Industry insiders believe that while the Department of Labor’s (DOL’s) new rule on association retirement plans (ARPs) is somewhat disappointing in that it did not pave the way for open multiple employer plans (MEPs) for employers without a common nexus, it is a positive step in the right direction of providing yet another cost-effective option for small businesses to offer retirement plans.
The rule, which will go into effect on September 30, will permit employers to connect with associations of employers in a city, county, state or multi-state metropolitan area. They will also have the option of banding together by industry. This is the first time that employers will have the opportunity to join a MEP based on geographic location, says Erin Turley, a partner with McDermott Will & Emery in Dallas.
For instance, a local chamber of commerce might sponsor an association retirement plan, says Drew Carrington, head of institutional defined contribution at Franklin Templeton in San Mateo, California.
In fact, right after the final rule was issued by the DOL, the Las Vegas Metro Chamber of Commerce announced it would be the first in the nation to create an association retirement plan. The chamber says it is doing so because the pooled assets will give small business members a better deal from investment advisers as well as lower fees.
“The Las Vegas Metro Chamber is proud to work with the Department of Labor to be a national leader in marking the new association retirement plans available to small businesses in Nevada,” says Mary Beth Sewald, president and CEO of the chamber. “This is an innovative solution to help small businesses give their employees access to retirement plan choices often only available to large companies.”
“It is a step in the right direction of marking retirement plans available to more employers and enable the establishment of small plans [by employers that] may not have the expertise on plan design or investments to get the benefits of economies of scale,” Carrington says. This might appeal to those small businesses that currently do not offer a retirement plan, as well as prompt those that do have a plan to weigh whether this arrangement might be more cost effective, he says.
“The real benefit of the association retirement plan rule is to expand the availability of retirement plans,” Carrington says.
Kevin Murphy, head of defined contribution strategic accounts at Franklin Templeton adds: “We view this as very positive for small businesses and advisers focused on small businesses to offer plans with all of the bells and whistles found in large plans, that is, institutionally priced plans. In fact, we see this as a fantastic opportunity for advisers.”
In addition, the rule also allows retirement plans to be sponsored through professional employer organizations (PEOs), i.e. third-party human resources providers offering services to small and midsized plan sponsors. “The rule is likely going to be significant for PEOs because it clears up a grey area under which they have been operating,” Turley says. “Previously, they only had a safe harbor to operate under the IRS code. Now, they can operate under ERISA [the Employee Retirement Income Security Act]. This will give PEOs and their clients peace of mind.”
However, there is one downside to the association retirement plans, she adds. “One of the drawbacks is that the main fiduciary of an association MEP cannot be a financial institution, insurer or third-party administrator, which are the precise entities that typically provide these types of plans,” she says. “The DOL’s reason for doing this is to protect people from fraud. There has been bit of a checkered history with respect to MEPs because they don’t have as much oversight [as traditional retirement plans do] because of their disassociated governance structure.”