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The Labor Department’s Proposal for Multiple-Employer Plans Is Limited

Ultimately, Congress needs to act to make retirement coverage more widely available

Aron Szapiro


For the past few years, Congress has been considering legislation that would allow unrelated small employers to band together when they offer a retirement plan, a concept known as open multiple-employer plans, or MEPs.

These plans are not a panacea. But as we’ve pointed out, small employers are overwhelmed by the big responsibilities that come with offering retirement plans and MEPs could help.

Last week, the U.S. Department of Labor proposed expanding multiple-employer plans—at least somewhat. The proposal isn’t comprehensive enough to create sweeping changes. But, it may induce a few more entities to offer MEPs, possibly increasing retirement coverage and perhaps improving the quality of the retirement plans for some small businesses. The most significant impact of this proposal might be that it gives professional employer organizations (which offer companies a way to outsource human-resources services) a leg up in offering MEPs and might encourage more employers to join such organizations.

In the meantime, many Congress watchers think lawmakers could pass a broader bill in the lame-duck session that would make multiple-employer plans more widely available.

The proposed rule is significantly limited in scope compared to pending legislation

The reason the Labor Department’s proposal is so limited is that to introduce multiple-employer plans on a broader scale, Congress must amend a few parts of the Employee Retirement Income Security Act.

The Labor Department’s proposal doesn’t empower insurance companies, broker/dealers, recordkeepers or third-party administrators to offer multiple-employer plans. In contrast, most of the bills pending in Congress contemplate such entities becoming “pooled service providers” to offer and market MEPs.

Instead, the department’s proposal would expand the availability of multiple-employer plans in two novel, but incomplete, ways. First, the proposal empowers professional employer organizations—which offer payroll, benefits, and human-resources services through a unique legal structure—to offer MEPs. Second, the proposal provides additional guidance to employer groups and associations and makes it clear they can act as employers in running a MEP for their members.

Still, the Labor Department’s proposal would bar any completely unrelated companies from forming multiple-employer plans. However, it would make it easier than it is today for companies to band together to offer retirement plans. For example, the proposal clarifies that associations of employers in the same trade, industry, line of business, or profession can offer MEPs. And, the proposal empowers associations of unrelated businesses in the same city, metropolitan area, or state to offer a MEP. That means that local Chambers of Commerce (which are geographically-based associations) could more easily sponsor a MEP under the proposal.

The proposal doesn’t address key issues employers view as blockers to joining multiple-employer plans

Just as notable as what’s in the proposal is what isn’t. The proposal doesn’t address the “one bad apple” provisions that have discouraged plan sponsors from joining plans. The “one bad apple” rule means that if one employer maintaining the MEP fails to satisfy all the requirements of ERISA, then the plan could lose its tax preferences for all the other employers. The Treasury Department has said it would address this rule, but it’s unclear to what extent the Treasury Department could fix this without congressional action.

The Labor Department’s proposal also doesn’t clarify employers’ fiduciary duties. The MEP sponsor would be responsible for reporting, disclosure, and fiduciary obligations. Individual employers wouldn’t be plan administrators or named fiduciaries and would have limited fiduciary responsibilities. But, although the regulation is light on this point, others who have examined this issue believe that plan sponsors still have some fiduciary obligations even when they are part of a multiple-employer plan. Further, other kinds of single-employer arrangements can similarly offload fiduciary obligations to other entities.

Ultimately, we continue to believe that Congress needs to act to pave the way for widespread adoption of multiple-employer plans, and we are cautiously optimistic that might happen.

Learn more about the small-business retirement-plan problem in the U.S. from our paper “Small Employers, Big Responsibilities."

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