Multiple employers are shaping the future of retirement plans.
- A growing number of small businesses and educational institutions are moving into multiple employer plan (MEP) programs.
- An MEP is a retirement plan that covers employers that typically have a common interest, but which are not commonly owned.
- The primary sponsor is the “lead” plan and, generally, the plan administrator and fiduciary.
- Employers each become “adopting employers” when they elect to join the MEP.
- These plans can be defined contribution (DC) or defined benefit (DB) plans.
Challenged by two financial crises since 2000, failing industries, greater longevity, and sharply higher healthcare costs, the retirement industry and government policymakers have scrambled to find new solutions. After all, millions of Americans still have no easy way to save for retirement through their employers.
Enter what’s called the open multiple employer plan (MEP), an approach that allows small employers to take advantage of the same economies of scale that make large 401(k) plans effective savings vehicles.
“It is simply common sense to open up this effective [defined contribution] system to more workers through open MEPs,” said Ida Rademacher, of The Aspen Institute Financial Security Program, last year. “Open MEPs will take the pressure off of small employers while delivering professional management and support to individual savers.”1
A multiple employer plan is one in which unrelated employers adopt a plan; it should be treated as one plan for purposes of filing a Form 5500. There are two types: 1) a closed MEP, in which there is a connection or nexus between all of the adopting employers, such as members of a trade group or association, and 2) an open MEP, in which the employers were unrelated to each other.
An open MEP is a qualified 401(k) retirement plan established under section 413(c) of the Internal Revenue Code that permits unaffiliated employers to opt into a retirement plan sponsored by an outside entity that bears responsibility for administering the plan. An open MEP is a fully integrated, yet fully customized, plan design—a turnkey retirement plan built to reduce employer liability and offer a cost-efficient retirement program to employees.
Some of the benefits for the owner of a small business to join an open MEP include:
- The employer relies on the plan sponsor of the MEP for plan administration.
- Asset oversight is managed and maintained by ERISA 3(38) investment managers.
- Fiduciary experts help to mitigate the employer’s fiduciary responsibility.
- Lower fees for the owner and participants due to the economies of scale as a result of the large pool of participants.
Some of the benefits for advisors representing an open MEP include:
- Efficient service model for small-market plans—and an opportunity to provide a solution that offers services previously restricted to large retirement plans.
- A gathering of more assets, which is a way to aggregate plans that would have been previously been turned away because they lacked significant assets.
- The ability to keep focus on large markets—and continue to prospect and provide a custom solution to plans in the market at large, while being able to offer a comprehensive solution to small-plan market.
- The capacity to wall off competition (since someone has to service the small-plan space, shouldn’t it be you?).
- A simple story—a full turnkey solution that possesses all the fiduciary mitigation.
Shaping the Industry
With regard to MEPs, current judicial and regulatory rulings require that there be a connection among the employers who participate in an MEP. Without this nexus, unrelated employers who band together to offer effectively the same retirement plan would each be viewed as plan sponsors offering their own retirement plan. As a result, the employers would not be able to obtain several key benefits of an open MEP. For example, under current rules, each firm would need to file a separate Form 5500, and may bear responsibility for investment decisions and be required to hold insurance protection in the form of a fidelity bond. Similarly, the Internal Revenue Code of 1986, as amended (the “tax code”), presents an impediment to the beneficial use of open MEPs. Section 413(c) of the tax code recognizes plans that are created for the employees of more than one unrelated employer. However, certain tax rules have been interpreted to mean that if one employer violates the rule, it can disqualify the plan for all of the participating employers. This often is referred to as the “one bad apple” rule.
Over the last two years, four bills have been introduced in the U.S. House of Representatives that would address both the “bad apple” rule and the elimination of nexus requirements. The relaxing of the current regulations surrounding MEPs would allow small businesses to share the administrative responsibilities, among others, associated with establishing and maintaining a retirement plan.
Open MEPs can provide small companies with a way to take advantage of economies of scale and lower fees and expenses, as the open MEP sponsor can assume overall fiduciary responsibility, file required reports, and handle many other administrative and recordkeeping tasks. Participating employers or a designated trustee would be responsible for contributions and distributions, but would be relieved of fiduciary responsibilities assumed by the sponsor, and would shoulder a significantly lower administrative burden.
With a need for Americans to increase their retirement savings, open MEPs likely will gain momentum in the coming years. A passing of the proposed bills in the House of Representatives will only continue to build upon the demand for open MEP opportunities by small and midsize companies as a way to offer comprehensive retirement plans that are cost-efficient and mitigate fiduciary risk. For the advisor community dedicated to providing corporate retirement solutions, open MEPs will be a way for them to amass small plans in an “incubator” environment that will allow the plan to thrive and grow its assets in ideal conditions (e.g., price, fiduciary safeguards, etc.). We believe open MEPs will become the solution for the micro and small market—a market segment that has, unfortunately, become lost in the retirement shuffle.
1 John Manganaro, “Leadership Forum Urges Update of Open MEPs,” PlanSponsor.com, November 17, 2017.
2 “Multiemployer Pension Study-Spring 2018,” Milliman, May 9, 2018.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.
The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.
Glossary of Terms
Defined benefit plan. A defined benefit retirement plan provides employees with guaranteed
retirement benefits that are based on a benefit formula. A participant’s retirement age, length of service, and pre-retirement earnings may affect the benefit received. In the private sector, defined benefit plans are typically funded exclusively by employer contributions.
Defined contribution plan. A defined contribution retirement plan specifies the level of employer and employee contributions (retirement savings) and places those contributions into individual employee accounts. Retirement benefits are based on the level of contributions, plus earnings, that have accumulated in the account at the time of retirement.
Employer matching contribution. The employer matches a specified percentage of employee contributions. The matching percentage can vary by length of service, amount of employee contribution, or other factors.
A 401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an aftertax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.