The DOL caused a minor stir (minor, particularly when compared to the Fiduciary Rule reactions) when it  effectively gave the States a “pass” on the rules which otherwise prohibit unrelated employers from joining a single multiple employer plan. Interpretive Bulletin 2509.2015-02, allows States to set up these platforms without worrying about the “commonality” imposed by DOL’s rules (for a discussion on commonality take a look in the archives at my prior MEP blogs). A state sponsored MEP meets the commonality requirement because, according to the DOL, the “state has a unique representational interest in the health and welfare of its citizens that connects it to the in-state employers that choose to participate in the state MEP and their employees, such that the state should be considered to act indirectly in the interest of the participating employers.”

What drove this decision was the desire to support the States in their efforts at expanding retirement plan coverage, where such efforts have generally been encountering difficulty in a deadlocked Congress. MEP platforms  provide “scale” to small employers, giving them access to investments and expertise that small plans typically cannot get on their own. So, the wider use of MEPs should serve to increase retirement plan coverage, especially where it is mandated by a State.

Causing the stir was that the Interpretive Bulletin effectively reserves the ability to offer  these widely available MEPs to the states:  privately offered MEPs cannot avail themselves of the States’ “unique representative interest” in order to meet the commonality rule. This have given further impetus to the bi-partisan efforts in Congress change the DOL rules to permit the private market to offer these MEP platforms.

It seems, however, that the MEPs patina of “retirement plan nirvana” may really be rust in disguise, and all of these legislative efforts may not really be necessary to improve coverage-and the hoopla about State MEPs may not mean much at all. As much as I believe in the value of MEPs for related organizations, if you look closely at the details, achieving scale for unrelated employers through MEPs comes at an unnecessary price. First and foremost, they are hard to do (and I seriously wonder if any State will have the ability to properly run one, even when relying on outside vendors). The recordkeeping is difficult; employers can be surprised by the way vesting rules apply; care has to be taken in the allocation of authority;  it is tough and risky to disgorge bad acting players; and there are still a number of unresolved issues in their administration and in the manner fiduciary rules apply.  Though EPCRS grants significant relief in correcting errors, the MEP sponsor still needs to price for it having to pay for the errors of the participating members. In short, MEPS carry inherent risk for the MEP organizer and the participating employer.

A more effective alternative at providing scale than the MEP platform, and one which really is made possible by technology, is what the DOL describes in its MEP IB  as the “Prototype Approach,” versions of which are apparently being considered by several states.

The chosen platform’s ultimate goal is efficient scale to expand coverage, not blind commitment to the MEP platform itself. It is possible under the “Prototype Approach” to mimic all but one “scale” element of the MEP.  We can, and do, create a package that combines all of the MEP elements of common plan documents, service agreement, fiduciary allocation, and  investment platforms into a  standardized program for unrelated employers which provides scale like a MEP. It provides those small plans the buying power and access to expertise which are at the heart of MEPs, doing so without that platform’s inherent difficulties.  For example, each plan is still legally a single plan, where the underwriters (nor the other plans in the pool) bears the risk of disqualification; and the dealing with a difficult participating employer is straightforward.

The sole disadvantage is the filing of a 5500 for each plan,  and an audit for each of the large plans.  With a simple regulatory change to the Form 5500 rules which would permit a single joint filing not unlike a Group Insurance Arrangement, a change which is well within the authority of the DOL under  29 CFR 2520.104-23(a)(2), “Prototype Plans”  would, in all respects, be a better tool for achieving scale and expanding coverage than MEPs. And unlike MEPs for unrelated employers-which can effectively only be offered by the States after the IB (mentioned above)-the private market can offer these platforms.

Best of all, this change to enhance the Prototype platform would not require complex legislation change, or a whole new scheme of interpretive regulation which would inevitably be required bound to follow. It would alsoprovide enhanced regulatory oversight in a way that cannot be provided over MEPs.