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Exclusive Interview: Ary Rosenbaum Says, Despite SECURE ACT, Some 401k MEPs Challenges Remain

Exclusive Interview: Ary Rosenbaum Says, Despite SECURE ACT, Some 401k MEPs Challenges Remain
January 22
00:03 2020

Ary Rosenbaum has been a reliable and regular source for Indeed, in addition to being a well-known ERISA attorney at The Rosenbaum Law Firm P.C., his is a prolific writer on the subject 401k plans from all perspectives. His blog not only contains excellent practical business advice, but he’ll often offer solid life lessons from outside the industry (but, somehow, always happen to be relevant to the industry).  

For the past couple of years now, Ary has had over a dozen local and regional events are for advisors and TPAs. This year, he’s hosting That 401(k) National Conference at Walt Disney World Swan on March 10-11 as well as regional events this spring in Houston, St. Louis, and Minneapolis.

FN: Ary, so nice to speak with you again. Tell us a little about your experience with 401k MEPs. When did you first start in the area? What attracted you to it
Rosenbaum: I’ve been an ERISA attorney for 21 years, so I’ve always worked with MEPs. It’s only become a larger part of my practice in the last 10 years because of the popularity of MEPs.

FN: The SECURE Act has answered many of the questions of 401k MEP proponents. Can you summarize the main points addressed by this new legislation, where there were concerns, and to what extent the SECURE Act alleviates that concern?
Rosenbaum: It finally codified into law that there can be single employer plan treatment for multiple employer plans where there is no commonality between adopting employers on the Internal Revenue Code side and ERISA. It also eliminated the one bad apple rule that said that the malfeasance of an adopting employer could threaten the qualification of the entire MEP.

FN: Prior to the SECURE Act, closed MEPs offered through business associations were the most likely way for a company to participate in a 401k MEP. In what ways do association-sponsored 401k MEPs benefit from the SECURE Act?
Rosenbaum: The biggest strike against a MEP was that one bad apple rule, which I always thought was a boogeyman rule in the sense that the IRS wasn’t likely going to disqualify a MEP because of a mistake by an adopting employer. I think eliminating that bad apple rule will help make it easier to market association MEPs.

FN: What’s the primary difference between a closed MEP and an open MEP?
Rosenbaum: The difference is commonality. A closed MEP requires a commonality between adopting employer, a connection other than the fact they are using a specific plan provided and are part of a MEP. An Open MEP which will be known as a pooled employer plan (PEP) requires no commonality between adopting employers. So an Open MEP can have adopting employers from different industries and locations.

FN: How has the SECURE Act changed the rules on open MEPs?
Rosenbaum: Open MEPs will no longer be Open MEPs, they will be PEPs. A PEP will require a pooled plan provider to serve as the plan sponsor/ administrator. That might be a third-party administrator, financial adviser, or another plan provider that must register with the IRS and DOL. As stated before, the one bad apple rule has been eliminated. Also, the law states that adopting employers will still have fiduciary responsibility in selecting the pooled plan provider.

FN: Layout the practical timeline which plan sponsors interested in moving to an open MEP can expect.
Rosenbaum: The pooled employer plan rule won’t go into effect until plan years beginning January 1, 2021.

FN: For companies with existing stand-alone 401k plans, what are the key factors they must consider before converting their current plan into a 401k MEP?
Rosenbaum: I think cost is still an overall concern, as well as fiduciary responsibility. The biggest problem with developing MEPs is that most fail in generating enough plan assets to truly cut down on overall plan cost. Another concern is that many plan providers don’t have MEP expertise, so switching to a MEP may require a plan provider change.

FN: Let’s turn to the 401k MEP plan sponsors themselves by taking 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?
Rosenbaum: The problem with an MEP is when dealing with multiple adopting employers around the country is the delivery of plan services, especially with the financial adviser. A financial adviser working on one plan with a single adopting employer will be more cost effective in time than in a MEP with multiple adopting employers that are already over a large area. Also, coordinating education/enrollment meetings between all these adopting employers can be burdensome.

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 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?
Rosenbaum: The question in selecting a recordkeeper is whether they have MEP experience. If a recordkeeper doesn’t have MEP experience, it’s not the time for on the job training for the plan sponsor. Another big concern is pricing, both for the plan sponsor and the recordkeeper. Until you have actual plan assets in the plan’s trust, a MEP is a tough thing on price because the record keeper and MEP might be basing pricing on hope and a prayer, rather than actual plan assets, which is either going to hurt the recordkeeper or the plan sponsors.

FN: While in the ideal case, all individual member companies will use the same payroll processor. Is this the reality and what are the ramifications of an MEP having to accommodate several different and often competing payroll processors?
Rosenbaum: The reality is multiple payroll providers. I actually have a single employer plan sponsor with multiple payroll providers because of multiple locations. A MEP dealing with one payroll company or multiple companies has the same issue when dealing with multiple employers, coordination between all the adopting employers. Late deferrals is a huge issue and not having a good process in place is only going to cause late deferrals.

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 an MEP?
Rosenbaum: To set up the plan structure and the document, I recommend using an ERISA attorney. As far as adopting employers, I would recommend an ERISA attorney because an MEP isn’t the right fit and fiduciary solution for every plan sponsor.

FN: Are there any other points that you think our readers might be interested in and should be aware of?
Rosenbaum: Again, some of the challenges of having a MEP such as plan asset size and plan operation hasn’t changed at all.

FN: Thank you Ary for your informative responses to our questions. There’s no doubt we’re seeing growing interest in 401k MEPs/PEPs among our readers. We’re sure your answers will more than whet their appetite. We look forward to hearing more from you in the future.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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