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How to Address Top Fiduciary Issues for Trade Associations Sponsoring 401k MEPs

How to Address Top Fiduciary Issues for Trade Associations Sponsoring 401k MEPs
November 05
00:03 2019

We may be on the cusp of a major change in the way 401k plans are delivered. This change isn’t coming for some industry innovation. In fact, it uses a tried and true method that many were once too afraid to take advantage of. It was only because of recent regulatory changes that these fears appear to have been removed.

It appears all but certain the floodgates will soon open wide, unleashing a torrent of trade association sponsored 401k MEPs. “The game changer for business associations in 2019 is two-fold,” says Terrance Power, founder of American Pension Services, LLC in Clearwater, Florida. “The Department of Labor’s Final Rule issued in July cleared up any questions about the ability for an Association (or Chamber of Commerce) to offer a ‘closed MEP’ for their members; and the IRS will be finalizing the repeal of the ‘one bad apple’ rule within the next 60 days. Both developments remove prior barricades for Associations.”

If you’re looking for the trigger that will open those floodgates, pay attention to that IRS rule. “In the past, the biggest perceived weakness of MEPs was one non-compliant company could adversely affect all the participating companies, potentially disqualifying the plan for all,” says Larry Steinberg, an investment adviser with Claraphi Advisory Network, LLC in Pasadena, California. “This was referred to in the industry as the One Bad Apple rule. Executive Order (EO)13847 is supposed to fix this, but rules have not been finalized by regulators. You may now hear the fixing of this issue referred to by the IRS as the Unified Plan Rule.”

This doesn’t mean the IRS will eliminate all the fiduciary risks for associations starting a 401k MEP plan. “The risk is largely the same as that taken by any other plan sponsor,” says Power.

And, at least initially, that may represent the biggest risk for trade associations. “The risk to business associations who create their own 401k MEP is getting into a business in which their knowledge base is very low,” says Jackie Reeves, Managing Director at Bell Rock Capital, LLC in Boca Raton, Florida. “The company retirement plan space is governed by ERISA and the responsibilities of sponsor compliance is lengthy whether in a MEP or providing a single employer plan. If not executed prudently there are costs. I believe it is worth the risk if the association takes the time to institute a process of execution primarily because we need to help the everyday person build their future piggy bank. Too many people are without education and a simple method to save for their future self.”

Beyond this risk of entering the unknown, there’s also a risk associated with enthusiasm exceeding the actual event. The association may (rightfully) believe a 401k MEP is a great idea, but if it fails to convince its members, then it may be sitting on a white elephant. “Aside from the liability in sponsor a plan, the biggest risk I see is that the plan doesn’t achieve the critical mass it needs to be an affordable option for association members,” says Ary Rosenbaum of The Rosenbaum Law Firm P.C. in Garden City, New York. “If plan assets aren’t big enough, participants bear the brunt of paying for the plan including the audit.”

Chris Lawson, Broker & Insurance Advisor at Insuraty Inc. in Bowie, Maryland, agrees. He says, “After all, is said and done, will employees enroll? Will the employers do their part to promote and ensure 401k program success”

The issue of achieving critical mass is related to the issue of running the plan. “I see two key related risks,” says Steinberg. “One is the failure of a MEP to reach scale and another is a failure of the sponsor organization to properly oversee the management of the plan. Either way participating companies could be left with a mess if the plan falls out of compliance due to a lack of attention and proper monitoring.”

It’s not just the lack of experience on the part of the trade association. There aren’t a lot of industry professionals with experience in this retirement savings tool, either. Power feels the most worrisome risk is “lack of proper plan structure that can protect the Association/Chambers, Adopting Employer/Members, and plan participants. Multiple Employer Plans are a niche market, but folks who have no experience in this market sector are certain to show up since it’s such a huge opportunity.”

Which makes it all come down to the same old fiduciary risk we continually hear about. “Liability is always the greatest concern,” says Rosenbaum

Offering is a much bigger deal than most of the benefits offered by business groups. “Associations need to come in with eyes wide open,” says Steinber. “Having a MEP is a big commitment. This isn’t the same as offering an insurance discount.”

A well-researched and methodical process will go a long way to making the benefit safer for both the member companies and the association itself. “The best way for the business association to reduce this risk is to make sure it structures its MEP in alignment with its business structure and future goals,” says Reeves. “Some organizations have talent in house and can execute a process with relative ease, while others may be better suited to outsource the fiduciary talent. It is critical to note that outsourcing still requires knowledge and consistent oversight.”

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In some cases, it may mean narrowing the offering. In all cases, it makes sense to get a feel for what the members want. “Offer a closed plan restricting the risk for only what makes sense for the Association to have a prosperous plan,” says Lawson. “Poll membership to determine if average size and revenues support offering a plan. That data would be invaluable.”

In terms of nuts and bolts, Rosenbaum is quite definitive. He says associations should consider “hiring a 3(16) administrator and 3(38) fiduciary.”

Power adds another important piece of advice: “Deal with experienced players in this space. And have a qualified ERISA attorney available. They’re worth every penny.”

Trade associations, chambers of commerce, and other affiliated groups will soon discover how sponsoring a 401k MEP may be required if they are to compete successfully for members. They needn’t be afraid of venturing into this unchartered territory. They just need someone to hold their hand.

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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