November 7, 2019 |
Not all employers have the financial flexibility to offer their employees a stand alone retirement plan. This is often the case with startups or smaller businesses, who may not be able to afford the start-up costs and ongoing fees charged by retirement plan providers and recordkeepers. Unfortunately, not being able to offer retirement benefits can be a real hindrance to attracting highly qualified workers. If a job candidate has the option between an employer that can offer retirement benefits and one that can’t, they’ll likely go with the employer that has the retirement plan.
However, employers that don’t have the budget for a stand alone retirement plan can participate in a multiple employer pension (MEP) plan instead. An MEP is essentially a retirement plan shared by multiple employers. It’s a great option for employers who either don’t have the financial capabilities to set up their own plan or the administrative capabilities (such as an HR department) to run it.
A MEP is a plan shared by multiple employers who are unrelated to one another other working in the same industry or line of business (a rule currently required by the Department of Labor (DOL) that may be removed depending on pending legislation). A single administrator or lead employer (the main sponsor of the plan) is in charge of administering the plan, so participants don’t have to worry about not having an HR department that can do this.
Although the lead employer (along with the recordkeeper) can decide the scope of the provisions available in the MEP, participating employers usually have some flexibility when it comes to eligibility requirements, vesting, loan availability, and employer contributions. Not all recordkeepers will allow this flexibility depending on the MEP platform. Note that if you opt into an MEP, it does mean that any employees who switch jobs and join a company that is also in the same MEP won’t be automatically covered by the same provisions (the other companies in the MEP may have different eligibility requirements).
Because there are multiple participants in an MEP all using different payroll providers and different ways to transmit payroll data, a data aggregator is often needed to convert the required payroll data into one common format that is acceptable to the recordkeeper of the MEP. This can be a bit complicated. Additionally, when it comes to investment options, an MEP will have a single menu of options that all participants can share. These investment options are generally chosen by the lead employer.
The following are a few of the reasons why you might want to consider participating in an MEP:
Relinquish primary fiduciary responsibility – The sponsor of the MEP assumes primary fiduciary responsibility and for ensuring that the plan remains in full compliance with all IRS and DOL regulations.
Relief from plan investment responsibility – The sponsor of the MEP is also the investment fiduciary, meaning that they are responsible for evaluating, identifying, choosing, and monitoring the investments in the plan. As a participant, you’ll be relieved of the potential liability associated with the burden of monitoring investments and of due diligence. The sponsor will typically choose an investment menu that is broad enough to meet the investment needs of your employees.
Greater buying power – Instead of acting as a single employer negotiating with a plan provider, you’ll be part of a group of employers that gives you more collective buying power when negotiating plan services or buying investments.
Save money – Joining an MEP plan will likely save you a significant amount of money as a result of economies of scale. Although you will still be contributing to the retirement plans of your employees, you won’t be solely financially responsible for the start-up costs (since you are joining an existing plan) and the administration costs (since you’ll be sharing those with the plan’s other participants).
Less paperwork – For the purposes of the Form 5500 and plan audit requirements, the DOL will treat an MEP as a single plan as long as the participants have an industry connection or pre-existing relationship and that they have control over the plan. This means that if your plan meets this requirement, only a single Form 5500 and plan audit will need to be performed. If the requirement is not met, then individual Form 5500s and plan audits would be required (as if you had an individual retirement plan and weren’t part of an MEP). Additionally, only a single plan document is maintained, which helps streamline things.
Single source solution for plan services – Most MEP plans provide a comprehensive package of services that often include plan design, plan consulting, document support, technical support, administration and recordkeeping, investment management, fiduciary protection, regulatory compliance, and sponsor and participant communications.
Ease of use – Navigating the different retirement plans available, all the different requirements, and all of the different options of each plan, can be a real headache for smaller companies. An MEP is much more straightforward in that it makes clear what your options are, from the plan services to the menu of investment options chosen by the plan’s sponsor. MEPs are much easier for smaller employers to use.
Greater attention to plan details – Because the plan sponsor takes on the majority of the responsibility of maintaining and monitoring the plan (as well as the liability related to the plan), MEP plans require an elevated level of governance and attention to detail. Most businesses cannot match such governance and attention to detail with single retirement plans without expensive professional assistance.
The ability to focus resources on business at hand – One advantage that can’t be overlooked is the fact that you won’t have to spend nearly as much time monitoring the plan. The sponsor and recordkeeper will oversee the plan, allowing you to dedicate your time and resources to your actual business. One of the big challenges of smaller companies that lack a dedicated HR department is to find the time needed to get everything done. Forcing high level employees to handle a retirement plan would take away time that they need to focus on other important tasks.
