Labor Department approves multiple employer plan expansion

A new rule from the Department of Labor will narrowly expand the use of multiple employer plans, but it will likely take an act of Congress to broadly allow small employers to band together to offer retirement plans, sources said.

"This is moving the ball forward a little bit but it's not the kinds of sweeping changes that people in (the) industry want to see and I think you'll continue to see a push for legislated open multiple employer plans," said Aron Szapiro, Morningstar Inc.'s director of policy research based in Washington. "It's not like the kind of substantial change that could dramatically reshape the small employer retirement plan marketplace."

On July 29, the Labor Department unveiled a final rule establishing association retirement plans. Under the rule, which was proposed in October 2018 and goes into effect Sept. 30, businesses could band together to offer employees defined contribution plans under limited circumstances. The rule lays out a host of condi-tions a group or association must meet to sponsor MEPs, including a requirement to have at least one substantial business purpose unrelated to offering employee benefits to its employee members. 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.

Currently, businesses are required to have some form of commonality, like a similar location or industry, to form an MEP.

"Many small businesses would like to offer retirement benefits to their employees, but are discouraged by the cost and complexity of running their own plans," said Patrick Pizzella, acting secretary of labor, in a news release. "Association retirement plans offer valuable retirement security to small businesses' employees through their retirement years."

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 join an association's MEP.

What the rule does not do is make it possible for two unrelated employers to go into a plan together — unless they belong to a sponsoring association in the same area — nor does it empower organizations that traditionally offer retirement plans, like financial services firms, to set up a multiple employer plan and start marketing it.

The Labor Department rule "is limited in scope, recognizing that only Congress may change the underlying statutes," said Edmund F. Murphy III, president and CEO of Empower Retirement, in a statement. "We continue to urge the Senate to pass the SECURE Act, which provides a much broader expansion of multiple employer plans."

Provisions that make it easier for smaller employers to join open MEPs are included in the SECURE Act, which overwhelmingly passed the House in May and is under consideration in the Senate. Among its dozens of provisions, the SECURE Act would remove the commonality requirements and allow financial institutions to operate MEPs.

"As of now, there really is no conflict between the SECURE Act and this rule," a senior Labor Department official said.

The department also filed a request for information seeking comments on whether it should permit financial institutions to run an open MEP, among other questions. That issue could be moot if the SECURE Act passes before the rule goes into effect Sept. 30, Mr. Szapiro said.

David Levine, principal at Groom Law Group in Washington, said it makes sense for the department to move on this topic ahead of the legislation. "If SECURE passes at some point, this starts them down the road of being able to build guidance quickly on open MEPs," he said. "It allows the department to be ready no matter which way things go."

The SECURE Act remains in a state of limbo. Three Republican senators — Mike Lee of Utah, Ted Cruz of Texas and Pat Toomey of Pennsylvania — each have holds on the bill, blocking its passage via unanimous consent, sources said. Bill proponents are hoping it gets attached to a piece of must-pass legislation, such as a spending bill, when the Senate returns in September.

In the final rule, the DOL said employers in MEPs do have some responsibility. "The business owner must prudently select and monitor the MEP sponsor and get periodic reports on the fiduciaries' management and administration of the MEP," the rule stated.

"Employers don't have a free pass," Mr. Levine said. "Even if you outsource you still have to monitor."

Mr. Szapiro said it's still unclear as to how employers should respond if they notice something improper with their MEP. "If I don't like how something's going, there's no mechanism to deal with it other than leaving the MEP entirely, which seems like a pretty big and complicated step," he said. "The employers are more analogous to customers at a bank than they are to members of a condo board who can let go their management company."

But there is interest in from small employers. A 2018 survey from Empower Retirement found that 66% of small business owners who do not offer a retirement plan are likely to consider an open MEP.

With its rule, the Labor Department 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, the senior official said.

"It's not a complete step, but it's a step in direction to more coverage, more plan availability and more participants getting the benefits of scale," said Drew Carrington, San Mateo, Calif.-based senior vice president, head of institutional defined contribution at Franklin Templeton Investments.

The Labor Department wasn't the only agency tasked under an August 2018 executive order from President Donald Trump to clarify and expand the circumstances under which U.S. employers, especially small- and midsize businesses, may sponsor or adopt an association retirement plan or MEP as a workplace retirement option for their employees, The Treasury Department has been active on this issue in recent weeks as well.

A major impediment to a broader adoption of open MEPs is the IRS' unified plan rule, which currently penalizes all members of a MEP when one employer is out of compliance. On July 3, the IRS proposed an exception to the regulation, also known as the "one bad apple" rule. The IRS proposal would allow non-offending employers in the MEP to claim the exemption if certain conditions are met, such as the disqualifying employer being unable or unwilling to correct the problem or to provide information.

The one bad apple rule is what many consider the biggest barrier to employers joining MEPs. The IRS is currently accepting comments on the proposal. "It's a really exciting time in the retirement space," Mr. Carrington said. "These are concrete steps to improve coverage for groups that it's historically been difficult to get coverage."