The Department of Labor proposed a rule that would narrowly expand the use of open multiple employer plans, but leaves room for improvement, industry sources said.
The move comes less than two months after President Donald Trump signed an executive order directing officials at the departments of Labor and Treasury to expand retirement savings options.
Under the proposed rule, released Oct. 22, small businesses could band together to offer employees defined contribution plans, under limited circumstances. The proposal lays out a host of conditions a group or association must meet to be permitted to sponsor MEPs, including a requirement to have at least one substantial business purpose unrelated to offering employee benefits to its employee members, and one that requires sponsors to have members with a commonality of interests with respect to their industry or location. If finalized, the plans could be offered by associations of employers in a city, county, state or a multistate metropolitan area, or in a particular industry nationwide, according to a DOL news release.
Sole proprietors, as well as their families, would also be permitted to join such plans. Professional employer organizations, which are human resources companies that contractually assume certain employment responsibilities for its client employers, could also sponsor plans, the DOL noted. Self-employed individuals would be able to belong to an association and join an MEP.
What the proposal does not do is make it possible for two unrelated employers to go into a plan together — unless they belong to an association in the same area — nor does it empower any of the kinds of organizations that traditionally offer retirement plans, like financial services firms, to set up an MEP and start marketing it, said Aron Szapiro, Morningstar Inc.'s director of policy research based in Washington.
Attorney Kent Mason with Davis & Harman, who represents numerous plan sponsors and service providers, said the proposed rule is narrow and maintains "very material restrictions on the ability of small employers to join together in an MEP."
The proposed rule keeps in place the criteria for how much commonality employers in any one plan must have, and doesn't amend the "one bad apple" rule, which means one employer's mistake would disqualify the entire MEP.
Mr. Szapiro said the DOL is looking to expand the availability of MEPs in "novel ways without totally getting rid of the common nexus requirements, which it doesn't seem that they have the ability to do without Congress amending ERISA in some way. So they went in a direction with these (professional employer organizations), which is a clever way of expanding the availability of MEPs within the current constructs."
The DOL said it expects the plans to reduce administrative costs through economies of scale and to strengthen small businesses' hand when negotiating with financial institutions and other service providers.
Elizabeth Kelly, senior vice president of operations at United Income, a Washington-based investment advisory firm for investors 50 and older, and former special assistant to the president at the White House National Economic Council under President Barack Obama, said the proposal is a "good step forward in enabling more small businesses to offer retirement savings plans to their employees. We'll likely see additional action."
The additional action will likely come from both Treasury and Congress, Ms. Kelly added. Per the president's executive order, Treasury is also looking into expanding MEPs and could do so by providing guidance on the one bad apple rule, according to Ms. Kelly. In Treasury's unified regulatory agenda that was updated this month, the IRS stated it intends to issue a notice of proposed rulemaking on the one bad apple rule by April 2019. Currently, if one employer fails to meet the tax-qualified plan criteria it disqualifies the tax-qualified status of the entire MEP.
Several legislative proposals have been introduced in Congress this session, including the bipartisan Retirement Enhancement and Savings Act of 2018 co-sponsored by Senate Finance Committee Chairman Orrin Hatch, R-Utah, and ranking member Ron Wyden, D-Ore., which has passed in the Senate, and the House-passed Family Savings Act of 2018.
The Family Savings Act, which is part of House Republican's tax reform 2.0 package, includes many of the same concepts as RESA, like open MEPs, but isn't as broad.
Whether RESA will get a vote during the lame-duck session after the Nov. 6 election remains to be seen. If it doesn't pass the House and get signed into law by Mr. Trump by the end of the year, it will have to be reintroduced next session.
David Levine, principal at Groom Law Group, said there's a chance RESA will move forward during the lame-duck session.
If RESA were to pass before the DOL rule on MEPs goes into effect, Mr. Levine said, "there's a chance the department will finalize (this rule) or there's a chance the department will take another step and say 'we're going to work with the changes made by RESA and what we proposed before to come up with a consolidated set of guidance to tie everything together.' At lot of it depends on timing."
RESA is a broader proposal than the DOL MEPs rule and features a slew of provisions, like lifting a 10% safe harbor cap on default contributions for automatic enrollment and escalation in defined contribution plans, letting participants more easily transfer their in-plan assets to an individual retirement account, and setting guidelines for sponsors' educating participants on how their balances translate into a post-retirement income stream.
Mr. Szapiro said passing RESA would not undermine the DOL proposal. "You might want the greater number of options within RESA and also want to empower associations to offer MEPs," he said.
Stakeholders now have a chance to weigh in on the DOL proposal, with comments due Dec. 24.
One item Mr. Szapiro said Morningstar is considering raising in its comment letter is increased disclosure in the Form 5500 annual report, which is not something the DOL is proposing in its rule.
Since every employer in a given MEP may not offer the same plan lineup, increased disclosure could be necessary, he said. "Different employers will do different things within a fixed offering," Mr. Szapiro added. "I think it will go that way, and if it does, I think you'd want that enhanced disclosure."
Those disclosures could be added in a way that "would not be onerous and don't discourage that formation," he concluded.
In a statement, Cathy Weatherford, president and CEO of the Insured Retirement Institute in Washington, welcomed DOL's efforts. "IRI and its members will carefully review this proposal and provide constructive input to the regulatory process," she said.n