The regulatory scheme governing the registration and sales of securities and the regulatory scheme governing retirement plan investments have historically developed separately from each other. The SEC and the U.S. Department of Labor’s Employee Benefits Security Administration (the “EBSA”) had worked independently of each other for decades, with their regulatory paths only occasionally crossing. Indeed, not only had there been little coordination between the SEC and EBSA, there had always been a bit of regulatory animosity between the two agencies.

The compliance marketplace has likewise developed separately, as the typical securities compliance staffs in financial services organizations have minimal relationship with the ERISA compliance staffs. The word “compliance” actually has greatly different meanings for the two different kinds of staffs.

It seems like ancient history now, but in 2008 the DOL and SEC began to address this with a formal Memorandum of Understanding Concerning Cooperation Between the U.S. Securities and Exchange Commission and the U.S. Department of Labor” (the “MOU).   This MOU resulted in the regional offices of the EBSA establishing regular and continuing relationships with their associated regional SEC Office on matters which “would be of interest to the other regulator in fulfilling their respective regulatory responsibilities”- occurring where either organization found themselves dealing with bad acting retirement plan advisers and broker-dealers.

The MOU covered several activities:

  • Regular Meetings
  • Points of Contact
  • Training
  • DOL Access to Non-Public SEC Examination Information
  • SEC and DOL Access to Non-Public SEC and DOL Enforcement Information.

I  encourage you to read the entire MOU. It really is pretty extensive. The processes implemented over 10 years ago are still very much working in at least a number of EBSA offices, with regularly scheduled meetings and the establishment of long term relationship between the personnel in both agencies.

The MOU could not, however,  address the substantial differences in the rules governing how either agency has dealt with retirement plan advice and product sales. Though they each sought to protect investors and plan participants, their activities continue to be disjointed by their very nature. Corporate compliance staffs, likewise, have generally continued to  reflect this disjointedness.

It is worth now considering, however,  the impact of this MOU on fiduciary enforcement with the publication of the SEC’s new Reg IB on fiduciary duties and the suggestions from EBSA that a a new fiduciary rule will be closely related to that of the SEC.

What will happen where you have two broadly empowered federal agencies working from what may be the same playbook (or at least very similar ones), where you already have a well established, coordinated cross-enforcement structure in place? It would seem that the potential is there for a substantial impact.


The Department of Treasury has fulfilled its portion of the directive under Executive Order (the “EO”)13847 by issuing its proposed regulation giving relief to under the “one bad apple” rule.

That EO had two MEP directives: the DOL was directed to propose regs which we permit unrelated employers to adopt MEPs (which it has done); and the Treasury was directed to issue rules which would prevent the disqualification of a Multiple Employer Plan under Code Section 413(c) should a single member of the MEP act in a way which would otherwise disqualify the plan. This is commonly referred to as the “one bad apple” rule, which has been cited as one reason small employers would not join a MEP-and thereby miss out on the advantages of scale. The IRS now refers to this as the “unified plan” rule.

Why the “unified plan” problem even occurs is because of the nature of the Tax Code’s MEP rules: each employer participating in a MEP is required to comply with the vast majority of the 401(a) rules as if they were in a stand-alone plan. However, if one participating employer in the MEP  is out of compliance, all of the employers risk the penalty of disqualification.

Sounds pretty draconian doesn’t it? Maybe not, because this rule has had a minimal practical effect. A senior Treasury official and I once were ruminating on this, and we both agreed that neither of us had ever seen a complete MEP disqualified because of it. Think about: when is the last time you’ve seen any plan disqualified?

The real issue with “bad apples” is the manner in which EPCRS applies. So, self-corrections (SCP) work well for most MEP issues, and the IRS’s newly proposed reg relief won’t impact that. The IRS has already covered MEPs for VCP, with the VCP sanction (which is the filing fee) being limited to that computed on the size of the “bad apple” employer, not on the entire plan. Even then, however, with the IRS’s substantial reduction in VCP filing fees for larger plans, VCP is a very affordable option even without relying on the EPCRS MEP relief.

This leaves CAP, which seems to where the rubber hits the road. The floor for sanctions under CAP for the MEP will, according to EPCRS, be the filing fee under VCP (though the IRS is now seeking a multiple of that fee as a CAP minimum). The real MEP problem is in the calculation of the “Maximum Payment Amount,” which includes the taxes which would be paid on all of the MEP assets, and the tax deductions of all the employers in the MEP.

But even the impact of this is limited by the  instructions under EPCRS for the CAP penalty. Part VI, Section 14 of EPCRS states that the ultimate sanction is a negotiated amount:

“If a failure (other than a failure corrected through SCP or VCP) is identified on audit, the Plan Sponsor may correct the failure and pay a sanction. The sanction imposed will bear a reasonable relationship to the nature, extent, and severity of the failure, taking into account the extent to which correction occurred before audit.”

EPCRS then lists a number of factors which come into play, which significantly argue for a penalty based solely on the impact of the “bad actor.”

