A concerted effort in Washington to get more employers to offer retirement plans has raised the profile of multiple employer plans, a largely untapped market for institutional money managers and other service providers.
Unlike multiemployer plans, which serve employers in a specific industry and are typically collectively bargained and managed, a multiple employer plan is adopted by two or more unrelated employers that do not want the administrative burdens and fiduciary responsibilities of sponsoring a plan themselves.
The three types of MEPs are those sponsored by a professional employer organization such as an employee leasing company, which can offer it to clients; by a trade group for its members; or “open” MEPs co-sponsored by employers with no business connection.
Some MEPs are several decades old, with the concept well established among professional organizations and associations as well as large corporations with numerous subsidiaries. It has not, however, taken off with small and midsize firms. That's because there has been a lack of guidance or sometimes conflicting guidance from the Internal Revenue Service, which has authority over the tax status of retirement plans, and the Department of Labor, which enforces the participant protections of the Employee Retirement Income Security Act. The Labor Department has reservations about open MEPs in particular.
Now, with four legislative proposals making the rounds on Capitol Hill to help clear up the confusion and make it easier to form multiple plans, “it's going to help conquer what I consider the last frontier,” said Edward Ferrigno, vice president for Washington affairs for the Plan Sponsor Council of America.
'An excellent tool'
“MEPs are an excellent tool to expand coverage, particularly in the small end of the market,” said Robert Holcomb, executive director for legislative and regulatory affairs for J.P. Morgan Retirement Plan Services, Kansas City, Mo. “To the extent we can give employers greater clarity so they feel comfortable, that's what will increase the usage.”
And, by encouraging more widespread use of MEPs that could, in turn, create larger asset pools that attract money managers and service providers, “you are providing these advantages of scale” to everyone, said Kristi Mitchem, executive vice president for State Street Global Advisors, which has $2 trillion in assets under management, including $305 billion in defined contribution plans. Her firm works with larger DC plans because the distribution costs of working with small employers outweigh the potential fees.
MEPs “could offer us access to a market that we do not have today,” said Ms. Mitchem, who is based in San Francisco.
In a 2012 analysis of 2009 data, the Government Accountability Office found that $175 billion in defined contribution MEP assets represented 6% of all defined contribution assets. While defined benefit MEP participation shrunk between 2001 and 2009, defined contribution participation increased 24% and continues to grow, said Charles Jeszeck, director of education, workforce and income security for the GAO. “People are looking to the MEPs model as a way to foster coverage,” he said.
In July, the GAO looked at the challenges faced by businesses with fewer than 100 employees where executives felt overwhelmed by the number of retirement plan and investment options, administrative burdens and fiduciary responsibilities of offering a retirement plan. They were also not happy paying higher fees than larger firms for record keeping and investment management, the GAO found.
The idea behind encouraging more small employers to join multiple employer plans is “to obtain more favorable pension investment results and more efficient and less expensive management services,” according to wording in a bill sponsored by Sen. Orrin Hatch, R-Utah, the ranking member of the Senate Finance Committee.
Pooled employer plans are also part of the universal retirement concept introduced in January by Sen. Tom Harkin, D-Iowa. It calls for privately run plans with professional money management overseen by independent trustees and subject to Labor Department oversight. Also in January, Senate Special Committee on Aging Chairman Bill Nelson, D-Fla., and ranking member Susan Collins, R-Maine, introduced their own retirement proposal.
The proposals also seek to foster more open multiple employer plans by having the Labor Department ease its stance that such plans must have a common nexus among participating companies.
“I know (DOL officials) worry about service providers playing games,” said a benefits consultant who declined to be identified, “but it's very hard for small employers to deal with. (The legislative proponents) are trying to find vehicles to move the burden off the employers who haven't the expertise.”
Representatives for plan sponsor and service provider groups would like legislation to address the disconnect between the way open MEPs are treated by the IRS and Labor Department.
Officials with the American Society of Pension Professionals & Actuaries in Arlington, Va., have noted in letters to members of Congress and the Obama administration that the popularity of multiple employer plans “has increased markedly” over the last 10 years, in part because of favorable rulings by the IRS.
But ASPPA officials and others say two advisory opinions issued in 2012 by the Labor Department could stymie that growth. The opinions said certain individual plans, made up of unrelated employers, could not be considered one plan under ERISA because they lacked a common connection. The concern is that ERISA reporting and fiduciary obligations could slip between the cracks if employers do not have direct involvement and oversight.
“Promoters are marketing these products to small employers as a way to offer a low-cost pension plan, and some are falsely claiming the employers will have no ERISA reporting or fiduciary obligations if they sign up for an open MEP,” Assistant Secretary of Labor of the Employee Benefits Security Administration Phyllis C. Borzi wrote to the GAO in 2012.
Open MEPs “could be a legitimate path,” said Mr. Jeszeck of the GAO, “but we really need a lot more information” to ensure that plans are structured to benefit all employees, not just higher-income ones, and to guard against “cannibalizing” existing plans.
'One bad apple' rule
The other legal gray area that needs to be addressed is the IRS “one bad apple” rule, where one employer failing to meet tax-qualified plan criteria can disqualify an entire multiple employer plan's tax-qualified status. Several of the pending bills would require the Treasury Department to remove the one bad apple threat through regulations, while a bill introduced by Rep. Richard Neal, D-Mass., would also have the DOL issue guidance stipulating that other employers would not be liable under ERISA for acts or omissions by an employer in the plan.
Despite an overall pessimism about the likelihood of getting anything through Congress in an election year, there is some optimism for improving the regulatory landscape for multiple employer plans, at least for smaller employers.
Mr. Harkin, who chairs the Senate Committee on Health, Education, Labor and Pensions which has discussed the pros and cons of multiple employer plans, said, “Given the bipartisan interest in this area, I'm optimistic we can reach an agreement in the Senate that will help employers pool their resources without compromising the participant protections under the law.”†
Jeanne de Cervens, vice president and director of federal government affairs for Transamerica Corp., a prominent player in the MEP market that provides record keeping and administrative services, said, “I'm really heartened by the fact that there are so many members on both of the aisles supporting this. It seems like there's a groundswell of support from Congress.” With plan sponsors, service providers and asset managers pushing to remove the regulatory impediments through legislation, “we think the possibilities are good,” she said.
This article originally appeared in the March 17, 2014 print issue as, "Multiple employer plans grabbing more attention".