For some time now, readers have seen Terry Power quoted frequently in many a FiduciaryNews.com article. Ever since we first met him at the 2012 fi360 Annual Conference, we’ve considered Terry one of our pre-eminent “go-to” guys when it comes to all things MEP. He is the Founder and President of The Platinum 401k, Inc., the independent marketing organization of American Pension Services, LLC located in Clearwater, Florida. Terry has been in the retirement plan industry since 1981 serving as an adviser, a retirement plan wholesaler, and a fee-for-service third party administrator. He is a frequent speaker at industry functions and has provided testimony before the United States Department of Labor ERISA Advisory Council on the subject of Outsourcing Employee Benefit Plan Services.
FN: Terry, we always like to give our readers a chance to discover how past experiences have led our interview subjects to where they are today. What are some of the highlights of your fascinating journey?
Power: Thanks for the opportunity to discuss my background, Chris. Like yourself, I’m a native of Western New York. I fled the cold weather and a lackluster economy back in 1985 where I had worked for several years as an investment broker with Dean Witter Reynolds and relocated to the Tampa Bay area. In 1990 I joined Manulife Financial (now John Hancock in the U.S.) as a retirement plan wholesaler working with brokers and advisers both locally and in southeast Florida. I left Manulife in 2000 to establish American Pension Services in Clearwater as an independent, fee-based third party retirement plan administration and consulting firm. I am the President of American Pension Services, LLC and also The Platinum 401k, Inc., the multiple employer plan marketing arm of our firm.
Our location in the Tampa Bay area helped to develop our expertise with multiple employer plans. I often note that we became “experts by proximity,” as much of the initial development of the Professional Employer Organization (PEO) industry – which were originally referred to as Employee Leasing Companies – began here in the Tampa Bay area. In 2002, the Internal Revenue Service issued Revenue Procedure 2002-21 which required PEO’s to utilize multiple employer plans as their retirement plan solution for their client organizations (adopting employers). By working closely with PEO’s, we gained years of experience with multiple employer plans, both regarding the legal framework as well as the operational details that are so critical in practice. We continue to provide third party administration services to PEO’s across the country to this day.
FN: Just to make sure everyone is up to speed on the subject matter, can you describe in simple terms what a 401k MEP is and what makes it an attractive option for companies?
Power: A 413(c) multiple employer plan is a defined contribution plan which, by its very definition, is composed of companies who are not directly related. A 401k MEP – not to be confused with a “multi-employer defined benefit plan” – functions fairly similarly to a traditional 401k plan, except most of the duties and responsibilities of running the plan falls to a third party. This allows the employer to effectively “outsource” many of the fiduciary duties associated with sponsoring a traditional retirement plan. These duties can include investment selection and monitoring, plan document amendment and restatements, approvals of hardship withdrawal/QDRO/beneficiary payments, filing of annual IRS forms, plan trustee and Plan Administrator duties, and much more.
FN: That sounds like a fairly attractive proposition. Does the 401k MEPs have a downside? Who is best served in a 401k format? What might be an example of an alternative?
Power: The main issues with MEPs are that they’re pre-packaged in terms of how they operate. The 3(38) Investment Manager has been named, the investment lineup has been set, and the various service providers have been contracted. A well-structured MEP can still allow for significant flexibility in plan design, and also allow a choice of investment providers. However, if the client is insisting on using a certain product or service provider, they’re probably going to be better served outside of a MEP arrangement. We view the MEP as the “value meal” option to feed your retirement plan hunger. It’s prepackaged, and as such there are minimal decisions to be made, and there are usually some pricing concessions. The “a la carte” or “off the menu” option would be a 3(16) Plan Administrator format outside of a MEP. In this type of structure, the client has more options available to them. We provide both services to clients. It’s really up to them as to which makes the most sense.
FN: What are the differences between a closed MEP and an open MEP?
