SECURE Act not clear on whether plan providers could sponsor Open MEPs
Industry’s biggest players need more clarity from Congress, regulators.
The nearly unanimous vote to pass the SECURE Act out of the U.S. House of Representatives has industry stakeholders optimistic that the largest retirement bill in more than a decade will ultimately be signed into law.
Last week, the Senate attempted to “hotline” the bill, which would have effectively moved the SECURE Act to a unanimous consent vote in the upper chamber.
That effort was driven by the overwhelming bipartisan support for the bill in the House, explained Jeanne de Cervens, vice president and director of federal government relations at Transamerica.
But the fast-tracking of the SECURE Act stalled, based on the objections of three senators, said de Cervens.
“It’s not as if those senators are against the bill,” she said. “But it’s that they need to know more information. It’s not uncommon for the Senate to hotline a bill and have it not go through the first time. Leadership could still move to pass it again by unanimous consent.”
Who can sponsor Open MEPs?
The names of the dissenting senators have not been released, added de Cervens. Nor is it clear what additional information they are seeking.
But in tapping the brakes, the Senate may have created the space to address emerging concerns over the SECURE Act’s Open Multiple Employer Plan provisions.
Open MEPs are designed to close the retirement plan access gap among small employers. Under the bill, unaffiliated employers can pool workers and their retirement savings under one defined contribution plan, potentially allaying employers’ fiduciary requirements, administrative burdens, and retirement investors’ costs.
Questions remain, however, as to the language—or lack of language—in the bill that would allow existing retirement plan service providers to be fiduciary sponsors of Open MEPs, according to Phil Waldeck, president of Prudential Retirement.
“Clarity is what providers would be looking for to participate in this market,” Waldeck told BenefitsPRO.
Under a Labor Department regulatory proposal, retirement plan service providers—recordkeepers, insurance companies, mutual fund companies, and investment advisors—are explicitly prohibited from sponsoring Open MEPs. Trade associations and Professional Employer Organizations (PEOs) are allowed to sponsor MEPs under Labor’s proposed rule.
The SECURE Act does not include prohibitions on retirement plan providers’ sponsorship of Open MEPs, which has led many in industry to assume existing plan providers could be fiduciary sponsors of pooled plans.
But Waldeck said industry’s largest service providers—Prudential among them—have genuine concerns that the bill is not specific enough on which entities can sponsor MEPs.
“For a recordkeeper that also offers investment products, there is a question as to whether it could sponsor a MEP,” said Waldeck. “Players like us would need to evaluate the legislative landscape that passes before entering the market.”
If plan providers are to enter the Open MEP market, they would need either additional legislation, or clean regulatory guidance from the Labor Department.
“To be both a service provider and a MEP sponsor would require an additional step,” added Waldeck. “If the conclusion is you can only be one, that would limit the market place.”
“To the extent service providers are saying the language in the SECURE Act is not clear, and there is some risk in that, I agree with them,” said Dominic DeMatties, a partner in Alston & Bird’s employee benefits and executive compensation team.
“But I don’t think all hope is lost,” added DeMatties, who previously served as an attorney in Treasury’s office of the benefits tax counsel. “The issue is that DOL has had a very strong historical position regarding who can be a plan sponsor and what the definition of an employer is. The way the SECURE Act is drafted deals with defining what a pooled plan is. But on defining a sponsor of pooled plans, that’s not entirely clear.”
The bill instructs the Labor Department to establish regulations on plan document language and fiduciary obligations for employers in pooled plans and providers.
DeMatties said Labor will also have broad authority to define whether plan providers such as Prudential can sponsor an Open MEP.
“The devil will be in the details,” said DeMatties. “There’s room for interpretation to be broad enough to bring providers in, but also interpretive room to be tighter about who can sponsor a MEP. Regulators have their work cut out for them.”
Market impact
DeMatties agrees with Prudential’s Waldeck in that a narrow interpretation from Labor—one that would be unfavorable to recordkeepers and fund companies—could significantly limit the amount of pooled plans marketed to employers, and in turn limit the ultimate intention of the SECURE Act’s MEP provision: to close the workplace retirement plan access gap.
“It comes down to what extent you want a smaller employer that doesn’t have a lot of benefits expertise to still be on the hook as fiduciaries,” said DeMatties.
Under the bill, individual employers in pooled plans would maintain a fiduciary obligation to monitor MEP providers. But other fiduciary obligations borne by sponsors of single employer plans, like investment selection and plan documentation, would fall to fiduciary providers.
“Bringing in a fiduciary provider would create a safer place for employers and participants,” said DeMatties, an argument that bodes well for Labor issuing broader regulations that would bring existing service providers into the MEP market.
But Labor has been considering the same policy arguments for years, and has continually favored maintaining ERISA’s strong fiduciary requirements for employers.
“With any new law that gives broad interpretive authority, there is the risk regulators won’t interpret it favorably for stakeholders,” added DeMatties. “I’m optimistic. My personal opinion is the policy in the bill is clear, and there is sufficient language in the bill’s text for Labor to expand coverage by bringing in more service providers to the Open MEP market.”
Don’t expect overnight change
Notwithstanding his optimism, DeMatties concedes that Labor has yet to provide any evidence that it is prepared to issue a broad regulatory interpretation that would include service providers as fiduciary sponsors of MEPs.
“If the SECURE Act were to pass, it wouldn’t surprise me to see a very cautious wait-and-see approach from service providers until something definitive comes from Labor,” said DeMatties.
In order for a new MEP market to develop, potential providers will need regulatory certainty. DeMatties thinks Labor would prioritize new MEP regulations, given the imperative established by President Trump’s 2018 executive order to expand access to workplace retirement plans.
“If Labor issued proposed regulations within a year of the law passing, that would be fast. But if you are waiting for that guidance, a year is an eternity for a provider, who has to begin to plan their business around what might happen,” said DeMatties.
The clarity that Prudential’s Waldeck and other service providers are seeking—be it in the form of added language to the SECURE Act, separate legislation, or favorable guidance from the Labor Department—will take time.
Even with that guidance, no one should expect an Open MEP market to emerge overnight.
“This legislation is very helpful, and we’re at a spot that’s taken a long time to get to,” said Waldeck. “But right now, there is no Open MEP market. It will take some time for the legislation to be effective, and time for a market to develop.”
How much time? Based on the experience of target-date funds, plan design features like automatic enrollment, and even the creation of the 401(k) plan itself, Waldeck says history shows it could take as much as a decade for Open MEPs to materially alter the access gap in workplace retirement plans.
“It doesn’t happen overnight,” he said. “First there is the question of passing the legislation, then the needed regulatory clarity. Then providers have to build their capabilities and engage the market. Then employers will have to move—and they don’t do that overnight. And they all won’t decide to sponsor a plan.”
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