An insider describes how ERISA came to be.
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Scott Simon: Jeff, I'd like to pick up on a point that you made earlier in the interview. You said that qualified retirement plans such as 401(k) plans work a lot better when independent fiduciaries are in charge of running them.
Jeff Mamorsky: Yes, that's right. One good example where independent trustees can make a real difference is in a multiple employer plan. There is a basic, critical difference between a multiple employer plan and other qualified retirement plans such as 401(k) plans. In your typical 401(k) plan, the employer and the plan sponsor are one and the same so company X is the plan sponsor. That makes the employer and the board of directors of the employer responsible and liable. But in a MEP, the sponsor of the MEP is not the employer but a separate and distinct entity from the employer. The sponsor of a MEP assumes all the duties that are inherent in a non-MEP such as those of the Named Fiduciary and Plan Administrator. On the one hand, the sponsor of the MEP could choose to reserve all these duties for itself. On the other hand, that sponsor, just like in a non-MEP, could choose to delegate all such duties to an Independent or Managing Fiduciary as the designated Named Fiduciary for plan investments and administration. The Independent Fiduciary could, in turn, choose to retain all such duties for itself or it could delegate them to the other designated fiduciaries. It's important to remember, though, that at each stage of delegation in a multiple employer plan, like in a non-MEP, there's a corresponding monitoring duty charged to the entity making the delegation. So while the sponsor of a multiple employer plan ordinarily is solely responsible and liable for managing all plan service providers and ensuring that the plan operates according to the plan document and all ERISA, IRS and DOL requirements, it does have the option to delegate to others some of those responsibilities and liabilities with appropriate monitoring oversights in place. This helps to diversify fiduciary responsibility and reduce risk further.
So what are the primary advantages of a multiple employer plan?
An employer that decides to join a MEP gets cost efficient administration and investments for its employee participants, and also has the assurance that the plan is being run by a professional in accordance with ERISA's prudent expert rule. However, it is important to emphasize that the employer's due diligence in selecting a well-run MEP is critical. A good indication of this is a MEP which is run by an Independent Fiduciary professionally accredited by the Independent Fiduciary Guild and Fiduciary Audit Protection Program. These are advantages for both the employer and the employees. But the greatest advantage by far for the employer in joining a multiple employer plan is that it avoids fiduciary responsibility and liability because most MEPs are run by a governing body of Trustees or Named Fiduciaries as Plan Sponsor with no involvement by any adopting employer. In this regard, it is important to review the MEP plan document and Adoption Agreement to make sure that the employer has no residual fiduciary responsibility.
Is an employer's decision to join a MEP fiduciary in nature or is it simply a settlor decision which would be non-fiduciary in nature?
No, it's just a settlor decision, it's not fiduciary in any way. From a legal standpoint, the employer is merely adopting the MEP which is a settlor decision. The running of the plan is fiduciary in nature and, as mentioned earlier, it's the plan document and adoption agreement which need to be carefully examined to make sure the employer has no fiduciary responsibility in running the plan.
So once an employer has chosen to join a multiple employer plan, does it sort of yield to the sponsor of the MEP?
Not sort of yield, it yields entirely, to the sponsor if the plan is drafted correctly. Once an employer joins a multiple employer plan, all fiduciary responsibilities and liabilities are given up by the employer to the sponsor and whoever the sponsor has named--typically an Independent Fiduciary--to run the MEP which has an existing fiduciary infrastructure. This includes even settlor issues such as amending the plan. By the way, that doesn't have to be the case, but it's normally the case. You can have a multiple employer plan where you have member employers of a trade association in a certain industry that want to have representatives of the employers serving as the Named Fiduciaries of the MEP. But even in that kind of situation, it's important to remember that the representatives are in no way there as employers but as Named Fiduciaries appointed by the sponsor of the MEP to run the MEP.
Once an employer has made the decision-settler in nature-to join a multiple employer plan, does it still retain any monitoring duties?
That's a very good question. Let me be clear: an employer retains no monitoring duties whatsoever once it has joined a multiple employer plan. The only responsibility that an employer retains is to make sure that its employees get enrolled and that contributions are made on time. Both of those functions are ministerial acts, settlor in nature, not fiduciary acts. Now, within a multiple employer plan, there are plenty of monitoring duties that must be carried out but those duties are borne by the sponsor of the MEP and any fiduciaries it may appoint, but not by any employer that has decided, on a settlor basis, to join the MEP.
You've said that a multiple employer plan is considered to be a single employer plan under the law. Could you please explain that seeming paradox?
