One of the first points made by the panelists was that a MEP—like any retirement plan design—is not a “one size fits” all solution. While it may be the perfect solution for one plan sponsor, it would not be appropriate for another. Therefore, understanding the structure, benefits, and possible detriments are critical before pitching a MEP to a client.
The panel was moderated by James Sampson, Managing Principal, Cornerstone Retirement Advisors, and included Terrance P. Power, President, American Pension Services, Inc., and Keith J. Gredys, CEO & President, Kidder Benefits Consultants, Inc.
Power’s firm sells the Platinum 401(k) (see “New Multiple-Employer DC Plan Coming to Market”) and Gredys’ firm consists of consultants and advisers for approximately 1,000 retirement plans ranging from traditional defined contribution, employee stock ownership plans, and defined benefit cash balance plans.
Power first explained the structure of a traditional employer-sponsored retirement plan in order to compare it to a multiple employer plan. In the traditional plan, there is a single plan sponsor from one company. This sponsor has to take care of trustee liability, form 5500, document fees, an annual audit, investment monitoring, and 408(b)(2) compliance. Of course, all of this is usually done with the help of an adviser, and in tandem with the investment provider, an ERISA attorney, and a third-party administrator (TPA). Oftentimes, the sponsor can become overwhelmed by juggling all of these responsibilities, and is simultaneously getting nerve-racking cold calls from people offering to lessen their “fiduciary risk.”
In a MEP, the single plan sponsor becomes one of many “plan adopters” with the bulk of responsibilities falling to the MEP. The sponsor no longer has trustee liability, does not have to file a form 5500, does not have to prepare for an audit, the investments are taken control of by a 3(38) investment manager, and because they didn’t file an individual 5500, the sponsor won’t receive any more cold calls. Each adopting plan sponsor can still have his own adviser to ensure the MEP is functioning properly—this fiduciary responsibility remains with the sponsor.
Not every small-business owner should jump right into a MEP, even though it may seem tempting. Typically, there is some commonality between employers in a MEP (physician’s practices, law firms, etc). However, it’s not a requirement in section 413(c), said Power, it actually says “unrelated employers” can form a MEP. But because of plan design needs, the adopting sponsors tend to be from the same industry. “Commonality” is still unclear though—does association membership matter? Or what about geographical regions, questioned Power; these things vary from MEP to MEP (and there are about 3,000 currently in existence, he said).
Also, if the plan sponsor has some very specific plan design aspirations in mind, a MEP probably won’t be a great fit. The master document is at the MEP level, and sponsors only sign an adoption agreement—the flexibility of the master document can vary.
One adviser in attendance asked the panel what would happen if an adopting member is involved in a prohibited transaction and becomes disqualified. Gredys said this is a risk, but there are remedies around it. The IRS doesn’t want to disqualify a plan, he said, and as long as someone brings the problem to light as soon as possible, it can usually be remedied.
The Bright Side
As for advisers working with sponsors who are members of a MEP, they are allowed to solicit IRA rollovers, since the fiduciary liability is at the MEP level and is no longer a prohibited transaction. Also, since their client hasn’t filed a form 5500 and has “fallen off the grid” so to speak, said Power, competitors will stop calling.
It can be thought of as “another tool to have in your tool box,” said Gredys, and the more possible solutions you can present to a prospect, the more valuable you will appear. This “tool” allows you to maintain a relationship with your client, while offering real cost savings for them and you since everything is “offloaded” to a third party. Your role is to help the sponsor monitor the fiduciary governance of the plan; the question remains—is this the best solution for the participants?