Since the SECURE Act of 2019 modified the rules for multiple employer plans (MEPs) and introduced pooled employer plans (PEPs) (which were further expanded under the SECURE Act 2.0), the retirement industry has been buzzing about MEPs and PEPs as an alternative to the traditional single employer-sponsored retirement plan.
MEPs and PEPs, employers are told, can ease the administrative and fiduciary burdens of sponsoring a retirement plan by outsourcing and centralizing administration, offering potentially lower costs for employers and plan participants, and simplifying just about everything. This sounds great, but will it be? An employer 1 considering joining a MEP or PEP needs to find out whether the potential advantages would hold true for its plan, and if so, whether the advantages would outweigh the potential downsides of joining a MEP or PEP both for it and for plan participants. 2 An employer, as a start, should carefully consider the following issues:
1. Will Employer and Participant Costs Actually Wind Up Being Lower?
MEPs and PEPs, employers are told, offer significantly lower costs compared to the costs of a single employer plan because of “economies of scale”. The idea is that MEP/PEP providers can use their bargaining power to achieve better deals on recordkeeping, third party administration, and investment fees, including management fees, than a single, smaller plan sponsor can get. That might be true, but at this point it is too early to tell if that is consistently true. In other words, it depends on the details of the proposed MEP/PEP and an employer contemplating moving from a single employer plan to MEP/PEP should compare the costs of its single employer plan to the proposed MEP/PEP costs, and employers just starting a plan should look at and benchmark the proposed MEP/PEP costs against single employer plan provider costs.
Moreover, all employers considering a MEP/PEP need to fully understand exactly which employer/participant costs and fees are included in the administrative fees and costs expressly quoted and/or set out in the MEP/PEP agreements and which fees and costs are “extras’; for example, for large plans, are independent auditor fees excluded only to be billed on a plan by plan basis later; what about plan amendments; SPD and disclosures/notices preparation; and how do participant fees (loans, distributions, QDRO’s, rollovers, etc.) compare to single employer fees? Determining expected fees and costs and whether a MEP/PEP is more cost effective requires detailed analysis of the “fine print.”
2. How Are Employer Administrative and Fiduciary Duties Reduced?
Employers are also told that MEPs and PEPs allow employers to reduce plan administration (and fiduciary) duties by outsourcing them to the MEP/PEP provider, who will be the plan administrator and named fiduciary of their plans. Although MEP/PEP providers may take on the day-to-day administration of the plan, and engage other service providers to handle recordkeeping, third party administration, and investment advice, no MEP/PEP arrangement will relieve an employer of all duties and an employer considering a MEP/PEP needs to know exactly who in the proposed new plan will be responsible to do what.
Obviously, the employer will still be responsible for timely remitting contributions to the plan and maintaining employee/participant data and providing it to the MEP/PEP. In addition, plan documents may sometimes contractually assign to the participating employer significant administrative duties, including reporting and disclosure, eligibility determinations, making plan distributions, and the like.
Apart from what the documents say, an employer or its employees who in fact exercise discretionary authority or control over the administration of a plan or the management and disposition of plan assets, are performing fiduciary functions and thus, are functional fiduciaries.
In addition, even where MEP/PEP agreements expressly offload investment fiduciary duties to the provider as the “named fiduciary” and the service providers it engages, a participating employer still has the ERISA fiduciary duty to monitor the MEP/PEP provider and its service providers. Employers thinking about moving to a MEP/PEP need to plan for how they will fulfill their duty to monitor and should carefully review the details of MEP/PEP participation agreements, service agreements, and any other agreements.
3. Is an Employer Protected from Liability Caused by the MEP/PEP Provider?
Although the “beauty” of a MEP/PEP, particularly for a small plan, is to relieve an employer of certain employer’s administrative and fiduciary responsibilities, that does not mean that employers are protected from co-fiduciary liability caused by the providers and its service provider’s mistakes in executing those responsibilities. Employers considering joining a MEP/PEP therefore need to scrutinize in detail the indemnity, limits of liability, liability caps, and hold harmless provisions set out in the MEP/PEP agreements to ensure that they are protected from liability for the acts of the MEP/PEP provider and its vendors, and if the documents are insufficiently protective, employers should engage in negotiations for satisfactory protection and consider taking a pass on joining a MEP/PEP which does not provide acceptable protections to participating employers.
4. Does The “One Size Fits All” MEP/PEP Model Best Serve Plan Needs?
MEP/PEP plan providers often explain their ability to offer lower costs by pointing to their standardization of plan design and investments. Standardization may appeal to employers with new plans or small plans, but for existing plans, it is crucial for employers considering a move to a MEP/PEP to determine which plan features will have to change and how those changes would impact both the employer and participants. For example: how will loan provisions be impacted; how will contribution limits be impacted; how will hardship distributions be affected; does the MEP/PEP permit Roth contributions? Also, what about the plan investment lineup – will certain investments no longer be available and how will that impact participants?
5. Who Has to Be Covered When an Employer Joins a MEP or PEP?
Some MEPs and PEPs require that all members of an employer’s related employer group (i.e., any employers in a controlled group or affiliated service group) participate in the MEP/PEP. Employers thinking about joining a MEP or PEP should be sure to know their related employer status when they evaluate the relative advantages and disadvantages of joining a MEP/PEP. It could well be that certain members of an employer’s controlled group or affiliated service group have their own single employer plans and would/or otherwise would not be on board with making a move.
