The Looming Retirement Plan Coverage Gap

June 2, 2017 4:05 PM
By Brian Dobbis
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Can multiple employer plans help more Americans save for their golden years?

THE ROAD TO RETIREMENT with BRIAN DOBBIS 

According to AARP (formerly, the American Association of Retired Persons), there are roughly 55 million private sector workers in the United States without access to an employer-sponsored retirement plan. Americans accumulate the vast majority of their retirement funds through employer-sponsored defined contribution (DC) plans, which currently comprise $7 trillion in assets, with the most well-known and popular being 401(k)s ($4.8 trillion).

Unfortunately, millions of American workers don’t have access to any type of employer retirement plans (e.g., 401(k), SEP, SIMPLE, etc.), leaving many ill prepared after they stop working, if they can leave their jobs at all. As a result, America faces an alarming retirement plan coverage gap (particularly among women), since not nearly enough business owners are establishing qualified retirement plans.

The coverage gap is most severe among small and medium-sized businesses, the main reason being the expense of starting such plans, according to The Pew Charitable Trusts. Other concerns cited in Pew research include complexity, fiduciary status and liability, lack of resources, etc.  Smaller companies, in particular, chafe at the cost, complexity, and fiduciary liability of qualified retirement plans that are subject to the Employee Retirement Income Security Act (ERISA).

Increasing Focus on Multiple Employer Plans (MEPs)
While potential solutions run the gamut, multiple employer plans (or MEPs) have been garnering considerable attention of late.

Do MEPs represent the “next generation” of retirement policy, as some headlines have suggested? A MEP, as found in Internal Revenue Code Section 413(c), is a plan sponsored by two or more employers, whereby at least two of the sponsoring employers are not members of the same related group. MEPs should not be confused with multi-employer plans as found in ERISA Section 3(37), which is a collectively bargained plan maintained by more than one employer, usually within the same related industries and a labor union. Most multi-employer plans serve as defined benefit (DB) plans or DB/DC combo plans.

Put another way, multiple employer plans serve as a single non-union plan that has been adopted by more than one unrelated employer. A MEP permits participating employers to be treated as a single employer for certain purposes, even though the adopting employers are not related under IRS’s “Controlled or Affiliated Service Group” rules.

For example, all of the participating employers must be treated as a single employer for the following: eligibility, exclusive benefit rule, vesting, and annual additions; whereas each unrelated participating employer must be considered separately for certain compliance testing, including: coverage testing, nondiscrimination testing, minimum funding, “top-heavy” testing, etc. (A plan is deemed “top heavy” if more than 60% of plans assets belong to key employees.)

MEPs in general are established by employers in the same industry, and often have employees who change jobs among participating employers. Further, an employer that participates in a MEP generally does so because there is a business relationship, or some common ownership among participating employers, even though some employers do not satisfy any of the aforementioned “controlled” group rules. 

The underlying concept of a MEP is that related businesses with some form of “nexus” or commonality can essentially participate in a single qualified plan with the potential for economies of scale, well-managed investments, lower fees, and reduced fiduciary risk for small employers.

Currently, there must be “commonality” among employers for them to join in a single plan, meaning that the employers must be in the same line of business. This requirement would make it easier for employers to share administrative costs and reduce compliance burdens. Pooled 401(k) plans offer the potential to do just that: offer a low-cost, high-quality plan for a small business.

Regulatory Obstacles Hinder MEP Adoption
If you are wondering why MEPs aren’t used with more frequency, look no farther than the confusion over some of the aforementioned Department of Labor (DOL) rules. In addition, current regulations adhere to the “one bad apple” rule, meaning that a qualification violation by one employer may disqualify the entire plan, leaving all adopting employers in the lurch. Further, current rules require unaffiliated employers to file separate DOL Form 5500s (“Annual Return/Report of Employee Benefit Plan”) due to concern about the "one bad apple rule."  

Coming Next: Open Multiple Employer Plans
Enter the Retirement Enhancement and Savings Act [RESA] of 2016, a bill that would, among other things, offer a number of “fixes” or reforms to narrow the aforementioned coverage gap for private sector workers. RESA received bipartisan support in late 2016, including a measure that would create a new enhanced type of MEP.   In addition, separate bills introduced earlier this year also would allow aggregated Form 5500 filings if the plans share the same trustee, fiduciary, plan administrator, plan year, and investment menu. 

While RESA contains a number of important proposals, most are outside the scope of this column.  So, I will continue to focus on the provisions applicable to MEPs, specifically one of the key provisions that would allow unrelated employers to enter into pooled employer plans (PEPs), replacing today’s far more limited defined contribution MEPs.

If enacted, RESA would create a new type of “Open MEP” for private sector workers that would allow unrelated employers (i.e., those without “commonality” or “nexus”) to pool their resources by participating in a new type of multiple employer plans, provided certain requirements are satisfied.

Removing the thorny “common nexus” obstacle would allow more unrelated employers to pool together in a single retirement plan and would radically change the retirement landscape by significantly decreasing the coverage gap, while increasing plan adoption by small businesses.

RESA contains a proposal that would allow two or more unrelated employers to adopt a defined contribution PEP, as long as the PEP has a designated “pooled plan provider” (PPP) as the named fiduciary to the plan. PEP plan document must designate a PPP.  Moreover, a PPP would be required register as such and, more importantly, to acknowledge their fiduciary status in writing. The PPP also could delegate other fiduciary functions, including investment selection to third parties or other named fiduciaries. However, employers would be required to exercise fiduciary oversight of selecting and monitoring the PPP. To offset the cost of the PEP proposal, RESA included a proposal to eliminate the “stretch” payout.

The PPP also would be responsible for administration and performing nondiscrimination testing and making required disclosures to participating employees. Participating employers would have a fiduciary duty to select and monitor the PPP in a prudent manner.

Legislation to expand retirement coverage to more private sector workers is laudable. However, with Congress focused on tax reform and health care, while the financial services focuses on the much-discussed DOL fiduciary rule, the fate of such legislation is anybody’s guess.

How do you feel about MEPs? Would open MEPs increase worker coverage?

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