Sure. We never thought of a multiple employer plan in the early days of ERISA as anything other than the plan of a controlled group. For example, let's say that Mobil had 20 subsidiaries and each subsidiary adopted a "jumbo plan" with 20 companies in that plan, or 20 different types of benefits. There really weren't any multiple employer plans with unaffiliated companies in the plan. MEPs have always been considered to be a single employer plan under the law; I know that sounds strange but that's how it is. So the best way to consider the seeming paradox is that a multiple employer plan is a single employer plan that is simply utilized by multiple employers. In a MEP, there is only a single sponsor of the plan, one plan document, one record-keeper, one custodian, etc. Other subsidiaries or unrelated businesses may join and then yield to the fiduciary infrastructure of the multiple employer plan.
You just mentioned that other subsidiaries or unrelated businesses may join a MEP which brings to mind the explanation I provide to plan sponsors that are considering joining a MEP. I tell them that, at first, different divisions of one company could form a MEP, then the concept of a MEP expanded to include different companies in the same industry such as trade associations and then the concept of a MEP expanded further to include different companies in different industries. I stress that the law has never changed--it was the same in 1974 when ERISA was enacted as it is today--just the concept of the nature of the relationship between the entities that can join a MEP.
Yes, I would agree. That's an accurate explanation. You would naturally think, for example, of a multiple employer plan as being comprised of companies in the same industry such as a trade association but there's no legal requirement that it be in the same industry.
Some ERISA attorneys are uncomfortable with a multiple employer plan because they say that one sour apple employer in a MEP could taint all the other employers and result in disqualification of all the plans in the MEP.
You can have a multiple employer plan with defined contribution or defined benefit plan features. On the defined contribution side, you have virtually no chance that a bankrupt employer will impact the other participating employers since participants in the DC plan each have individual accounts and are not at risk of losing everything when an employer goes bankrupt. However, if an employer goes bankrupt on the defined benefit side, the other employers in the MEP become responsible for paying the DB benefits of the employees in the bankrupt company. Moreover, in both a DC and DB plan if an employer commits a disqualifying defect, the entire DC or DB MEP can be disqualified under the rules of ERISA section 413. That's why you need to monitor a multiple employer plan very carefully to make sure that the plan is operated in accordance with plan documents and all applicable law (ERISA and IRS requirements) and that an employer is not committing an operational defect and otherwise causing the plan to be in violation of ERISA or IRS rules. It's incumbent on those who are running MEPs to establish best-practice operational internal controls, funding structures and other prophylactics to ensure that if one employer is not cooperating with the plan or it goes belly up, the other employers won't get hurt. With respect to funding, you can do that by setting up withdrawal assessments, so if a company wants to play games and withdraw from a MEP they get hit with a contingency assessment. It can also be achieved by making sure that every employer is funding properly. Also, with regard to protecting the plan under ERISA and DOL requirements for the MEPs that I represent, I place a "disgorgement" provision in the plan and trust documents that remove employers who are found to be committing disqualifying defects. I also perform Fiduciary Audit® Operational Reviews and constantly monitor, and if I find an employer that is recalcitrant and will not agree to correct defects that I've uncovered, then whoever is running the MEP can throw that employer out of the plan in accordance with the plan document I've drafted.
But is it possible even under your best practices monitoring system that you could miss a rotten apple in the barrel that could still taint the whole MEP?
No, not if you monitor. You would go in and do self audits to make sure that a multiple employer plan is being run properly. In addition, the IRS audits MEPs. The IRS would want to see if there are internal controls at the level of whoever is running the MEP. The Plan Sponsor or Independent Fiduciary has to have controls in place with all the employers in the MEP to make sure that the employers are sending the right information to the plan administrator such as making sure that the company payroll is correct, as well as eligibility and service. That should be done quarterly.
It sounds like a multiple employer plan is the best thing since sliced bread.
A multiple employer plan is an excellent plan particularly if it's a defined contribution individual account plan, but only if it's run by a Plan Sponsor or Independent Fiduciary who are experts in plan investments and administration. An employer needs to be cautious in adopting a defined benefit MEP with dozens or even hundreds of other companies, especially in this economically volatile environment, because there is the possibility that other companies may go bankrupt and the remaining employers will have to make plan contributions for employees of the bankrupt employers. Running a multiple employer plan properly is a great challenge which is why a MEP really needs the right expert Plan Sponsor, Independent Fiduciaries and other plan advisors.
My interview with Jeffrey Mamorsky will conclude next month.