An MEP plan can certainly be an excellent alternative to other available retirement plans, especially if you’re a smaller employer working with limited resources. However, that doesn’t mean that just any MEP will do. You need to perform due diligence when finding an MEP that will suit your employees’ needs. You’re essentially outsourcing your retirement plan administration. This means that you’re putting the retirement plans of your employees into the hands of third-party administrators and advisors. You’ll want to speak with the sponsor of the plan in detail about the MEP as well as look into who is administering the plan.
There are a few other risks to be aware of as well. There have been cases in which service providers have charged hidden fees that you need to be careful of. Make sure that the MEP’s service provider has disclosed all of the plan’s fees. Additionally, termination is somewhat difficult, so be sure the plan suits your needs and the needs of your employees. Finally, look into the employers participating in the plan. Should one employer terminate, it could affect the entire plan in a negative manner.
Traditional 410(k) plans are the most popular of all retirement plans. It’s a plan you should at least look into when weighing your options. Here are a few of the differences between a typical MEP plan and a traditional 401(k) plan to keep in mind when making your decision:
Traditional 401(k) plans require individual audits – Smaller businesses (businesses with fewer than 100 employees) that have a traditional 401(k) plan won’t have to worry about an audit. However, if you do have over 100 employees or grow to eventually have over 100 employees, an audit will be required every year. This requires you to provide a significant amount of information to prove that you are fulfilling your fiduciary responsibility of compliance. If you fail to meet requirements, you’ll be subjected to potential fines and penalties. MEPs are treated as a single plan (as long as the participants are from the same industry), which means participants aren’t audited individually–the sponsor will take responsibility for the audit. If the plan is found to violate any laws or regulations, the sponsor will usually be responsible for any fines, not the participants.
You are responsible for the administration of a 401(k) plan – Administrative duties you’ll be responsible for if you choose a traditional 401(k) plan include the plan design, regular plan updates, monitoring operations, preparing filings and disclosures, fixing any issues, consulting employees, and performing tests. Most companies will hire a professional service to administer their plans. With an MEP, participants won’t have to worry about administration as this will be the responsibility of the sponsor (although you may share in the costs of hiring a professional service to administer the plan).
Traditional 401(k) plans are more customizable – With a traditional 401(k) plan, you will have plenty of flexibility when choosing your plan design and investment options. If there are certain investment options you want to include, such as those that are socially or environmentally responsible, you can include them. With an MEP, you’re limited to the plan design chosen by the sponsor. While you’ll have a menu of investment options to choose from, these are also chosen by the sponsor, which means your investment choices will be limited.
Terminating a 401(k) plan isn’t too difficult – There are a variety of reasons to terminate a traditional 401(k) plan and this can be done as long as a specific process is followed to remain compliant with the DOL. When successfully terminated, assets should be distributed to participating employees in an uncomplicated fashion. Terminating an MEP plan is more difficult. In fact, some MEP plans may make it impossible to terminate your plan and distribute your employees’ assets. Instead, the MEP’s sponsor may need to spin your plan off into a new stand-alone plan. Even then, this is not a distributable event. There will need to be a plan-to-plan transfer of assets to your new stand-alone plan.
MEPs can be affected by withdrawing participants – If an employer does decide to terminate (requiring their plan to be spun off into a stand-alone plan), it could have a huge impact on the remaining participants. This is because a portion of the MEPs assets will be removed, which could cause issues with the MEP plan’s pricing at the recordkeeper level, causing anticipated revenues to potentially decline. This could be an especially big issue if the participant terminating is one of the bigger employers in the group.
If you do decide that an MEP plan will suit your company’s needs, then follow these steps to find and set up an MEP:
Make sure that the plan design and investment options line up with the needs of your company and those of your employees.
Make sure the service providers have experience with fully serving MEPs. Remember, MEPs are very unique and require specific expertise. When evaluating an MEP, ask how long the provider has worked with MEPs, how many clients they serve, and how many employers participate in their MEPs.
Ask the sponsor of the MEP whether they are acting as the plan’s fiduciary. You should request a written explanation of what their fiduciary role is, including specific functions.
Find out whether the MEP’s service providers have the proper protocol in place should one of the participants fail to make the required contributions or fail to submit contributions on time. You’ll want to know that the MEP is protected against employers who fail to do their part.
Make sure that all of the MEP’s service providers are properly insured.
Ask the sponsor of the MEP how often they review the service provider fees to determine whether or not they are reasonable.
MEP plans can be an excellent alternative to other retirement plans for smaller businesses who may not have the resources for traditional 401(k) plans. Even though there are many benefits to opting into an MEP plan, understand what an MEP plan entails and what are the potential risks. Be sure to perform due diligence before you decide to invest in an MEP and to find an MEP that works for you.