The very system that has enabled small businesses to offer affordable 401(k) plans to employees may be in peril.
Back in May of 2012, the Department of Labor provided guidance on “open” multiple employer 401(k) arrangements—aka MEPs. These plans enable businesses that do not share common ownership to pool assets to lower fees, share fiduciary responsibility and spread the burden of costly annual audits among multiple entities. MEPs are great vehicles for small- to mid-sized employers and their employees, because the fees paid by the businesses as well as the participants are often greatly reduced.
The Department of Labor recently concluded that the open MEPs are not single retirement plans for purposes of the Employment Retirement Income Security Act of 1974 (ERISA), but are several separate retirement plans separately established and maintained by the individual employers. This guidance suggests that each plan needs to be treated separately, with separate 5500 filings and audits.
So what happens if a business is currently participating in a multiple employer arrangement? This guidance may or may not ever lead to a ruling that necessitates action; however, I suggest playing ahead of the curve with a strategy that will keep you from scrambling to become compliant.
One strategy is for a group of businesses or vendor to tie the participating businesses together through some type of trade association or commonality. While this strategy would keep the multiple employer arrangement intact as a single plan, there is no guarantee that the Department of Labor would agree with the established link or commonality between the businesses.
Another option is to file separate 5500s for each of the participating entities and obtain fidelity bonds for each. Our third-party administrator, Pinnacle Financial Services, has chosen this route for each of our participating employers. Due to our volume of plans and overall assets, Pinnacle has negotiated rates for us on these separate filings and audits that enable us to remain a financially attractive 401(k) solution. While this is a costly alternative, we believe this to be the safest strategy moving forward. Our proactive stance will enable us and our participating employers to have peace of mind moving forward, and participating employees will continue to enjoy a high-quality plan with low fees.
If your business is considering a Multiple Employer 401(k), I strongly suggest that you ask the potential vendor what their strategy is moving forward into somewhat uncharted water. If a sound strategy is in place, the pricing of a multiple employer arrangement can be a very attractive solution.