The IRS has also treated MEPs well over time, and we  should not ignore the informal history of the broken MEP. The idea of being able to disgorge a bad actor from a MEP to preserve the MEP was the informal position of the IRS for years, as repeatedly explained by Dick Wickersham. Once Wickersham retired, so did this position.

My point in all of this? Yes, the proposed reg is welcome, of course, as a purely technical and structural matter. But the relief may be mostly illusory. The “bad apple” problem has always sounded worse than it is and may have been able to be  fixed by a simple adjustment to the Maximum penalty Amount rules under EPCRS, and to the rules as to who should be responsible for that penalty. The IRS may want to consider this change in any event, particularly where spin-offs don’t occur for any number of practical reasons.

The proposed reg is far from the panacea that the promoters may have you believe it is. This is most apparent in the proposed protocols for spinning off a bad actor. The most difficult logistical and legal challenges facing MEPs (OK, other than the DOL’s rules on “employers”) are in the forced spin-off of a recalcitrant participating employer. The IRS proposal only really addresses small part of what actually happens under these circumstances-all of  which will eventually need to be addressed. This may take a significant regulatory effort, especially if RESA/SECURE become law.

As the restatement process for 403(b) plans continues on, a familiar “vestige” of certain past practices of a major vendor continues to bubble its way to the top. That “vestige” is the 403(b) “Money Purchase Plan.”

It is a very common practice in the 403(b) market for an employer to specifically identify the percentage of compensation it will deposit as an employer contribution to their 403(b) plan: percentages as high as 8, 10 or 12% are not uncommon, especially in higher education. There had been a raging debate in the past as to whether or not this practice of identifying a specific percentage of compensation as the employer formula made the plan a “money purchase plan.” It has been typical for 401(a) plan sponsors to treat plans with set percentage of compensation as “Money Purchase Plans”, where the employer has not reserved the right to, instead, make it a discretionary profit-sharing contribution. But does this rule apply to 403(b) plans?

This is not an esoteric issue. If you truly believe that your 403(b) plan is a “money purchase plan” several things happen. What do you do if you want to merge this plan with another 403(b) “voluntary only” plan which many employers have maintained side by side with the money purchase plan? Can you merge them, and what are the recordkeeping requirements when you do? What rules will apply to this new plan? Most importantly, the joint and survivor and spousal consent rules would apply to money purchase ERISA 403(b) funds because the normal form of benefit under such plans is an annuity-which typically does not otherwise apply to the voluntary only plan with which it is merging. Even with no merger,  do the J&S rules carry on into the newly restated document?

It really had seemed like this issue has faded into obscurity, especially with most 403(b) prototype documents avoiding this issue all together. However, practitioners are now occasionally faced again with this issue as they restate their 403(b) docents to the new volume submitter/prototype documents. What do you do if the plan has been identified in the past as a money purchase plan, and the plan document follows the money purchase rules? And what if you run into an insistent vendor claiming that your plan is a money purchase plan?

I, personally, have always been of the thought there is no such animal as a 403(b)-money purchase plan. Code Section 401(a)27 requires that you specifically identify a plan as either a profit-sharing plan or a money purchase plan as a condition of qualification. However, 403(b) has no such rule, and there is no reference in 403(b) to 401(a) 27. There is no mention of it in the regs, and the only reference in the preamble to the 403(b) regs state that 403(b) plans are NOT subject to the money purchase distribution rules. Under ERISA 205, the J&S rules will apply if the Code’s minimum funding standard applies. But the Code’s minimum funding standards do not apply to 403(b) plans.

I suppose there is an argument that a 403(b) plan sponsor can opt into money purchase status, and thereby elect application of Code Section 412, but I’m not quite sure how you would do this. Nonetheless, there are still some who are insistent.

The practical answer is to pay attention to the J&S rules as contained in the underlying investment contract as you restate the document. Many of the contracts funding these plans require application of the J&S and consent rules as a matter of contract-not as a matter of law. Given that the 403(b) plan document incorporates the terms of the underlying contract as being plan terms, you will need to honor that rule-but only with regard to those investments.

This also means that you may want to consider being able to merge an old “money purchase” with that “voluntary only” plan, without having to carry over and track these J&S rules for the new plan’s assets other than for those transferred. Transferring those assets to a merged plan would not typically need participant (or spousal) consent, even in participant controlled contracts. But you likely will still need to follow the contract’s spousal consent and J&S rules on those transferred contracts-whatever they may be-but  only as a matter of contract, not as a matter of law.


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.

The Portman-Cardin Bill, the Retirement Security and Savings Act – 2019 introduces sweeping changes to 403(b) plans by expanding their investment universe. These changes, however, also required modification to the Securities Laws otherwise applicable to 403(b) plans in order for them to work. A few critical issues have gone unanswered in the legislation, and there are a number of transition issues which we will have to be addressed.

