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A Company Fiduciary Must Ask These Questions Before Joining a 401k MEP

A Company Fiduciary Must Ask These Questions Before Joining a 401k MEP
October 01
00:03 2019

September 30, 2019 may very well be remembered as the first day of a brand-new era. In July, the DOL finalized its rule which redefined “Employer” under Section 3(5) of ERISA. Published in the July 31 Federal Register, the DOL states “a group or association, as well as a professional employer organization (PEO), can sponsor a defined contribution retirement plan for its members (collectively referred to as ‘multiple employer plans’ or ‘MEPs.’”

The DOL states “The final rule primarily affects groups or associations of employers, PEOs, plan participants, and plan beneficiaries.” It also said the regulation “permits certain working owners without employees to participate in a MEP sponsored by an employer group or association.”

The new rule became effective sixty days after publication – September 30, 2019.

While not opening up the 401k MEP concept to all (via, no pun intended, “open” MEPs), the new regulation makes it clear that closed MEPs will have the advantages they notionally should have. Current 401k plan sponsors, however, may want to consider asking these questions before joining an association 401k MEP.

In brief, a 401k MEP isn’t much different than a company sponsored plan, but it does reduce the fiduciary liability for the company sponsor. “A traditional single-company 401k plan enables employees at only one company to access a retirement plan, whereas a multiple employer plan (MEP) expands its reach to several employers,” says Nasrin Mazooji, Vice President of Compliance and Regulatory Affairs at Ubiquity Retirement + Savings based in San Francisco, California. “Theoretically, by banding together, the operational burden and costs associated with offering a retirement plan can be reduced for each employer.”

One obstacle for smaller business owners may be the fact they’d have to give up control. Drew Carrington, Head of Institutional DC in Franklin Templeton in San Mateo, California, says, “For employers that currently offer a plan and are considering joining a MEP—especially smaller employers that may lack dedicated benefits/investment expertise—the key questions to weigh are the tradeoffs between the customization and control of having their own plan and choosing their own investment menu vs. potential cost savings from scale, and some degree of fiduciary relief over investment selection.”

The need to control must be weighed against the reality of the time consumed by other priorities. “A key question employers need to ask themselves is the degree to which they want to take on the responsibilities of being a plan sponsor,” says Neil Lloyd, Head of US Defined Contribution and Financial Wellness Research at Mercer in Vancouver. “While being a plan sponsor can provide the employer with more flexibility, one has to be realistic about the time involved in performing these responsibilities. Many employers have the greatest intentions but still struggle with the time to focus on their plans (most of the employer representatives have other day jobs). In general, if you do not have the time, resources or expertise to fulfil these responsibilities then look for ways to find some supporting advice or delegate those responsibilities. (Remembering that the retirement market has been litigious). The MEP structure is probably the vehicle through which most employers will be able to outsource most of their responsibilities, but it’s worth remembering that there are other models were only some outsourcing is considered.”

Employers may look to trade associations, chambers of commerce, or other groups as potential 401k MEP sponsors for their company plan. When comparing options, there are some basic questions you should always ask. For example, Dr. Guy Baker, Ph.D, founder Wealth Teams Alliance in Irvine, California, suggests these: “Who picks the portfolio that is offered to my employees? How do they monitor the portfolio and what do they do if there needs to be changes? Do I get to participate in the decision? What are the fees to participate in this plan – how do they compare if I do it myself?”

Speaking of fees, Kyle P. Webber, Managing Partner at Quartz Partners Investment Management in Troy, New York, asks, “How much are the administrative and investment costs reduced with the MEP versus sponsoring a traditional 401k under a single employer? By pooling multiple retirement plans together the fixed costs should be reduced greatly and fee breakpoints should be realized by way of lower investment and custodial fees.”

Out-of-pocket dollars aren’t the only way employers can save. They can also save time. Webber asks, “In what ways are the administrative burdens of offering an employer sponsored retirement plan reduced? For instance, is employee enrollment, payroll submission, and employee disclosures handled at the plan level or individually by each employer?”

But employers can’t just be thinking of themselves. They have a continuing fiduciary duty to their employees. Lloyd says, “the employer will need to assess the impact on participants, so key issues to consider will include:

  • Quality of investment options being offered;
  • Robustness of recordkeeping in place;
  • Quality of any communication or guidance being provided;
  • Other services offered to a participant;
  • Any potential conflicts of interest for anyone involved with the MEP;
  • Cost and competitiveness of the service (particularly compared to alternatives).”

There’s a twist on this 401k MEP opportunity. Not all MEPs are created equal. The DOL’s new regulation pertains only to closed MEPs. Webber says you must ask whether you need “to file a separate form 5500 with the IRS as an open MEP or is it a closed MEP where a single form 5500 is filed at the plan level? With a separate form 5500 filing by each employer the onus of preparing, filing and ultimately the accuracy of the form 5500 falls upon each trustee of the employer offering the plan, increasing liability and operational oversight burdens.”

Finally, Lloyd reminds everyone one that “under current proposals the employer will retain the responsibility to select and monitor the open MEP provider so the employer will also need to consider what the process for ongoing review will be.”

MEPs have the potential to do what state-sponsored plans may not be able to offer – protection under ERISA. That’s in the employees’ best interests. If many embrace this concept, September 30, 2019 may indeed signal the dawn of a new day in retirement saving. Still, due diligence remains an imperative.

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 TwitterFacebook, 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.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA

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