MEPs: The Rumors, The Facts, and Buying in Bulk

1n 1946, a bunch of grocers in New Jersey started a cooperative called Wakerfern Corporation so they could get reasonable prices on wholesale goods. In 1951, these grocers decide to market their independently owned groceries under one name and that name was Shoprite.  By uniting as a cooperative, these grocers (which have grown in number) are able to buy products in bulk and at a lower cost so that they can compete against other supermarkets.

I always see multiple employer plans (MEPS) as the ability of small plans to group together and buy in “bulk”. By buying in “bulk” and grouping together with other employers, plan sponsors can get a better product at a better price. At least that’s the way it should be.  For me MEPS is the ability of smaller plans to have a greater choice in the choice of plan providers, allowing them to get services from unbundled providers that they probably could not afford as a standalone plan.

MEPS have become very popular of late and have certainly become a burgeoning business for me. That being said, any burgeoning business will bring in the entry of many new players in the market. The problem for the MEP area, it may bring in a lot of providers that have no background in MEPS or understand how they actually operate.

There has been discussion of late of the Department of Labor (DOL) looking at MEPs of late because someone asked someone from the DOL at some benefits conference. The person for the DOL said that they would be taking a closer look at MEPs that are “open”, meaning that the plans are not affiliated through an association like a bar association or some type of civic group. Low and behold, a lot of people started to act as if the MEP sky was falling. You had advisors questioning of having their clients in MEPs and plan providers consider curtailing their interest in them.  Calm yourselves, will you? The sky isn’t about to fall just yet and there is no reason to panic. Having someone from the DOL say something at some Midwest benefits conference is hardly regulation. However, if you read between the lines, I think MEPs that really look like individual plans bundled together for the sole purpose of avoiding separate 5500s. What types of MEPs are these? I think MEPs where you have the third party administrator (TPA) or a registered investment advisor as the plan sponsor.  If the plan sponsor is an association or a company that is unrelated to the TPA, I don’t think you have anything to worry about. If I’m wrong and the DOL is going to act on open MEPs, they would offer some relief to wind them down and allow the participating employers to spin them off.

As with anything new and popular, you hear a lot of false marketing and innuendo. One piece of false marketing is that joining a MEP totally eliminates a participating employer’s fiduciary responsibility. Not true. Joining a MEP is a fiduciary function, so the participating employer still has potential liability. Another false rumor out there is that if one participating employer is not in compliance, then the entire plan is out of compliance and susceptible to plan disqualification. While the malfeasance of a participating employer puts the entire MEP at risk, the issue is really a red herring. First off, the Internal Revenue Service allows MEP to self correct or voluntarily correct any plan errors. In addition, plan disqualification is an extreme penalty and is very doubtful that the Internal Revenue Service would disqualify all participating employers for the malfeasance of one. In addition, a good MEP helped by a good ERISA attorney (cough, cough) would draft language in the participating employer/joinder agreements that would force the spinoff of participating employers who refused to abide with the compliance of the plan such as paying top heavy minimum contributions.

In addition, there are a lot of insurance company based MEPs. While I have not really look into the issue on a fund expense level, I always believe that the beauty of a MEP was low costs, so I would urge employers and their advisor to look into cost.

A MEP isn’t for anyone, but it s a great opportunity for some employers to get a better plan at a better price.

This entry was posted in 401(k) Plans, Retirement Plans. Bookmark the permalink.

3 Responses to MEPs: The Rumors, The Facts, and Buying in Bulk

  1. Lance Studdard says:

    Nice post, Ary. One thing I have noticed is that MEP vendors generally put their best foot forward in terms of their fees almost as an effort to meet the promise of efficient pricing. I am still not sure if the actual costs are less for a MEP vendor but the consumer market is certainly enjoying a sort of self-fulfilling prophecy.

  2. Greg Smith says:

    Good work, Ary. Yes, the pricing of TPA services related to MEPs can be much more reasonable for small businesses….as minimums can be lowered significantly when multiple plans with identical investment options are involved. Selfishly, I know our minimum fees for recordkeeping MEPs (“PEOs”) are a small fraction of what they would otherwise be for an individual plan because we know administering the plans will be much more straightforward than with numerous individual small plans.

  3. Background Understanding of Attys’ Position on Potential Problems with Department of Labor (DOL)
    In the late 1980s at a point where group medical premiums were increasing at an annual inflation/utilization rate of 20-30%, several independent medical admin firms decided to create essentially self-insured medical pools, whereby they attempted to pool a number of individual employer plans under a trust aegis. After 5 or 6 years, the DOL came in and stopped the trusts, due to a number of unpaid claims and questionable accounting practices.
    At a recent ASPPA meeting, a DOL representative made a negative comment on open architecture MEPs comparing the pooling of retirement plans within a MEP to the trust structure of pooled group medical plans, as comparable to this situation. I might add that this was a ‘cloak room-type’ comment, but in today’s overly regulated economy, backroom comments have a tendency to be taken seriously.
    Attys indicated that the risk of disallowing MEPs may result retroactively in fees, fines or penalties to those plan sponsors that rely on the trust company for annual 5500 returns and potential audit requirements.

