an “Open MEP” and, until the Trump Executive Order or an act of Congress is fully implemented, they do not offer the same advantages as true 401k MEPs. Jennings says, “‘Open MEPs’ are really just collections of separate stand-alone plans that share some resources (DOL Advisory Opinion 2012-04A).”

A true 401k MEP traditionally offers significant advantages to individual company sponsored plans. “The MEP platform was designed to create efficiencies of scale by aggregating and outsourcing many of those chores to third party service providers,” says Elena Dixon of Linden Wealth Advisors, LLC. in New Haven, Connecticut. “Increased media coverage due to recent legislative efforts have brought MEPs to the attention of more employers and plan sponsors than ever before. Still, there is a lot of confusion about what MEPs are and how they work.”

There are a number of important questions and considerations the corporate retirement plan fiduciary must address when determining if a 401k MEP would be a more appropriate alternative to maintaining a stand-alone 401k plan. “The questions are usually centered around whether the MEP absolves them of all fiduciary liability,” says Ary Rosenbaum, Managing Attorney at the Rosenbaum Law Firm in Garden City, New York.

While it’s clear 401k MEPs reduce fiduciary liability – sometimes quite significantly – companies need to be mindful this liability cannot be fully eliminated. They need to know what liability they will retain. “Some adopting employer mistakenly believe that by merging their plan into a MEP that they’ll eliminate 100% of their fiduciary responsibilities. This is not true,” says Terrance Power, CEO of The Platinum 401k, Inc. in Clearwater, Florida. “There is a dramatic reduction in liability to the employer, but there are still certain duties that fall under fiduciary activities that the employer simply cannot avoid. Timely remittances of elective deferrals, distributing required notices, and oversight of the suitability of the arrangement on an annual or more frequent basis all come to mind.”

“As opposed to a single employer plan, the company will be adopting a plan that also covers other employers,” says Taylor Hammons, VP, Head of Retirement Plans at Kestra Financial in Austin, Texas. “As a result, when evaluating adopting a MEP, most companies should ask how their fiduciary responsibilities, administrative support and pricing would be impacted by adopting a MEP. Specifically for pricing, they want to understand how the aggregation of plan assets could help reduce their pricing. Also, along the lines of ‘one bad apple spoils the bunch’, they want to understand how a plan failure by another adopting Plan Sponsor may adversely impact their fiduciary responsibilities.”

This “One Bad Apple” problem is very real (the current proposed legislation attempts to mitigate it, though). It poses a benefit/risk trade-off companies will need to assess. “The most common questions plan sponsors ask arise from the most common misconceptions: “Small plan fiduciaries appreciate the chance to off-load some of their liability yet may fear increased risk as a result of association with other participants,” says Dixon. “They wonder if all retirement plan funds are co-mingled and if other employees have access to their funds. It’s important to note that each adopting employer still has their own plan provisions and the funds are kept in separate accounts. If one party to the plan fails in the oversight of their own part of the plan, they may be ‘unwound’ from the MEP to ensure ERISA compliance is maintained.”

While the “One Bad Apple” problem exists in theory, Power doesn’t see it as a practical concern. “I’ve never seen a MEP disqualified due to this issue in the 37 years I’ve been in the retirement plan industry,” he says. In addition, he notes that experienced MEP TPA’s have proprietary strategies that they use to address this issue.

If the “One Bad Apple” problem isn’t as bad as it seems, the cost savings benefit may not be as good as it seems. “I think too many plan sponsors think they will get lower fees, but there are some very high-priced MEPs out there,” says Rosenbaum.

“The big misconception is the costs savings,” says Adam Bergman, President of the IRA Financial Group & IRA Financial Trust Company in New York City. “Plan administrators of MEP will still charge some fees from all sponsors for the filing of the 5500 and annual plan admin/testing. The fees may be less, however, the real costs involved is in the offering of 401k plan benefits to employees, especially for safe harbor or DB plans. The savings on the annual TPA fees are generally minimal.”

Hammons sees another misunderstanding among companies looking at 401k MEPs. “The most common misconception that Plan Sponsors have about MEPs,” he says, “is that they lose control and flexibility on how the plan is set up and administered. In essence, they are concerned that they have lost the freedom that comes with adopting a single employer plan.”

In truth, 401k MEPs plan designs can be constructed to allow individual companies to customize what they offer their employees – within certain bounds. In fact, it would not be unusual for a single business association to offer multiple 401k MEP plans, each designed to cater to specific company needs. Power says, while “some MEPs may not have as much flexibility,” MEPs can be designed to be “exactly as flexible as any non-standardized prototype or volume submitter document.”

Still, it’s important to fully scrutinize the particular 401k MEPs the company is considering joining. Not all 401k MEPs are the same. Some may be more appropriate for the company than others.

“Adopting an MEP is not always the right fit,” says Dixon. “Plan sponsors should consider the process and expense involved in creating a centralized board to oversee the plan and outside service providers. While the streamlined operation of the plan may save time and money over the long-term, a commitment must be made by the participating community to ensure that the intended efficiencies and ERISA compliance are maintained.”

And what happens if the company discovers after it has joined the MEP that it no longer wants to participate? This is a possibility too often overlooked. “One of the most important ‘unasked’ questions regarding MEPs is how does the company sever its relationship with the MEP if it decides to sever its relationship with the MEP,” says Hammons. “Typically, there is a lot of discussion regarding how to join a MEP, but there also needs to be in-depth conversations regarding leaving a MEP.”

Finally, there’s this most important question: due diligence regarding the MEPs’ plan sponsor. “Who is the plan sponsor, who will serve as a fiduciary capacity?” says Rosenbaum. “As we saw with Matt Hutchison, there can be unsavory characters involved with MEPs.”

As we approach clarity with regards to Congressional action and/or implementation of the Trump Executive Order, we may find need to expand these MEP guidelines. Until then, though, companies in business associations where commonality exists may wish to use these ground rules when determining if a 401k MEP is the right course to take.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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