6. How Can an Employer Ensure That There is Appropriate Plan Cybersecurity Protection?
The Department of Labor (“DOL”) issued cybersecurity guidance in 2021 3 (which it recently updated) 4, “suggesting” that employers should follow very specific practices and procedures in vetting plan service providers and in administering their own plans. In addition, the DOL includes in its investigatory protocol the examination of plan cybersecurity, including the employer’s program and its vetting of vendors. The DOL treats its compliance with its own cybersecurity guidance as a high investigatory priority.
Employers considering joining a MEP/PEP are not relieved of the duty to ensure that a plan and its services providers have robust cybersecurity protection that aligns with DOL guidance, and this is true even though, as discussed with respect to the fiduciary duty to monitor, because of the lack of employer control, participating employers likely will face additional challenges to determine whether the MEP/PEP provider itself, and each of its vendors, have sufficient cybersecurity protections in place.
At a minimum, employers considering joining a MEP/PEP should review the MEP/PEP provider’s written cybersecurity programs and the program of their chosen service providers. They should make sure that they receive provider and vendor evidence of cybersecurity insurance. Employers will also want to evaluate and negotiate for appropriate protections from any risks related to a provider’s use of artificial intelligence using MEP/PEP data.
7. How will Compliance Issues Impact Joining a MEP/PEP?
Employers should also be aware of the “one bad apple” rule. Under prior law, a qualification failure in a MEP could result in the disqualification of the MEP for all participating employers. In other words, if any one participating employer’s plan had/has a compliance issue, it could taint all participating employer plans.
The SECURE Act added statutory relief from the one bad apple rule for certain MEPs, and the IRS has proposed regulations detailing how a MEP can take advantage of such relief. Under currently proposed regulations (subject to change in the final regulations), the MEP sponsor will have a duty to work with a participating employer to correct compliance failures in its own plan and if not corrected, may be required to terminate the employer’s participation in the MEP and spin off their portion of the plan into a single employer plan, and even may be required to notify the Department of Labor. Employers considering joining a MEP should understand the potential consequences if a qualification failure in the employer’s own plan is not corrected (or the employer and MEP sponsor do not agree on the method to correct).
Because representations regarding compliance typically must be made when joining a MEP/PEP and corrections may be more difficult if errors are not discovered until after joining, employers who want to move to a MEP/PEP may want to do a compliance review before making that move.
8. What about Exiting the MEP or PEP?
Employers considering joining a MEP/PEP should carefully review the MEP/PEP agreements and documents to ensure that they understand how exiting a MEP or PEP works if they choose to leave the Plan or if the provider determines to terminate their plan’s participation. Specifically, an employer needs to make sure that the agreements and other documents sufficiently detail the steps that need to be taken to accomplish a smooth exit from the MEP/PEP that preserves the exiting employer’s plan qualification and protects plan participant benefits.
For example, although the agreements may set out the notice requirements for exit 5, they may not sufficiently cover the transition process from the MEP/PEP to a successor plan, or what happens to plan assets if they are not timely or otherwise successfully transferred to a successor plan. An employer should also make sure the documents spell out how participant accounts are handled after notice of termination, and other specific ramifications of exiting the MEP or PEP. Other plan specific issues should be addressed as well depending on the features of the MEP/PEP; for example, if the MEP/PEP is a safe harbor plan, how do restrictions on the timing of safe harbor plan changes impact exit?
In short, exiting a MEP/PEP, over which a participating employer, by choice, has no or little control, can be trickier than terminating a single employer plan or merging it into another plan, especially in cases where the MEP/PEP provider also provides other services to the Employer – for example, if the sponsor is a PEO and provides bundled payroll, human resources, or other services, untangling just the plan from the PEO while maintaining other services can be tricky.
Conclusion
As can be seen from just this sampling of issues, the decision to join a MEP/PEP is not as straightforward as it may seem. Although “outsourcing” plan administration/fiduciary duties may reduce costs or administrative and fiduciary duties for an employer, the opposite may also be true and might instead obfuscate some of those duties and/or hinder or complicate others (such as the duty to monitor) resulting, for some plans, in little net gain but new potential fiduciary and other legal risks. Drilling down on the details of a proposed MEP/PEP and all related contracts and documents before signing them will go a long way to mitigating risks and facilitating a good decision-making process.
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Footnotes
Note – when evaluating a MEP or PEP, employers may at times be acting in their “plan sponsor” role and at other times, in a fiduciary role. See: https://www.boutwellfay.com/post/unpacking-the-settlor-fiduciary-two-hat-principle. For risk mitigation purposes, employers who fulfill both roles may want to separately act and appropriately document their diligence and decision making for each role.
See https://www.boutwellfay.com/post/the-latest-on-meps-peps-dcgs-formerly-gops for a general explanation of MEPs and PEPs.
https://www.boutwellfay.com/post/dol-update-cybersecurity-guidance-applies-to-all-erisa plans
An employer considering joining a MEP/PEP should review the notice provisions carefully to make sure they are not burdensome or otherwise objectionable. For example, the documents may permit the MEP/PEP provider to terminate an employer’s participation with little to no notice in the event of non-payment of fees (and for certain other reasons) and/or in the normal course without sufficient notice to allow the employer. The employer should push back on such provisions. In fact, the DOL’s § 408(b)(2) regulations require that terminations carry no penalty so that the plan does not get “locked into an arrangement that has become disadvantageous.”
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