Multiple employer plans (MEPs) can provide a credible and cost-efficient plan design alternative — but they aren’t the only way to go, even for the smallest plan sponsors.
At a panel discussion at the 2015 NAPA 401(k) Summit entitled “‘Multiple’ Choices – Is Your Practice Ready for MEPs?”, Greg Carpenter, founder of Employee Fiduciary, LLC, explained that single-employer plans are a viable alternative, even in the micro market (or what he called the “nano” market) consisting of plans with three to 50 workers. Even in situations where MEPs might have advantages, he noted that single-employer plan designs can serve as a “credible baseline” against which to evaluate the effectiveness of MEPs because they offer market returns, low cost, fiduciary protection and professional money management.
Not that small plan sponsors always take advantage of the options available. That said, Carpenter noted that employers are not shut out of these options because they lack scale — an argument that MEP proponents often tout as an advantage of that design — but rather because of poor decisions made by plan sponsors.
Carpenter noted that he finds that there are two key things that employers in the nano market focus on:
- whether they can benefit from higher deferral limits compared with an IRA; and which investment vehicles they can choose.
They are not thinking about fiduciary, he noted. “They should be, but they aren’t,” he said. And, he maintained, they are not well educated on investments. “They think they can buy the market for cheap,” he said.
A single employer plan can access low cost, index and target-date funds, and can benefit from flexible plan design, although Carpenter acknowledged that such plans can suffer from “suboptimal” fiduciary oversight. And he noted that expense ratio, custody, record keeping, TPA and ERISA 3(38) investment manager services for a $1M plan are available for less than 50 BPs “all in” cost.
A question remains for those who establish MEPs, Carpenter said: How many participating employers are necessary to achieve investment “economies of scale,” since the ability to aggregate and provide investment consultant expertise may be the biggest MEP advantage?
MEPs can be, after all, more expensive to record keep than individual plans. In fact, Carpenter cited a 2012 report by the Government Accountability Office (GAO) which noted that “MEPs are marketed as providing several advantages for employers over single-employer plans, but GAO found that these advantages may not always be unique to MEPs,” he said.
And, as was pointed out in response to a question following the presentation, unwinding from a MEP in the event of a plan termination can be more complicated.
The Role of an Advisor
According to Mike Montgomery, CEO of Fidelis Fiduciary Management, working with a MEP reduces the potential/perception of conflict of interest/self-dealing. Additionally, working with a MEP could extend your reach to a larger number of employers, while bringing investment oversight to small plans that may not otherwise have access to a plan level 3(38). That said, advisors should be sure they have the qualifications, insurance, bonding and BD/RIA approval to work with the MEP, he said.
As for what lies ahead, Terry Powers, CEO of the Platinum 401k Inc., noted that the Department of Labor’s ERISA Advisory Council recently published a list of recommendations for the DOL, including facilitating the use of MEPs and similar arrangements as a means of encouraging plan formation, to consider developing a sample structure for MEPs that will help ensure that conflicts of interest, prohibited transactions, fiduciary independence and disclosure are addressed, and to develop safe harbors for MEP sponsors and adopting employers that would minimize their liability from acts of non-compliant adopting employers. Additionally, he cited the inclusion of MEPs in Sen. Orrin Hatch’s SAFE Retirement Act, as well as the Retirement Security Act of 2015 (HR 557), introduced by Reps. Vern Buchanan (R-Fla.) and Ron Kind (D-Wisc.) in the House of Representatives. A companion bill, the Collins-Nelson Retirement Security Act of 2015 (S. 266) was introduced in the Senate by Sens. Susan Collins (R-Maine) and Bill Nelson (D-Fla.).
All of which suggests that the current interest in, and development of, MEPs is not likely to fade any time soon.
