Would Open MEPs disrupt 401(k) plan market?

Last week, President Trump signed an executive order establishing the expansion of access to workplace retirement plans as a formal policy of the federal government.

The order, which gives the Labor and Treasury Departments six months to propose new rules or guidance that would clarify which employers could join Multiple Employer Plans, was lauded by employer advocates and retirement plan providers across industry.

But support for so-called Open MEPs, which is shared across the aisle on Capitol Hill, has not always been universal, thanks to one prominent case of fraud by a MEP plan fiduciary and other cases of mismanaged Multiple Employer Welfare Arrangements, says Troy Tisue, president of TAG Resources, a Knoxville, Tennessee provider of MEPs

In 2012, Tisue went to the Labor Department seeking an opinion letter on whether he could pool non-related employers into a MEP and have the plan still qualify as a single employer plan under the Employee Retirement Income Security Act.

Not only did Tisue not get his opinion letter, in fact, what TAG Resources and industry got was a clear declaration from Labor that employers required a nexus, or commonality relationship, for the MEP to be regarded as a single plan under ERISA.

In effect, the advisory opinion issued under the leadership of then Assistant Secretary of Labor Philys Borzi established a prohibition period for Open MEPs by creating the “nexus” requirement.

“She was exercising caution in the face of several cases of pure theft,” Tisue explained to BenefitsPRO.

Borzi, whose career in the private sector and government was guided by a dogged advocacy for ERISA’s participant protections, was being asked by Tisue and others in industry for guidance broadening access to MEPs just as the FBI was investigating Matthew Hutcheson, an Idaho-based fiduciary to several MEPs, for stealing millions from the plans.

“The timing could not have been worse,” said Tisue. Hutcheson was arrested a month before Labor issued its advisory letter. He was ultimately sentenced to 17 ½ years in prison.

“We were trying to establish what a good player looked like,” added Tisue. “But the good players were thrown out with the bath water.”

Other fraud by trustees of MEWAs, which are arranged like MEPs but are not regulated by ERISA, had cropped up in prior years. In the aggregate, the crimes were enough to make Borzi, the ERISA purist, closed to the idea of opening MEPs, thinks Tisue.

Potential for sponsors to save thousands a year in audit costs

President Trump’s executive order does not specifically address the nexus requirement, but industry insiders widely expect Labor will explore removing it, allowing small and midsized employers to join a MEP even if they don’t share a commonality, such as membership in a trade organization.

Under MEPs, employers are still fiduciaries, but most of the burdens of administering plans can be offloaded to third-party providers. A MEP files one annual Form 5500, removing that reporting requirement for employers.

But the real topline value comes in savings from annual audits required of sponsors of single-employer 401(k) plans, says Terry Power, president and CEO of The Platinum 401(k), a Clearwater, Florida-based MEP provider.

“If it goes through as expected, the real impact will be on employers’ audit expenses and requirements,” said Power. “I would expect we will go to one 5500 filing, one audit and a separate reporting schedule for Open MEPs.”

Annual plan audits are huge costs borne by employers and participants in 401(k) plans. The bill can run as high as $30,000 for a midsized plan. Under a MEP, that cost is spread among participating employers and participants.

“An existing audit bill could be chopped down by as much as 95 percent for an individual sponsor,” said Power. “If you are a company that sells plan documents, or a CPA, you probably don’t like MEPs, because there is one audit instead of 1,000. The only CPA that likes this is the one that will audit the MEP.”

Plans with fewer than 100 participants are not required to be audited annually. A 50-participant plan with $20 million in assets would be subject to an audit if it joined a MEP. Power sees that as a positive development for participants in existing small plans. “That’s a great thing. It brings in third-party oversight and a separate set of outside eyes on the plan.”

Tisue said a $20 million 401(k) plan can expect to pay between $10,000 and $12,000 annually for audits. In the closed MEPs run by TAG Resources, individual employers pay around $4,000 for annual audits. “It’s reasonable to expect that sponsors could save at least half on audit costs, and maybe considerably more than that,” said Tisue.

President Trump’s executive order is targeted to address the coverage gap among small and midsized employers that do not sponsor plans, but the dramatic savings in audit costs alone begs the question of whether or not Open MEPs would encourage employers that sponsor a single plan to seek pooled arrangements.

Tisue expects the mounting energy around Open MEPs will continue to grow with Labor’s regulatory action, potentially disrupting the existing plan market. “There’s going to be so much buzz. Single plans will have to consider joining MEPs.”

One bad apple rule reveals few bad apples

Buried in Treasury Department regulations for MEPs is the so-called “one bad apple rule.” A lone employer in a MEP that fails regulatory requirements could disqualify the plan’s tax-advantaged status. Trump’s executive order instructs regulators to yank it.

Power has never seen a bad apple in a MEP in his career, which spans three decades. Tisue can think of two instances in his 18 years providing MEPs. Both firms retain the power to spin out employers if they fail their regulatory obligations.

While the one bad apple rule doesn’t have much of a record for disqualifying MEPs, both said that it has been used as a cudgel by some plan advisors to dissuade sponsors from joining a pooled plan and protect incumbent business.

“It’s used as a scare tactic by some advisors—not everyone—but it does happen,” said Tisue.