The Setting Every Community Up for Retirement Enhancement Act (Secure Act) has finally become law, bringing sweeping changes to multiple aspects of the retirement system. Some of the most significant changes for small business owners are the important expansions of the rules governing multiple employer plans (MEPs).
MEPs are meant to reduce the administrative costs associated with providing employees with a 401(k) retirement savings option while simultaneously easing concerns about the employer’s fiduciary responsibilities. However, like any other savings option, employers should consider all aspects of the MEP option before diving in. Moving forward this year, small business clients will likely have a number of questions about how the Secure Act has changed the MEP rules and whether the MEP option is right for them.
Secure Act Expansion of the MEP Rules
The Secure Act fundamentally changed the nature of MEPs by removing both the “common nexus” requirement and the “one bad apple” rule.
The common nexus requirement restricted the MEP option to small business employers with a relatively strong connection—whether operating in the same industry or same geographic location. Although final regulations issued last summer relaxed this rule, the Secure Act goes even further. Under the Secure Act, even employers that do not operate in the same industry or in the same location can join together in an “open MEP” that can be administered by a pooled plan provider (generally, a financial services firm).
Use of the pooled plan provider to act as both plan administrator and a fiduciary with respect to the plan is intended to ease both the administrative burden and fear of fiduciary liability for small business owners.
Eliminating the one bad apple rule shields participating employers from fiduciary liability if one member of the MEP violates the MEP rules or otherwise fails to satisfy applicable fiduciary duties. Under the one bad apple rule, the entire MEP could be disqualified based upon the actions of only one employer that participated in the plan—based upon the assumption that the MEP is to be treated a single unified plan.
Small business employers will also be eligible for new tax credits for offering a retirement savings option to employees.
Continuing Considerations for Clients Evaluating MEPs
While the introduction of open MEPs is an exciting change for small business clients, some industry experts still consider the administrative costs of the MEP to be high compared to those of larger employers. One Secure Act change that allows unrelated employers to file a single Form 5500 (filed by the plan administrator) could help ease that cost burden.
Additionally, the employer continues to bear fiduciary responsibility with respect to selecting and monitoring the pooled plan provider. Pooled plan providers can outsource investment decisions to another fiduciary (likely what is known as a “3(38) fiduciary”). This arrangement does spread the costs of investment advice among the MEP participants to reduce expenses, but the extent of the employer’s fiduciary exposure still remains unclear under the law.
Employers may also wish to consider the extent of the investment options that will be available under the MEP format. It is possible that some plans will provide investment options that are much more limited than the 401(k) and retirement savings options that were already available to small business clients. Offering only a limited selection of investments may reduce fiduciary monitoring responsibilities for the client, but could also hinder the performance of their retirement funds.
Ultimately, many of the questions that still surround the use of MEPs will be left to regulators and how they choose to interpret the provisions of the new law. For now, MEPs remain an interesting option added to an already broad array of choices for small business employers looking to provide a retirement savings benefit to employees.