For those who have been wondering what happened to the IRS’ proposal to change the “one-bad-apple” rule for multiple employer plans (MEPs), it was taken care of in the SECURE Act, which was passed in December.
Details about this and other provisions of the act related to pooled employer plans (PEPs) were shared by Bradford P. Campbell, a partner in Drinker Biddle’s Employee Benefits and Executive Compensation Group in Washington, D.C., during an audiocast.
Campbell explained that the SECURE Act allows for PEPs, previously referred to as “open MEPs” by the industry, which are a new type of plan in addition to MEPs that already exist. In a MEP, participating employers have a common nexus, such as industry, while PEPs are set to become available as of January 1, 2021, for employers that do not have a common nexus.
In the SECURE Act, Congress provided relief from one company affecting the whole PEP by its failure to satisfy a qualification requirement or to provide information needed to determine compliance with a qualification requirement. Campbell said this relief was also extended to MEPs.
He also explained that PEPs are 401(k) plans only, not 403(b), 457(b) or defined benefit (DB) plans. PEPs must have a pooled plan provider (PPP), which is the main fiduciary and a 3(16) administrator for the plan. Campbell said plan sponsors still have fiduciary responsibility for selecting the PPP, as well as monitoring it and monitoring the PPP’s compensation. The PPP is responsible for all other plan administration. Plan sponsors can either select the investments they will offer to participants or have the PPP select investments for them.
Campbell said the SECURE Act also requires PEPs to have a trustee and reasonable and systematic procedures for contributions, loans, etc. The PPP can either do investment management itself or can delegate it to a 3(38) fiduciary investment manager. There can be no unreasonable restrictions or penalties for plan sponsors who choose to leave or enter a PEP.
To ease administration, another provision of the legislation allows for single filing of the Form 5500. Campbell said this is not mandated for PEPs, though.
There are still some unanswered questions and guidance that needs to be released, he said. For example, there are uncertainties about prohibited transactions. “If a PPP elects to do investment management—selecting and monitoring investments itself—will it cause a prohibited transaction if the PPP is affiliated with some investments? The DOL [Department of Labor] will provide guidance about that,” Campbell said.
As for upcoming changes to the retirement plan marketplace due to PEPs, Campbell said it’s not clear yet how they will affect it. He said he believes some PEPs will come to market quickly, “but it will be ones most clearly within where the rules now sit.”
In a previous conversation with PLANADVISER, David Whaley, partner at Thompson Hine LLP in Cincinnati said, “I anticipate some will be sponsored on day one. There’s already a movement among trade associations to have pooled plans. They will choose to treat themselves as [a PEP], with a single 5500, and will make modifications to be ready January 1, 2021.”
In the audiocast, Campbell said PEPs may be a perfect opportunity for third-party administrators (TPAs), but it will take time for additional regulatory guidance for the market players to figure out how the business side works and who has the economics to work through it.
SECURE Act Lifetime Income Provisions
The SECURE Act provides a fiduciary safe harbor with respect to the selection of an insurer to provide guaranteed retirement income products in defined contribution (DC) plans. Campbell said the SECURE Act is much more objective than previous DOL guidance, and plan sponsors can more easily know if they fall into the safe harbor. “They can rely on representations of insurance carriers and have clear standards for how to assess them. They still have to decide whether the cost of products is reasonable,” he added.
Also, under the legislation, participants are permitted to transfer annuities that are no longer authorized to be held as investment options under a qualified DC plan to another eligible employer plan or individual retirement account (IRA). Campbell said guidance is still needed about the mechanics of annuity portability.
Another provision of the SECURE Act is that, at least annually, plan sponsors must provide a lifetime income projection to participants. Campbell noted that the legislation gives the DOL 12 months to come up with an interim final rule about this provision. “It will be a challenge for the DOL, as it will be very technically difficult to write how these projections will be made,” Campbell said. “Will the projections be based on participants’ current balance or a projected balance in the future? What assumptions will be used?”
Campbell pointed out that some service providers do this already, and wondered if the DOL’s guidance about how to make the projection will chill providers who are calculating it another way. He reminded audiocast listeners that the agency previously decided it was too hard to solve and abandoned its rulemaking.
Campbell concluded his discussion about the SECURE Act by saying it came out at time when there could potentially be a change in presidential administrations soon. “This could create difficulties in meeting deadlines and questions about policy,” he said.