(Editor's Note: W. Michael Montgomery, managing principal ofMontgomery Retirement Plan Advisors, Inc., is the 2011 winner of the fi360 Fiduciary Article Competition.)
As more defined contribution plan sponsors come to grips with their fiduciary responsibilities, a solution rapidly gaining market traction is the use of multiple employer plans (MEPs). Traditionally utilized as the plan structure for association plans and professional employer organizations (PEOs), MEPs have expanded in recent years to include unrelated employers seeking a streamlined approach to plan oversight. It is these “independent” multiple employer plans, open to virtually any employer, which have led the surge in MEP growth.
Employers adopting a sound multiple employer plans eliminate their plan audit and Form 5500 filings, simplify plan operations and achieve a profound reduction in fiduciary risk exposure. This paper focuses on the most controversial claim—transfer of fiduciary risk.
Multiple Employer Plan Defined
A multiple employer plan is a retirement plan established by one plan sponsor which is then adopted by one or more participating employers. The adopting employers may have a common link, such as an industry association, or may have no shared connection at all beyond that of their participation in the same plan. Instead of being the plan sponsor themselves, adopting employers are joining a plan sponsored by another entity.
Legal Basis for Multiple Employer Plans
Multiple employer plans are established under Section 413(c) of the Internal Revenue Code, defining a plan as a Section 413(c) plan if:
(i) The plan is a single plan, within the meaning of section 413(a)
and Sec. 1.413-1(a)(2), and
(ii) The plan is maintained by more than one employer.
The surrounding text provides details on rules related to the handling of participation, vesting, funding and other issues, and differentiates between collectively bargained “multiemployer” (Taft Hartley) plans, controlled group plans and Section 413(c) multiple employer plans.
Notably, there is no reference in the code to a requirement for a connection among adopting employers such as a trade association or professional employer organization, although both of these are common structures.
Typical MEP Characteristics
A MEP fund menu generally is the same for all adopters. Plan features, however, are a different story. While some MEPs limit adopters to safe harbor or automatic enrollment plan structures, many MEPs have written their plan document to accommodate a wide variety of provisions, resulting in little or no takeaways for employers merging into the plan. When the MEP is associated with a professional employer organization (PEO), there is usually a common payroll system that makes it easier for the MEP to handle consolidated reporting at the plan level. When the MEP is open to unrelated employers, the MEP must develop a means to aggregate data among diverse employers in order to prepare a single MEP-level Form 5500 and provide data for the annual plan audit.
Outsourcing the Key Fiduciary Roles
A multiple employer plan can offer significant mitigation of fiduciary responsibility to the adopting employer. The reason is a simple one: The adopting employer ceases to perform certain key roles that incur fiduciary status. When an employer merges their current single employer plan into a properly structured multiple employer plan, they are no longer the sponsor of the plan. They should also cease to be a trustee, plan administrator or any sort of named fiduciary. Those central roles move to the MEP, and the inherent fiduciary liability transfers with them.
Let’s break down exactly how this works. As we do, bear in mind
there are variations in structure among MEPs that can markedly affect roles and fiduciary responsibilities.
How Do Responsibilities Transfer From the Adopting Employer to the MEP?
To explain the transfer of fiduciary responsibilities, it is necessary to understand the fiduciary roles normally inherent in being a plan sponsor.
In a single employer plan, the employer is generally the plan sponsor and they appoint certain “named fiduciaries” and/or serve in the fiduciary roles themselves.