As you can imagine, I have been asked by a number of folks of my thoughts related to the statements by the DOL in their brief for removal of the fiduciaries in the Hutcheson matter. Besides the observation that this sort of mischief could have (and does happen) regardless of the existence of a MEP, to my mind, its all about accountability. Lets explore this:
An employer, when directly acting for the benefit of its employees in sponsoring an ERISA plan, can do many things. It can delegate its fiduciary authority to a plan administrator responsible for doing those things (such as filing a Form 5500) which are legally required of the plan administrator; it can delegate the responsibility to properly operate the plan to a third party fiduciary; it can hire investment advisors, investment managers and all other manner of fiduciaries for the plan. It can even agree to become a co-fiduciary to a plan, or to appoint co-fiduciaries.
What it can’t do is to do these things in such a way to avoid accountability for these acts.
Similarly, what an employer also cannot do is merely entrust those obligations to a group or association to act indirectly on its behalf if that is accomplished by joining a group or organization formed solely for the purposes of joining the plan.
This last rule was established by interpretive fiat, because the unaccountable aggregating of ERISA assets which is possible when one attempts to merely entrust a group to act indirectly on its behalf can be fraught with all manner of risks for plan participants, as demonstrated by the MEWA cases.
Abusive MEWAS of the past three decades were designed to effectively rob participants of their promised, and paid for, health care coverage, in the cruelest sort of Ponzi schemes. They were designed to do this by attempting to collect and aggregate the premiums of several employers in a single non-regulated pool, which provided the scale necessary to pull the scheme off. They took advantage of ERISA’s lack (prior to PPACCA) of substantive requirements for health insurance, while effectively hiding the funds from state regulation-where all of the important participant and employer protections existed for health benefit arrangements.
Non-regulated “scale” was fundamental to these schemes working: without the ability to pool significant assets in one place, the arrangement would fail before sufficient (and ill-gotten) gain could be had to make it worth the effort. The DOL’s approach was then a simple and elegant one: prevent scale from happening in the first place. By requiring “commonality and control” of organizations acting indirectly behalf of employers, illicit organizations would be disrupted in their efforts to do harm.
Asset aggregation and co-fiduciary administration in the retirement plan world, however (and unlike in welfare plan world), is a highly regulated activity under ERISA, and has a long history. They have been consistently recognized and well governed from the inception of ERISA, and much earlier. Multi-employer plans; 413(c); ERISA Section 210; collective trusts; 81-100 arrangements; non-registered separate accounts; master and prototype plans; operating companies under the plan assets rules; are among many examples. Even mutual funds are a classic example of asset aggregation which is critical to the retirement world. In short, “regulated scale” is fundamental to retirement security.
Even then, applying the “commonality and control” rule to association based retirement plans makes a great deal of sense, as it may serve to limit the ease and availability of abusive arrangements (or structures which would lend themselves to abuse) where an employer seeks to appoint a questionable organization to act indirectly on its behalf, where it may mean that the employer is seeking to inappropriately avoid accountability for its actions. Allowing this to happen could undermine an important element in the effective regulation of “scale”-the oversight by, and accountability of, the employer.
But it is one thing to merely “entrust” employer actions to a third party appointed to stand in your shoes as an employer. It is quite another to directly and responsibly act as a fiduciary on behalf of your own employees (as permitted under ERISA 3(5)), to accept co-fiduciary responsibility (as permitted under ERISA Section 405) as a plan co-sponsor with ongoing oversight responsibilities. It would be incumbent on the employer adopting any particular MEP, for example, to make sure checks and balances are in place on the handling of funds, and to have ongoing access to data.
Not only then do you have “scale” in assets and professional administration (and all the benefits that can bring to a plan and participants); but “scale” in oversight, with a large number of independent fiduciaries responsible for overseeing the action of the appointed fiduciaries in the MEP.
On the other side of the fiduciary fence, we also recognize that small employers often provide the greatest compliance challenges. Imposing the oversight of a professional fiduciary under a MEP (in addition to the traditional administrative function of the typical TPA) serves well to protect the plan participant in these small plans which may otherwise be unavailable to them; provides audit oversight that typically would never happen for these small sponsors; while bringing these participants a level of investment choice and related services which only scale can bring at a reasonable cost.
In the end, the properly designed and well run MEP advances the policy of the small employer adopting plans, while providing a measure of protection against abuses. "Commonality" may be appropriately applied to limit the availability of MEP structures which may be vulnerable to abuse, but should it be broadly used to limit those which, by design, promote accountability?
Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.