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Multiple Employer Plans, Revisited

Some commentators are convinced that the U.S. Department of Labor is about to put the hammer on MEPs

W. Scott Simon, 10/06/2011

Have a comment, insight, or burning opinion on this article? Make your feelings known in the comments section at the end of the article.

There seems to have been an uptick lately in the number of multiple employer plans (MEP) coming to market, including those sponsored by third party administration (TPA) firms. Perhaps in response, representatives of the U.S. Department of Labor (DOL) made some informal comments about MEPs at a small gathering of retirement plan service providers earlier this year.

A blog written by a prominent attorney in attendance at that meeting garnered a lot of attention in the blogosphere--including a wide array of opinions about a number of issues concerning MEPs. In the course of those online discussions, some participants appeared to have talked themselves into believing that the DOL was going to ban any and all MEPs as a danger to human life as we know it on the planet Earth. Even the American Society of Pension Professionals & Actuaries got into the act with its own Code Red Special Alert Bulletin.

In my August 2009 column, I described MEPs as the "platinum standard" of qualified retirement plans. In retrospect, I should have been more exact in my phrasing: MEPs, when run by experienced independent fiduciaries and featuring transparent, low-cost, and broadly and deeply diversified investment options, are the platinum standard of qualified retirement plans.

According to data supplied by BrightScope, 2,747 plans (of 213,562 plans) filed as MEPs on long form 5500s in 2009. Other sources indicate that there were 3,530 MEPs (holding 401(k) and profit-sharing plans only) holding $500,000 or more of assets in 2009, totaling $169 billion and 3.2 million participants. When welfare benefit and defined benefit plans are included, the number of MEPs holding $500,000 or more of assets in 2009 increased to 4,118, totaling $290 billion and 5.9 million participants. Some MEPs invest and manage billions of dollars (with nearly 50 each holding at least $1 billion in assets as of 2009), and have hundreds of participating employers (also referred to as adopting employers).

As would be expected from such large numbers, there will be a wide variation in outcomes. Some sponsors of MEPs retain highly experienced independent fiduciaries that are well-versed in the intricacies of MEPs. These sponsors require that the investment options in their MEPs have low and transparent costs, and have broad and deep diversification--which results in keeping more money in the pockets of plan participants. This requirement is in line with what should be the ultimate goal of every retirement plan: to provide plan participants (and their beneficiaries) with retirement income security that maximizes the odds that they will have a comfortable retirement.

Other sponsors of MEPs retain experienced independent fiduciaries that restrict plan participants to investment options with high and hidden costs, and poor diversification--which results in keeping less money in the pockets of plan participants. Then there are those MEP sponsors that are soundly incompetent: They don't know what they don't know. Their MEPs are run poorly and have poor investment options, which, of course, directly harm the very people that they're supposed to benefit: plan participants (and their beneficiaries).

The third part of my four-part interview with Jeffrey Mamorsky in November 2010 covered MEPs. Mamorsky played a central role in educating and advising the congressional staffs that drafted ERISA in the early 1970s. Now co-chairman of the global benefits and compensation group at Greenberg Traurig, LLP, Mamorsky has had significant experience with MEPs and discussed them in his CFO.com column recently. As a result, I thought it would be interesting to get his views on a number of issues concerning MEPs.

Interview with Jeffrey Mamorsky

Scott Simon: Jeff, thanks for taking time out from your schedule for this interview. Before we get started, can you please describe your hands-on experience in advising MEPs?
Jeff Mamorsky: My pleasure. I've been legal counsel for one of the largest MEPs in the country for the last eight years. I have also been counsel to other MEPs in my 40 years of law practice.

Some commentators are convinced that the U.S. Department of Labor is about to put the hammer on MEPs. With thousands of MEPs in existence--some of which have been operating for decades--and millions of employees participating in them and billions of dollars held by them, do you think that the DOL will make major changes in the rules that govern them? 
I don't believe that the DOL will make any changes to the rules governing MEPs. It's more likely the DOL will only enforce their longstanding position that a plan must be sponsored by an employer in order to satisfy ERISA, and that "employer" as defined by ERISA Section 3(5) is "any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan and includes a group or association of employers acting for an employer in such capacity." [emphasis added]

With respect to the "indirect employer" requirement under ERISA, the DOL has opined that an employee welfare benefit plan must be tied "to the employers and employees that participate in the plan by some common economic or representation interest or genuine organizational relationship unrelated to the provision of benefits." [Please see DOL Op. No. 2008-07A.] The DOL has also applied these concepts to pension plans. [Please see DOL Op. No. 85-07A; DOL Op. No. 88-07A.]