Power: A “closed MEP” is a multiple employer plan where there is some “commonality” or “nexus” between the companies who adopt onto the multiple employer plan. A few examples of this would include a plan sponsored by an association for their members, or a Professional Employer Organization (PEO) plan. These plans only need to file one global Form 5500 and have one annual plan audit regardless of the number of adopters in their plan.
An “open MEP” simply means that the “commonality” or “nexus” isn’t there between the adopters. Under a Department of Labor advisory opinion that came out in 2012, open MEP adopters are treated as individual plans in terms of reporting and other requirements. This means that each adopter is required to file an individual Form 5500 on an annual basis, and if necessary, an annual audit must be performed at the adopter-level. The Form 5500’s are typically filed by the MEP’s 3(16) Plan Administrator on behalf of the adopter, by the way.
In either situation, the worksite employer eliminates their trustee-level liability (since they’re not a trustee) as well as investment fund selection and monitoring duties. Many MEPs will use an unaffiliated ERISA 3(38) Investment Manager to provide an additional layer of protection for both the MEP and the plan participants. Many programs also incorporate a 3(16) Plan Administrator who has a fiduciary obligation to oversee many of the operational aspects of the plan. This eliminates the need for the employer to become skilled on evaluating QDROs, approving hardship withdrawals, maintaining and amending plan documents, approving beneficiary payouts, creating annual notices to participants, and much more.
A MEP – whether open or closed – can help the employer run their retirement plan in much the same manner as they handle all of their other employee benefit programs: they choose a provider, the provider assumes responsibility for the operation of the program, and the employer evaluates the program on an annual or more frequent basis. This is how most Worker’s Compensation, Group Health, Group Life, Dental, Vision, etc. plans all work. 401k Plans will eventually work in much the same manner once pending legislation fully embraces these programs in an effort to help close the “retirement gap” in our country.
FN: How did the 2012 DOL Advisory Opinion letter change the landscape of MEPs?
Power: The Department of Labor Advisory Opinion 2012-04A clarified the U.S. Department of Labor’s position that they treat each individual adopter in an open MEP as a separate plan for reporting purposes. This meant that we, as the third party administrator for the MEP, would need to prepare and file an annual Form 5500 for each adopter. Also, any adopter who had a sufficient number of employees to qualify for an annual plan audit would now have to have their own annual audit (as they would if they had a stand-alone plan).
It was interesting to notice after this advisory opinion came out that less than 20% of our adopters were “audit clients.” Our average adopter size at that time was around 80 employees. That meant that 80% of our clients came to us not because they were trying to “dodge the audit costs,” but because they just wanted someone to run their 401k plan for them. Just like they do all of their other employee benefit programs.
FN: Other than compliance, what are some of the operational challenges facing the creation and maintenance of MEPs?
Power: It’s a very complicated and narrow part of the ERISA landscape. If you’ve got 26 years of dealing with multiple employer clients like we do, they’re not extremely hard to deal with. When we hit the marketplace with our Platinum 401k program over five years ago, we seemed to give birth to a number of competitors very quickly. It became very obvious that most of these folks had zero experience with these types of plans. I expect the same problems to arise once Congress approves the pending legislation (which the President’s proposed 2017 budget has already allocated $100 million towards). My best advice is that if you don’t have the background in working with these types of programs, it’s not something that lends itself to on-the-job training.
FN: You’ve been heavily involved in Congressional Hearings on the subject of MEPs. Share with us some of the insights you’ve picked up from these activities. How long has Congress been interested in this subject and who are the key players involved? Where does the proposed MEP legislation rank in terms of priority?
Power: There have been several hearings on Capitol Hill on the subject. I was invited to make a formal presentation before the U.S. Department of Labor’s ERISA Advisory Council in August 2014 on the subject. The findings of the Council appear to reflect that they appreciate the many benefits associated with the expansion of multiple employer plan solutions in the marketplace.
There has been a bill of one sort or another in Congress for at least the past four years. Senate Finance Chairman Orrin Hatch is one of the leading proponents of expanding open multiple employer plans. His committee has a bi-partisan recommendation to move forward to expand these types of plans. Senators Collins and Nelson also have a bipartisan bill that offers some terrific benefits.
