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Exclusive Interview: Terrance Power Tells All About What’s Changed (and More!) With 401k MEPs

Exclusive Interview: Terrance Power Tells All About What’s Changed (and More!) With 401k MEPs
October 15
00:03 2019

You may recognize Terrance Power from our previous Exclusive Interview with him in 2016 where he explains how 401k MEPs reduce downside risks for company executives. He is an experienced retirement plan consultant; he has been in the Retirement Plan Industry since 1981. He works with clients and advisers across the country. With the new DOL MEP Rule finally effective, we thought it might be a good time to catch up with in light of all the MEP changes we expect to see coming in the near future.

 Power is the founder of American Pension Services, LLC, a fee-for-service third party administration firm located in Clearwater, Florida. The firm also serves as a 3(16) Plan Administrator. He is a frequent speaker at industry conferences on the subject of Multiple Employer Plans and 401k Outsourcing, including those sponsored by ASPPA, fi360, NAPA 401(k) Summit, NIPA, PLAN ADVISOR, Wolters Kluwer, the United States Chamber of Commerce and several others.

FN: The DOL’s new ruling has “opened” the door to closed MEPs but has left the issue of open MEPs in the hands of Congress. What’s the main difference between an open MEP and a closed MEP?
Power: An open MEP typically refers to a multiple employer plan where the adopting employers lack a “nexus” or “commonality” that could allow them to come under a traditional single employer plan. The Department of Labor issued an Advisory Opinion in 2012 that requires adopting employers who are in a multiple employer plan who lack this connection to be treated as a separate plan for Form 5500 filings, annual plan audit, and ERISA bond purposes.

A closed MEP is typically a plan where the adopting employers may have a common ownership interest that doesn’t rise to a level of being part of a Control Group, or where the adopting employers are all Client Organizations of a Professional Employer Organization (PEO) or an Association. The Department of Labor’s recent Final Rule (issued in July 2019) clarifies what plan sponsors may be considered to sponsor multiple employer plan so that it is treated as a “closed MEP,” and thereby affording the adopters the ability to come under one global Form 5500 and one annual plan audit.

FN: Which is better for an employer to join – an open or closed MEP?
Power: In some ways, that’s like asking “which is better… Coke or Pepsi?” If you’re an employer who is subject to an annual plan audit, a closed MEP should be the first option to be considered due to the potential significant savings on the annual plan audit expense. Pricing on multiple employer plans vary by plan, so employers will need to do their research to determine the best structure for their own specific situation.

FN: Why might a company without a 401k want to join a MEP?
Power: Multiple employer plans offer companies without a plan an easy entry into the qualified plan arena. Apart from enjoying significant pricing reductions which could be half of what they would pay as a “stand alone” plan, they also get the expertise that they may not have to properly run a retirement plan. The hope of the Department of Labor (and hopefully Congress) in promoting multiple employer plans as a solution for the small to mid-sized employer market is that it will lead to the expansion of retirement plan coverage for America’s workers.

FN: Why might a company with an existing 401k want to join a MEP?
Power: Apart from the potential internal costs savings associated with aggregating assets of many companies for pricing leverage and elimination of the annual individual Form 5500 and plan audits, moving to a properly structured multiple employer plan can offer a dramatic reduction in fiduciary liability for the employer. Most multiple employer plans will utilize an ERISA 3(38) Investment Manager for fund selection and monitoring, as well as a 3(16) Plan Administrator to oversee the operation of the plan. These independent fiduciaries are bound to act in the best interests of the plan participants at all times. When you think about it, if an employer becomes an adopting employer in a multiple employer plan, most of the decisions and operational duties are handled for them. This structure mirrors virtually all of their other employee benefit plans. A health insurance provider will select the hospitals and doctors that are available within their program and the employer decides if that program is suitable for their company. The provider is tasked with insuring that the various service providers within the plan maintain accreditation and licensing, and they work to help keep costs down to the extent that they can. Group Life Insurance, Workers Compensation, Disability Insurance and other employee benefit programs operate in much the same manner. There is no reason why an employer shouldn’t align their 401k plan to operate that way so they can concentrate on their customers and the bottom line instead of their 401k plan.

FN: When looking for a MEP, what might an employer ask to determine if it’s a closed or open MEP?
Power: It’s a pretty straightforward question that they should pose to their financial advisor or service provider as they explore options.

FN: What did the new DOL Rule change in terms of using a MEP?
Power: This new Final Rule, which went into effect on September 30, 2019, clarified the fact that Associations, including Chambers of Commerce, can sponsor a closed MEP for their members provided that the group of adopters is limited to either a single state, single metropolitan area (such as NYC/Northern New Jersey, for instance), or nationwide if an Association plan where the adopting employers are all in the same industry. This clarification, in conjunction with the recent Internal Revenue Service “Unified Plan Rule,” effectively eliminates the “one bad apple” concern for adopting employers within a multiple employer plan and makes a MEP a great option for employers. We are in the process of establishing several new Chamber plans across the country to take advantage of these developments. It’s an extremely exciting time for this market segment!