    Personal Background Information on the Issues behind the Group Insurance Trust Disallowance
    The following are the key features within the group insurance trust that ran afoul of the DOL:

    1. Lack of Pooling for Incurred but Unreported/Reported, but Unpaid Claims – In the first year of taking over any group medical insurance plan, you take in 12 months of premiums and usually payout only 8 months of claims, the difference of which insurance companies typically place in a pool towards the day when a plan leaves and the reverse is the case. The self-insured trusts that I am familiar with never established those pools and in effect lowered the premium rates accordingly based solely on paid claims, in order to maintain a constant incoming pool of new employer plans. If the pool stopped growing or new plans failed to materialize, the net premium costs were insufficient to cover current claim flow much less claim runout on former clients.

    2. Failure to Provide Transferred Benefits Coverage – As a self-insured pool with limited assets, based solely on premiums paid, the worst case scenario was one where they got hit by a number of catastrophic claims, wherein they had no pool or cash reserves like insurance companies. At a personal level, I had an employee of mine place a small 10 life case (Chemtan Company – Exeter NH) within one of these pools, where a spouse happened to be pregnant and went through a difficult delivery and major infant problems totally somewhere in the vicinity of $250,000. The group insurance trust held that this was an uninsured loss and refused to pay. The State Insurance Commissioner became involved and went after my business and me personally, where I fortunately had E&O coverage to cover the liability.

    It was my understanding that this was not an isolated situation and eventually resulted in the DOL becoming involved with the end result referenced above.

    How can this be even remotely comparable to the Multiple Employer Plan situation?
    The only identical factors here are the presence of a trust element and administration/recordkeeping:

    1. In the DC World the Asset Base Is What It Is – Money transferred into the MEP from individual plans becomes the beginning balance negating the need for any pooling element.
    2. No Limit on the Account Balance Transferred – Therefor no limitation of benefits from the onset of the transfer.
    3. On termination from the MEP, 100% the closing balance is transferred to the successor provider
    4. Where is the Potential for Liability? – As compared to an individual plan, MEP participants have a trust company overseeing the plan document and acting as a directed trustee, whereas in most small plans these duties fall to the Plan Sponsor. The trust company provides an annual audit for all plans regardless of size, whereas most small plans under 100 participants have no independent audit. If a Plan Sponsors fails to meet minimum compliance standards, the IRS allows a MEP to remove the damaged plan from the MEP; and the trust/TPA/recordkeeping services are in place to provide ongoing service. If a Plan chooses to leave the MEP for one reason or another, then all assets and account records are transferred intact. Given the number of MEPs currently in place, either independents or insurance company sponsored, there is always the chance that the DOL might negate the MEP concept, but would have to mollify an always substantial and well-funded insurance lobby.
    5. What about failure to file 5500s and Audits? – One would think however that like the group medical insurance trusts, the DOL would allow Plan Sponsors to unwind from the MEP without fees, fines and penalties, as none of the current plan sponsors are operating in violation of specific DOL rulings, but merely transferring fiduciary liabilities and responsibilities to the professionals like plan sponsors did in managed fully-insured insurance care programs and in using mass buying power to narrow the aggregate cost of benefits gap with the large plan market. At the end of the day, we have a trust company overseeing and blessing the entire process, where one assumes that they as MEP Sponsor have some liability should the worst case scenario occur.

    Where is the industry in this process?

    In terms of ou MEPs, we have a trust company willing to sponsor the MEP. We have national recordkeeping firms ready to provide the complicated trading and custody role, based on active engagement at the Federal level. We have national advisory firms working with insurance companies to run MEPs through its proprietary TPA admin only firm. We have nationally recognized ERISA practices (Rosenbaum Law Firm) actively supporting the development of MEPs , as a win-win solution. We have national trading and custody firms (TDAmeritrade and Matrix) working diligently to secure this type of business.

    In a Win-Win Scenario who are the Losers and Winners?

    Service providers that support individual retirement plans are losers. I remember when interstate banking and utilities were approved in New England. All of the regional banks and utilities were bought up and merged into large out-of-state conglomerates, where all the regional service providers lost out on that sizeable business base.

    The Plan Sponsors are winners, because they go back to doing what they enjoy and are most profitable at – making widgets. Plan Participants are winners, because the aggregate costs of running a plan in this economy tend to fall heavily on the Plan Participants. “Net cost drives change in the retirement industry and Size Matters!” If professionals are running the plans and making the investment decisions on the part of the Sponsor in a 3(38) capacity and Plan Participants are happily engaged fishing, golfing and boating while invested in Fund-of-Fund products, who will complain to the DOL and motivate them to take action, as there are no losers here!

Leave a Reply

Your email address will not be published. Required fields are marked *