Can Open MEPS close the access gap with small employers?

As Congress sets out on its summer recess, bipartisan support for open multiple employer plans and other retirement and savings reforms in both chambers has raised the possibility of legislative action by the midterm elections.

“The situation is ripe for things to move quickly,” said Barbara Van Zomeren, senior vice president of the ERISA team at Ascensus.

A provision in the Retirement Enhancement Security Act, the most comprehensive retirement bill on the table, would address the workplace retirement access gap among small employers by removing existing restrictions on participation in MEPs, which allow small employers to pool retirement assets to achieve economies of scale.

Read: Employers would not be fiduciaries in Open MEPs

Today, MEPs cover around 4.5 million savers, according to Morningstar research.

An existing so-called “one bad apple” rule means participating employers can lose their tax-exempted status when one employer in the plan is guilty of an administrative breach.

And today’s nexus requirement means employers must share a commonality, such as membership in a trade group, to benefit from fiduciary protections in MEPs.

RESA, and related legislation recently proposed in the Senate, would remove those restrictions, theoretically opening up access to MEPs to thousands more employers and millions more workers.

“This could be a very good idea for many small employers that can’t achieve economies of scale,” said Steven Friedman, an ERISA attorney and shareholder at Littler.

“There have always been impediments to employers banding together, even when they do share an affiliation. One administrative miscue and the plan could be disqualified and cause hardship for other employers,” added Friedman.

Small plans, big disadvantage

For small employers, the disadvantages of sponsoring a retirement plan are considerable compared to large employers.

While more than 90 percent of large employers sponsor a 401(k) plan, data from the Bureau of Labor Statistics estimates that only 48 percent of employers with fewer than 50 employees sponsor a plan.

When they do sponsor a plan, small employers and their participants pay a premium, given their small accounts.

Plans with less than $1 million in assets pay an average of 142 basis points in investment fees. By comparison, plans with more than $1 billion in assets pay an average of 37 basis points, according to Morningstar research. The difference can translate to an account with 20 percent less in accrued savings by retirement.

Along with the deterrent of extra costs, small employers are subject to the same fiduciary liability under the Employee Retirement Income Security Act as large employers.

But legislation recently introduced by Sen. Tom Cotton, R-AR, which was reportedly written to support passage and implementation of RESA’s open MEP provisions, would exempt employers with fewer than 100 workers from fiduciary status. Instead, providers of open MEPs, or pooled employer plans, would be named fiduciaries.

Sen. Cotton’s bill instructs the Labor Department to create a clearinghouse of qualified MEP providers. If an employer joins a plan registered with the Labor Department, they “shall not be treated as a fiduciary with respect to such plan, including with respect to the selection or monitoring of any plan service provider or any investment under the plan,” according to language in the bill.

The extent of that relief for small employers could prove to be a sticking point if and when Congress considers the options on the table.

“There are different schools of thought on how to handle the fiduciary question for small employer in open MEPs,” said Ascensus SVP Van Zomeren. “Some proposals want service providers to absorb all of the fiduciary liability, and leave participating employers without any.”

Ascensus, which specializes in plan administration in the small universe, prefers a balanced solution, wherein employers are not completely off the hook for fiduciary obligations.

“Employers should have some fiduciary responsibility for selecting service providers, ongoing monitoring, and determining reasonableness of fees,” said Van Zomeren.

An alternative to complete fiduciary absolution could be employer safe harbor guidance on selecting a service provider, and further guidance for service providers, says Van Zomeren.

Open MEPs a game changer?

If lawmakers continue to coalesce around open MEPs and actually pass legislation, regulators at the Labor and Treasury Departments will clearly have a role to play in the ensuing months.

Littler’s Friedman expects that could be done efficiently.

“Like any piece of retirement legislation, the devil is always in the details,” he said. “If a law is passed, regulators will have to come in and figure out how it will all work.”

With the Labor Department’s fiduciary rule being vacated by a federal court, regulators have some spare bandwidth, says Friedman. “If Congress passes a law for open MEPs, I think regulators could turn around guidance within a year.”

Whether wider access to MEPs would materially impact sponsorship of retirement plans among small employers is unknown, even among supporters for the ideas on the table.

“My best guess is that MEP reform would do more good than not,” said Matt Sommer, vice president, Retirement Strategy Group at Janus Henderson Investors.

“I don’t think there is a downside to MEP reform. It has a chance to help close the access gap, and every bit helps,” he added.

“But whether or not it will be a game changer, I’m not sure. I think it would help at the margins, but it wouldn’t necessarily close the access gap on its own,” he added.