At this point, it’s really not a matter of “”are they going to do anything?” but more of “when will the bill get through and be signed into law?” The wheels turn painfully slow in Congress, but it would not be unreasonable to think that we could see a bill on the new President’s desk as early as this time next year.
FN: You’ve earlier outlined some of the concerns with the current state of MEPs. How does it appear Congress intends to address these?
Power: The proposed legislation should take away the “commonality” requirement in open MEPs, meaning that the individual Form 5500 filings and individual annual audits will become a thing of the past. I also believe that – depending on which political party controls the legislature – multiple employer plans as a solution for the upcoming state-sponsored retirement plans for private sector employees will be eliminated. The resources and expertise for running retirement plans for private sector employers exists just fine under ERISA, and in my opinion, that’s exactly where these plans need to remain.
FN: Turning to the subject of the DOL’s new Conflict-of-Interest Rule, there are some who suggest complying with this Rule may increase fiduciary liability on the part of plan sponsors (who must monitor the integrity of the now mandatory disclosures from service providers). In what ways does the DOL’s new Rule impact MEPs both in terms of the individuals running the MEP and the relative attractiveness of the MEP alternative to current 401k plan sponsors?
Power: I’m not an attorney, so these are just my own thoughts: I think the “Best Interests Contract” exemption is a plaintiff’s attorney’s dream. Reading between the lines, it just looks to me that the Department of Labor wants everybody who is involved with helping Americans save for a secure retirement to have an acknowledged fiduciary status so they’re on the same side of the table as their client. Some advisers or brokers don’t have the knowledge or experience (or ability) to become a fiduciary. That’s where a well-structured multiple employer plan can be a great solution.
In our program, there are three separate and unrelated plan fiduciaries who oversee the investments, plan operations and administration, and the service providers. I think the separation of the three entities is critically important as a way to protect the plan and the plan participants for a variety of reasons. Some of the industry’s top ERISA attorneys have opined on this very subject in great detail over the past few years. I’d encourage anyone interested in learning more about this to spend a little time researching the subject. Separation of fiduciary duties is a critical component of retirement plan success.
FN: Let’s end with a couple of predictions. First, policy makers have complained about the lack of availability of corporate retirement plans. This has prompted many states to consider offering the alternative of sponsoring their own private employee retirement plans. How might broader use of MEPs both address the “lack of availability” problem head-on and obviate the need for state-sponsored private employee retirement plans?
Power: I think Congress will take care of the state-sponsored plans through a legislation solution at the same time they expand the availability of open multiple employer plans across the country. I don’t see them being implemented.
FN: Second, picture the retirement world of the next generation. Why might MEPs become the new standard for delivering retirement plan to private companies? Under what special circumstances would you see an individual company justify continuing their own plan rather than joining in with an MEP?
Power: MEPs bring the employer’s retirement plan right in line with all of their other employee benefit programs. The employer selects a provider, and the provider handles the details. There is no upside for an employer doing everything perfectly with their retirement plan. The downside risk, however, can be huge. It’s a risk that just isn’t worth the employer taking.
The only companies in the smaller end of the market (under 5,000 employees) who wouldn’t want to at least consider a multiple employer plan solution years from now are likely those who have a very demanding need for specialized investment options that just wouldn’t be typically found in a MEP portfolio. I think it will be very unusual for a plan sponsor not to at least consider a multiple employer plan solution after all the dust settles in Congress on these programs.
FN: Are there any other thoughts on the new Rule you’d like to add?
Power: My only thoughts really deal with observing the legislative and lawsuit challenges that are certain to come on the Fiduciary Rule. It will be fascinating to read the arguments that will be made by opponents of the rule as to their reluctance and outrage of being placed on the “same side of the table” as the investing public.
FN: Terry, you’ve been very enlightening and we appreciate you taking the time to share with our readers some of the fruits of your unique experience in the 401k MEP world. We look forward to continue this ongoing discussion and can’t wait to see the future unfold for 401k MEPs.