Moreover, the DOL's view has been upheld by the courts. For example, the U.S. Fifth Circuit Court of Appeals has determined that where a third party established a plan for the benefit of unrelated employers, the plan was merely an "entrepreneurial venture" and could not qualify as a person acting indirectly on behalf of the employer under ERISA Section 3(5). [Please see MD Physicians & Assoc., Inc. v. State Board of Ins., 957 F.2d 178 (5th Cir. 1992).]

Accordingly, should the DOL contest so-called "open" MEPs such as TPA-sponsored MEPs, it will argue that such MEPs do not satisfy the "indirect employer" requirement under ERISA, if there is no "commonality" among the participating employers. In determining whether a particular group or association constitutes an "employer," the DOL has determined that in order for a group or association to constitute an "employer" within the meaning of Section 3(5), there must be a bona fide group or association of employers acting in the interest of its employer-members to provide benefits for their employees. [Please see DOL Op. No. 82-59A; DOL MEWA Guide.] According to the DOL, where no bona fide group or association of employers exists, each of the employer-members that utilizes the group or association benefit program to provide (welfare) benefits to its employees is considered as having established separate, single-employer welfare benefit plans subject to ERISA. As mentioned earlier, the DOL has applied these concepts to pension plans, as well. [Please see DOL Op. No. 85-07A; DOL Op. No. 88-07A.] 

I'd like to get your views on some issues that seem to have generated a good amount of discussion among MEP service providers. One of these issues is whether a participating employer's decision to join a MEP is fiduciary in nature or is it a settlor decision?
As I noted when you interviewed me last year, the adoption of a MEP is just a settlor decision, not a fiduciary decision. If there was ever any doubt about this, it was settled by two U.S. Supreme Court cases in the mid-1990s. [Please see Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73 (1995) and Lockheed Corp. v. Spink, 517 U.S. 882 (1996).] However, it's important to understand that when adopting a MEP, a participating employer also "selects" the plan sponsor who is responsible for running the MEP and the selection of other fiduciaries to help the sponsor run the MEP. Such "selections" are not actual selections made by a participating employer but are, in effect, ratifications [i.e., approvals] of the MEP sponsor's actual selection of the fiduciaries, and therefore it is "best practice" for the sponsor of a MEP to retain independent counsel to prepare a report on plan operations and investments for submission to participating employers on at least an annual basis. Where a bona fide MEP does not exist--that is, there is no association or commonality--it is the view of the DOL that each participating employer in a MEP is a sponsor of the MEP--that is, each such employer has adopted the MEP as its own plan--and in such cases, each participating employer has a fiduciary responsibility to monitor the fiduciaries running the plan. However, as mentioned, this requirement can easily be met by an annual operational compliance review and report prepared by independent counsel that is distributed to participating employers.

Let me parse what you just said a bit. In my view, there are two levels of appointments occurring in a MEP. First, the sponsor of a MEP appoints various fiduciaries to run the MEP. Second, and subsequent to such actual fiduciary decisions made by the plan sponsor, a participating employer makes its settlor, non-fiduciary decision to join a MEP and, in so doing, also "selects" the plan sponsor who has appointed other fiduciaries to run the MEP. So, in effect, you could say that the participating employer "approves" [i.e., ratifies] the MEP sponsor's appointment of the fiduciaries in the MEP, correct?
Well, as noted earlier, this is not the case with a bona fide MEP where there is an organizational relationship or commonality, but it is nonetheless best practice for the MEP sponsor to distribute an operational compliance review and report to participating employers. However, in the case of an open MEP, such as a TPA-sponsored MEP where there is no organizational relationship or commonality, each employer is viewed by DOL as its own plan sponsor, and therefore such reviews and reports are mandatory in order to satisfy the employers' monitoring responsibilities. And in that case, your view is correct. 

