Small business pooling, or multi-employer plans (MEPs), has existed for decades, providing an avenue for employers to pool risk and economies of scale to minimize costs and provide retirement plans competitive with larger companies. However, the ability to pool is highly regulated by the commonality of interest requirement, resulting in the term closed MEP.
In a US Senate Committee on Health, Education, Labor, and Pensions, business leaders and senators joined together seeking bipartisan support for reform to the multi-employer plans, allowing for more ‘open’ plans and fewer barriers to offering plans.
Presiding Senators Michael B. Enzi (R-WY) and Bernie Sanders (D-VT) were joined by leaders from AARP, Prudential, and business owners seeking reform to multi-employer plans.
Current State of MEPs
According to the Prudential Retirement whitepaper on Multi-Employer Plans, Employer-sponsored retirement savings plans have become a critical component of the private retirement system in the U.S., and a proven tool for helping working Americans prepare for life after work.
According to calculations by the nonprofit Employee Benefit Research Institute, people earning between $30,000 and $50,000 per year are 16.4 times more likely to save for retirement if they have access to a workplace plan.
Unfortunately, tens of millions of Americans don’t have access to a plan on the job, leaving many ill-prepared to meet their financial needs after they stop working. This retirement coverage gap is most acute among employees of small companies, many of whom do not sponsor plans due to concerns about costs, complexity, and fiduciary liability.
Four Challenges to Expanding MEPs
Expanding access to multiple employer plans for small businesses and their employees will require legislative and regulatory action in Washington. The challenges are concentrated in four areas:
Section 413(c) of the Internal Revenue Code already recognizes plans maintained by more than one unrelated employer. However, it imposes a number of requirements on these plans as a condition of maintaining their tax-qualified status. As currently interpreted, some of these requirements, such as nondiscrimination rules, are applied on an employer-by-employer basis rather than a plan basis. This means that just one non-compliant employer can jeopardize the tax status of the entire plan, putting all other employers at risk.
For purposes of ERISA, the Department of Labor treats as a single retirement plan only those multiple employer plans that are sponsored by a “cognizable, bona fide group or association of employers” acting in the interest of its members. It also requires that this group of employers have a “commonality of interest,” such as operating in the same industry, and exercise either direct or indirect control over the plan. Taken together, these conditions significantly limit the ability of other organizations, such as a local Chamber of Commerce, to sponsor a MEP for a diverse population of smaller employers.
Some employers—particularly small employers—shy away from offering a retirement savings plan because they are concerned about the responsibilities and liabilities they might assume, under ERISA, as plan fiduciaries. The recent uptick in retirement-plan litigation relating to plan fees and other factors has only exacerbated their concerns.
The Labor Department has expressed concern that expanding the number of “open” multiple employer plans—those sponsored by any entity other than “a bona fide group or association of employers”—would allow the promoters of such plans to take advantage of small employers and their employees under the guise of offering a low-cost, no-liability plan.
Five Recommendations for Congress
In helping small businesses gain better access to retirement plans for employees, Prudential Retirement SVP of Institutional Investment Solutions Jamie Kalamarides recommends Congress do the following, according to EBN:
- Allowing unaffiliated businesses with separate employee groups to pool purchasing power, removing commonality-of-interest requirements.
- Reducing the liability of small business owners only to the decisions they make.
- Directing the IRS and DOL to develop a model plan design that includes all the best behavioral finance best practices and eliminates discrimination testing.
- Empowering the DOL with enforcement capabilities such as reporting and cease-and-desist powers.
- Passing the Lifetime Income Disclosure Act and directing the DOL to reduce barriers to employers’ selection of lifetime income solutions.
Generating reforms for small businesses will allow more firms to offer employer-sponsored retirement plans to employees by reducing the risk and closing the retirement gap. With a 401(k) considered a ‘must have’ benefit by nearly 90 percent of employees, according to Schwab, allowing small businesses to offer more effective plans to employees will provide these employers to become more competitive in the fight for talent.
For more information, watch the Senate Subcommittee discussion on reforming MEPs, and download the Prudential Whitepaper, “Multiple Employer Plans: Expanding Retirement Savings Oportunities.”