Expanding multiple employer plans: A bipartisan idea to narrow the coverage gapContributor Dan Notto
You’ve heard about the problem: An alarmingly high percentage of American workers, especially among those who work for smaller companies, don’t have access to a retirement plan through their employers.1 Despite legislative efforts over the years to create plans tailored for small employers—like the Savings Incentive Match Plan for Employees (SIMPLE) IRA—and to provide tax incentives to encourage small companies to set these plans up, a coverage gap persists.
To help narrow this coverage gap, a handful of states are preparing to launch programs that would require employers within these states that do not maintain retirement plans to automatically enroll employees in IRAs funded with payroll deductions. But unlike 401(k)s or other qualified retirement plans, these state-based IRA programs do not permit matching or other types of employer contributions, and the amounts employees can contribute are subject to the IRA limits, which for 2017 are $5,500 per year for those under 50 years of age and $6,500 for employees age 50 or older—less than one-third of what 401(k) plans currently allow.
Now, however, a promising solution to encourage more employers to adopt 401(k)s or other qualified retirement plans is being seriously considered in Washington, with bipartisan support: namely, to expand and enhance a vehicle that has been around for generations—the multiple employer plan (MEP). This could enable unrelated as well as related employers to join together and offer a retirement plan while realizing economies of scale.
As its name suggests, a MEP is a single plan adopted by more than one employer. These plans are often maintained by trade or professional associations as a benefit for their member firms. Because a MEP is a group arrangement, a participating employer typically pays less for investment and administrative services than it would if it maintained an individual plan for its employees. In addition, the MEP sponsor, or one or more service providers hired by the sponsor, often assumes fiduciary responsibility for selecting the investments on the plan’s menu and serving as the plan administrator, thus relieving the adopting employers of those duties.
However, there are some problems with existing rules that detract from the utility of MEPs. One is the so-called one-bad-apple rule, according to which one employer’s violation of the qualification rules could disqualify the entire plan. The other is that the Department of Labor (DOL) takes the position that a purported MEP in which there is no nexus (for example, no membership in a common trade organization among participating employers) is not a single plan but a collection of individual plans. Applying this interpretation would eliminate some of the advantages and cost efficiencies of participating in a group arrangement. For example, each employer would incur costs for preparing and filing a Form 5500 and, if its plan has 100 or more participants, for the accompanying audit and accountant’s opinion.
Momentum is building for open MEPs
Over the past few years, the notion of allowing unrelated employers to band together in so-called open MEPs to take advantage of the economies of scale that MEPs provide has been embraced by business groups, the financial services industry and policymakers on both sides of the aisle. Open MEPs are seen as a promising way to encourage more employers to establish retirement plans. President Obama’s budget proposal for fiscal year 2017 included a provision that would have authorized open MEPs. In addition, the Senate Finance Committee last September unanimously passed the Retirement Enhancement and Savings Act, which included an open MEP provision. However, neither measure was taken up by the full Congress before it adjourned at the end of 2016.
The Retirement Security for American Workers Act
On February 3, a bipartisan group in the House of Representatives introduced a bill titled the Retirement Security for American Workers Act. If enacted, the bill would enhance MEPs by addressing both of the shortcomings mentioned earlier. First, it would fix the one-bad-apple rule by requiring that the assets of a non-compliant employer be transferred out of the MEP, either to a separate plan for that employer or to other retirement plans for employees, such as IRAs. Second, it would permit open MEPs by eliminating the requirement of a nexus among participating employers for MEPs sponsored by a “pooled plan provider.”
The bill describes a pooled plan provider as an entity that:
- registers with the Internal Revenue Service (IRS) and the DOL
- acknowledges in writing that it is a named fiduciary and plan administrator
- performs certain administrative duties and provides disclosures and other information that the IRS or DOL prescribes
An open MEP would be required to have an institutional trustee responsible for collecting contributions and holding the MEP’s assets. While participating employers would retain fiduciary responsibility for prudently selecting and monitoring the pooled plan provider, they would be off-loading significant responsibility to the pooled plan provider. As proposed, the bill would be effective in 2017, but Congress would likely delay the effective date in the event the bill passes late in the year.
Given the strong support for open MEPs, the Retirement Security for American Workers Act could become a reality, especially if it could be attached to a larger bill like a tax reform measure. If so, we believe the retirement services industry will create innovative open MEP programs that combine all the services needed to operate a plan in a cost-effective manner. This would make retirement plans very attractive to small employers, helping to further the goal of increasing the number of American workers who have access to a retirement plan through their employer.
We will monitor this bill and other proposed legislation and keep you apprised of any significant developments.
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1 For example, according to the Employee Benefit Research Institute, in 2013, 51.3% of American workers worked for an employer or union that sponsored a retirement plan. Craig Copeland, “Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2013,” EBRI Issue Brief No. 405 (October 2014).
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