Now I'd like to do some more parsing here. You've said that a participating employer's decision to join or merge into a MEP is a settlor act, which makes it non-fiduciary in nature. But is the employer's decision-making process leading up to that settlor act also non-fiduciary in nature? Or must a participating employer that's contemplating merging its stand-alone plan into a MEP conduct a prudent fiduciary-based process to ensure that its plan will join a MEP like the ones you advise as opposed to those "advised" by the Bernie Madoffs of the world?
That's a very good question. The process leading up to the participating employer's settlor act to join a MEP is fiduciary in nature. A prudent employer would first survey the marketplace of MEPs. As part of that process, it should ask MEP sponsors to see reports on plan operational compliance reviews prepared by independent counsel that the MEPs are being run prudently, including whether their fees are reasonable. Good sense and good judgment require an independent report to be submitted to the MEP sponsor and then distributed to participating employers. Apart from any issues raised under ERISA or the IRC, it's possible that a participating employer that doesn't conduct a reasonable due diligence process in deciding whether to join a MEP could be sued for simple negligence under state law.

The sponsor of a MEP appoints all the named fiduciaries in a MEP, most importantly the ERISA section 3(21) Named Fiduciary and 3(16) Plan Administrator. But the second to last paragraph of your recent article at CFO.com seems to contradict that. It says, in part: "the participating employers have a responsibility to monitor the prudence of their 'appointment' of the MEP's Named Fiduciary and Plan Administrator." Could you please clear up this seeming inconsistency?
As mentioned before, it is the view of the DOL that only participating employers in an open MEP such as a TPA-sponsored MEP have monitoring responsibilities over the MEP plan fiduciaries since in such a MEP, the DOL considers each employer as running its own plan. Even in cases where this monitoring responsibility does not apply to a bona fide MEP with a genuine organizational relationship or commonality, it is nonetheless best practice for independent counsel to provide reviews and reports to participating employers.

So much for joining a MEP. What about getting out of one? Some MEPs are really difficult for participating employers to exit, which makes them sort of like the Roach Motel: You can check in, but you can't check out. Does a participating employer have any authority--fiduciary or otherwise--to unilaterally take its plan out of a MEP, or must it, in effect, obtain permission to do so from the relevant fiduciary in charge of running the MEP?
Once a participating employer has merged its existing stand-alone 401(k) plan into a MEP and adopted it, it retains the authority to unilaterally take the plan out of the MEP. That's assuming, of course, that the MEP plan document allows for it. Best practice and common sense require that the plan document make such allowance. Just as a participating employer's decision to adopt a MEP is settlor in nature, so too is its decision--settlor in nature--to take its plan out of the MEP. Of course, once the plan leaves the MEP, the participating employer ceases to be such and reverts to being the sponsor of a stand-alone 401(k) plan, making the sponsor once again subject fully to ERISA's fiduciary standard and all associated fiduciary duties.

Assuming that a participating employer has the ongoing duty to monitor the relevant fiduciaries running a MEP, what is the exact nature of that duty? How precisely does the employer prudently carry out that duty?
The monitoring duty of participating employers in an open MEP such as a TPA-sponsored MEP is satisfied if the sponsor responsible for running the MEP and selecting plan fiduciaries retains independent counsel to perform an annual operational compliance review and prepare a report for submission to the sponsor that is then distributed to all the participating employers.

Sometimes such reports are produced by the fiduciaries running the MEP, so aren't they simply reporting on the prudence of their own decisions? Shouldn't a participating employer with the duty to monitor the relevant fiduciaries in a MEP receive reporting information from a third party that's independent of such fiduciaries? In short, shouldn't the employers have an independent source of information?
Yes they should. That's why, as noted, reviews and reports on plan operational compliance should be prepared by independent counsel so that legal compliance with ERISA and the IRC can be assessed on an independent privileged confidential basis.

Thanks, Jeff.
You're quite welcome. 

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W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understanding is the definitive work on modern prudent fiduciary investing.

Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals.

For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

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