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Big Picture

Could Multiple-Employer Plans Be a Game Changer for Retirement Security?

Considering key questions around the new, sweeping legislation

Multiple-employer plans have finally been passed into law by Congress as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, paving the way for the most significant change to the retirement system since the Pension Protection Act of 2006. This legislation has a few major implications:

  • The removal of the common nexus requirement enables unrelated employers to join together to offer a retirement plan.
  • By eliminating the “one bad apple” rule, employers are assured that violations by one member will not disqualify the entire MEP from its tax-favored status.
  • It creates a new entity: a pooled plan provider that will act both as an administrator and a fiduciary.

Open MEPs are an exciting policy change, but it is far from clear how they will work in practice. Their effectiveness in improving retirement-plan quality and their overall appeal depends on how this niche industry reacts. There’s also the matter of how regulators nudge MEPs along, as they will have to balance concerns regarding the soundness and proper regulation of these plans with maintaining their appeal to the industry for use and promotion.

Below, see our take on a few questions employers and plan sponsors may have around open MEPs.

Can open multiple-employer plans reduce administrative costs?

Given the inherent complexity of maintaining a plan with many employers, it’s unclear whether open MEPs will reduce administrative costs more than they add to them.

Our analysis of the Form 5500 (a required annual retirement-plan filing) shows that small plans currently pay around four times as much for administrative costs as large plans. That number, however, does not necessarily capture indirect administrative costs, such as participant fees for investments that are shared back with retirement-plan service providers.

Policymakers hope that by helping small employers band together to form larger plans, open MEPs will drive down costs. Although, to see this theory take shape in a complex system, regulators and the industry will need to address some key challenges. For instance, the Department of Labor will need to determine how it can reduce administrative costs while still assuring that the MEPs are well-regulated.

Will open multiple-employer plans reduce fiduciary liability, and for whom?

The MEP legislation is clear that each employer retains fiduciary responsibility around the selection and monitoring of the pooled service provider (the new entity created by this legislation), so the employers’ fiduciary liability is not reduced.

The pooled service provider will be a named fiduciary as well as the administrator of the plan. The pooled service provider, in turn, will have the option to outsource investment decisions to another named fiduciary.

There are already arrangements in place that let a so-called 3(38) fiduciary(named after the section in the Employee Retirement Income Security Act) help select a plan’s investment lineup. But since the open MEP structure means the cost of high-quality advice is spread out among more employers, these fiduciaries may become more widely adopted.

Ultimately, the extent to which the MEP legislation will relieve small employers of fiduciary obligations depends on how MEPs evolve and the kinds of guidance and regulations the Department of Labor promulgates, if any. For example, the department could give broad exemptive relief to the pooled plan providers, reducing the operational constraints that apply to them as fiduciaries. This action may occur if regulators think it will induce more plan providers to enter the open MEP market without undermining protections for their participants.

Will open multiple-employer plans offer a limited investment lineup, or will they turn into a platform by another name?

The manner in which open MEPs offer investments to their constituent employers will depend on the answers to some of the previous questions, and could determine whether MEPs emerge as an improvement from single-employer plans. They could offer investments in two forms:

  • An extensive list of investment options that each plan sponsor must select. In this case, from an employer’s perspective, the only advantage of an open MEP would be the single annual disclosure, and possibly some other small economies of scale. The employees’ investments will still need to be picked by the employer, and the plan likely won’t have the leverage to access institutionally priced investment options.
  • A limited investment lineup. This format—particularly one with a 3(38) fiduciary—would relieve employers of the burden of ongoing lineup monitoring and selection. The challenge will be for the 3(38) fiduciary to identify an investment lineup that will work for disparate employers, particularly if the open MEP will offer qualified default investment alternatives for automatic enrollment.

A possible solution might be to layer managed accounts on top of a limited-fund lineup, which could then customize asset allocations to each worker in an MEP, based on basic census information.

The success of multiple-employer plans depends on the private sector and regulators

Regulators will likely want to see how the industry adopts open MEPs before proposing additional regulations. A couple of key questions to the success of open MEPs may be:

  • Will they be able to work without a new exemption? Without such an exemption, open MEPs will probably rely on 3(38) fiduciaries to select investments, likely for the entire group of employers.
  • Will they provide sufficient, useful disclosure? They will need to provide this without eliminating the administrative efficiency that they are supposed to bring to the retirement market.

If all the pieces fit together, open MEPs could dramatically restructure the retirement industry.

For a deeper dive into the effects of this legislation, download our white paper.
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