FN: Where are the best places for employers to look for MEP?
Power: In light of the Department of Labor’s recent Final Rule issued in late July 2019, local Chambers of Commerce provide an exciting and fully credentialed solution for employers who are seeking the benefits associated with a traditional “closed MEP”. Specifically, existing Chamber members (and new companies who join the Chamber) will be able to take advantage of not having to file an individual Form 5500, elimination of individual annual plan audits (the overall plan has a single annual plan  audit), elimination of their plan trustee duties and liability, elimination of plan document charges, including document restatement fees, and much more.

FN: What are the types of associations individual companies might already be involved with that are eligible to start MEPs. Which of these associations are more likely to sponsor a 401k MEP and why might that be so?
Power: This final answer to this question is part of the mystery as to what direction this new DOL Final Rule will lead us in. We believe that employers who are currently subject to an annual plan audit (typically those groups with over 100 employees) will be among the first to embrace these programs, either through an industry association or a Chamber of Commerce in their state or metro area. Associations whose members fall into this category would be the most likely candidates for sponsoring an Association Retirement Plan for their members as it would be of great benefit for their association members.

FN: Let’s take a look at the roles of the underlying MEP service providers and how they might interact both with the MEP plan sponsor and the individual member companies. Let’s start with the investment adviser. Explain the similarities and differences in what a MEP plan sponsor might look for in an adviser versus what a stand-alone 401k plan sponsor might look for. How might an individual member company interact with this adviser?
Power: Another good question. The role of the adviser will change under a MEP relationship in most cases. Typically, the MEP will already have in place a recordkeeper, a 3(16) Plan Administrator, and a 3(38) Investment Manager. The adviser’s role in working with a MEP sponsor is one of sitting on the same side of the table as the sponsor in order to evaluate the program, both at installation as well as on an ongoing basis for suitability and pricing. The MEP plan sponsor also needs to ensure that the selected solution will accommodate the unique needs of a multiple employer plan such as multiple payroll feed sources, tracking service for eligibility and vesting crediting, etc. These are significant operational challenges far above those of a traditional 401k plan sponsor.

FN: Recordkeepers have always played a critical role in the smooth running of stand-alone 401k plans. Their role in MEPs are even more critical as they are the ones responsible for herding all the individual member companies. What critical questions might a MEP plan sponsor ask a potential recordkeeper? How does the MEP recordkeeper interact with the individual member company?
Power: Experience counts in the MEP marketplace. A MEP plan sponsor needs to inquire as to the level of experience that each of the various service providers tied into a MEP arrangement brings to the table. The interaction between the MEP recordkeeper varies tremendously depending upon which recordkeeper is being utilized and whether or not the recordkeeper is also providing plan administration (bundled) services to the plan.

FN: In the ideal case, all individual member companies will use the same payroll processor. Is this the reality and what are the ramifications of a 401k MEP having to accommodate several different and often competing payroll processors?
Power: Only Professional Employer Organizations (PEO’s, or “employee leasing companies”) are likely to have a single payroll feed. Part of the due diligence process will need to be identifying those providers who can handle multiple payroll feeds directly with the adopting employer or those who have some sort of outsourced payroll consolidator serving in that capacity for the recordkeeper.

FN: Finally, how important is if for a MEP sponsor to work with an ERISA attorney? Is it also necessary for individual member companies to retain an ERISA attorney for the purposes of determining whether to join a 401k MEP?
Power: I believe that it is critical for a MEP sponsor to use a qualified ERISA attorney who has experience with multiple employer plans both at plan establishment as well as on an ongoing basis. We don’t see as much use of an ERISA attorney at the adopter level, although I believe that it is always money well spent to use one.

FN: Are there any other points that you think our readers might be interested in and should be aware of?
Power: Multiple Employer Plans are here, and they’re only going to expand from this point. The growth will multiple tremendously if Congress is able to finally pass the SECURE Act. However, the availability of Chambers of Commerce to establish a “Closed MEP” in conjunction with the elimination of the “one bad apple” concern later this year puts the handwriting on the wall. There are big changes ahead. It’s now just a matter of just how big they will be.

FN: Terry, as always, it’s been a delight speaking with you, especially on an issue as timely as this. We’re sure our readers will only want to hear more on MEPs. Keep us on your speed dial should you have any breaking information on this fascinating product that has the potential to provide every worker with a 401k plan. 

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA

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