Mountains or Molehills?

I have been trying to resist the urge to blog about the “new” phenomenon of Multiple Employer Plans, but temptation got the better of me.In very broad terms, there are two general types of MEPs – the “common” MEP and the “open” MEP.  The gist of the common MEP is that it covers companies that, though unrelated by ownership or direct business relationship, have some sort of commonalty, e.g. members of a Chamber of Commerce or doctors’ offices in a certain geographic area.  By contrast, an open MEP covers businesses that have no commonality.  Although open MEPs seem to be causing some controversy these days (as Ilene Ferenczy describes in this post), there are important details that must be considered with all MEPs.Some tout MEPs as bulk purchasing arrangements in which many small employers band together to obtain a level of service they might not otherwise be able to obtain cost-effectively…a kind of Costco for retirement plans.  However, not everything at Costco is cheaper, and you may be forced to buy 5 bottles of aspirin that will expire before you use up the hand-bag sized bottle you went in to purchase. Similarly, some MEP features are available in stand-alone plans with similar price-tags, more flexibility and in more reasonable amounts.Others promote MEPs as a way for employers to completely absolve themselves of fiduciary responsibility.  An employer joins a MEP along with the pre-determined investment menu, service-providers, etc. but completely escapes any legal responsibility for the prudence of the decision?  In an era when plaintiff’s lawyers and the DOL are seeking to broaden the fiduciary net?  Really?Some MEPs are designed to give maximum plan design flexibility to adopting employers.  This might seem to make sense, but with more flexibility comes complexity and the increased possibility of mistakes that could lead to penalties.  Similarly, if an adopting employer with a stand-alone plan in which there are unresolved errors merges in to the MEP, those errors come along with the merger.  Although MEPs are usually large plans, they are often comprised of smaller employers who might not have the time or resources to establish the internal controls necessary to prevent oversights.Some say these are non-issues, since errors can be corrected.  Ok, but who pays the associated expenses?  They can’t be paid from plan assets, so somebody has to write the check.  The lead employer?  The adopting employer that caused the error?  What if the adopting employer refuses to pay?  Is the entire MEP left hanging?  The IRS correction program does allow filing fees to be based on the adopting employer at fault, but it provides that “the plan administrator (rather than any contributing or adopting employer) must request consideration of the plan under VCP.”Another issue is whether and how a neglectful adopting employer can be kicked out of the MEP.  An employer leaving (or being removed) does not entitle participants to a distribution, so those balances remain in the MEP unless there is a formal spin-off into a stand-alone plan.  If there is a spin-off, the question of fees comes up again.  Who is responsible to write the check?  How does one compel the excommunicated employer to sign the plan documents for the spin-off plan?As with most types of business partnerships, the best time to address these concerns is at the beginning of the relationship before any actual problems arise.  MEP issues can be easily addressed through carefully drafted plan documents, participation agreements and contracts.  When (not if) mistakes happen, how will they be handled?  What information does the MEP provide to help adopting employers demonstrate they followed a prudent decision-making process?MEPs that are properly established and maintained by providers with the requisite expertise can be excellent mechanisms to provide cost-effective retirement benefits under the right cirsumstances, but one size does not fit all.  If you are considering involvement with a MEP, make sure those in charge have acknowledged and addressed these issues rather than simply blowing them off as unimportant or unlikely to occur.  Otherwise, what should be MEP molehills may turn into MEP mountains very quickly.
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