Technically, the Act expands 403(b) custodial account investments, permitting them to hold interests in 81-100 group trusts as well as mutual funds. (An 81-100 trust is a reference to Rev Ruling 81-100 which, as later expanded, permits the common investment of 403(b) funds and 401(a) funds in the same investment trust vehicle. It can include collective trusts). This change only works, as a practical matter, if the 81-100 trust is subject to the same securities law rules as 401(a) plans. Securities laws have always exempted 81-100 group trust interests issued in connection with 401(a) plans from registration. But that exemption has never applied to trust interest issued in connection to 403(b) plans. This has meant that any collective trust (such as those providing stable value funds or ETFs) would have to go through the expensive and burdensome process of registering (and maintaining itself) as an investment company subject to the Investment Company Act of 1940, the Securities Act of 1933 and the Securities Exchange Act of 1934.

The method the Portman Cardin drafters  chose to make this work is to introduce fundamental changes to the securities laws as they apply to 403(b) plan-across the board- effectively making all of the security law exemptions which have been available in the past to 401(a) plans also available to 403(b) plans.The practical effect? Should the legislation pass, 403(b) plans which (i) are governed by ERISA; (ii) if not an ERISA plan, the employer sponsoring the plan agrees to serve as a fiduciary with respect to the investments made available to plan participants; (iii) or is a governmental plan will be treated like 401(a) plats for Securities Law purposes. On a simple level, this means that the following investments would now be made available under 403(b) plans, where they have not been available in the past:

  • non-insurance stable value funds (these are largely funded by 81-100 collective trusts;
  • ETFs, which are also largely funded by 81-100 collective trusts;
  • non-registered separate accounts under group annuity contracts-of the sort typically purchased by 401(k) plans; and
  • because the 81-100 trusts are not required to own mutual funds, equity-based CITs will now be available as investments.

It also solves the “cash” problem 403(b) plans have always had. There has never been a simple way to handle stray cash in a 403(b) plan before this.

Simple seeming measures which are narrowly focused (here, it’s clear that collective trust interests have been the focus), often have unintended consequences when you take a broader view. A few things are conspicuously absent from the statute:

Who is the shareholder?  Exemption from registration is one thing. However, these newly authorized non-registered investments are still securities, still subject to a number of securities laws (for example, certain anti-fraud provisions). It has been a long-standing position of the SEC that the 403(b) individual participant is the shareholder who is protected by securities laws, even under group custodial accounts and group annuities. This is unlike 401(a) plans, where the SEC has traditionally viewed the plan fiduciary as the shareholder. This has forced prospectus, evergreen and proxy delivery to the individual 403(b) participant itself. Failure to comply with this rule is expensive: participants not receiving these disclosures are entitled to a 12-month put on their investments.

Portman Cardin needs to address this. If not, even under the new rules which do not require registration, the collective trustee (or the insure of the non-registered annuity) may still owe substantial legal duties to the individual participants under securities laws. Besides not addressing a long-standing securities law issue for 403(b) plans,  this could conceivably cause  a reluctance to engage in this new 81-100 business if this issue is not addressed.

Unitization under 403(b). The IRS has never answered the question as to whether or not you can pool permitted investments within the 403(b) plan and unitize that pool. For example, if you were to create an asset allocation model within the plan using the plan’s mutual funds and collective trusts, and created a daily value on that model, the new law pretty much makes it clear that that the pool will not have to be registered as an investment company (under current law, it has to be registerred unless you meet Rule 3a-4-and this another story). But it is nowhere clear that this unitization would pass muster under 403(b), as the unit of the pool would not be an 81-100 pool, it would not be a mutual fund and it would not be an interest in an insurance company separate account. Portman Cardin can simply address this.

Distributed annuities. The variety of law changes under RESA, SECURE and Portman Cardin put into play a number of rules would promote the distribution of annuities to provide lifetime income-including, for example, the authorization of the variable annuity QLAC. This used to be simple under 403(b)s, as they would all be registered. But what happens when you purchase a non-registered variable annuity within the plan, and then distribute it? Does it have to be registered? It does get complicated for the plan. Portman Cardin forces the issue, as we will have to address  this same problem in the 401(a) space.

Finally, there are a whole host of transition issues (well beyond the simple matter of collective trust registration) which really need to be vetted-and which typically are vetted through the regulation process. This will include answering intriguing questions related to how this would operate in state university and K-12 403(b) plans, which may have no fiduciary; won’t be subject to ERISA; but are governmental plans exempt from both ERISA and securities law registration. What investment information will participants now be required to be given?

Something which directs the SEC, IRS and DOL to draft regulations which address these issues would be helpful, as there certainly will be  a number of significant ones which arise- and the SEC seems to have been much more reluctant to issue regulatory guidance than the DOL and Treasury have in the past.



For all the noisy support being generated for the changes to Multiple Employer Plan arrangements in RESA and SECURE, little notice is being given to the provisions which are likely to have a much more meaningful impact on the ability for smaller plans to obtain the advantages of scale: the rules permitting the “Combined Annual Report for Groups of Plans.”

These rules are based upon old DOL regulations called “Group Insurance Arrangements (or “GIAs) for welfare plans under 29 CFR 2520.104-21, which permit unrelated employers on the same insurance platform to file a single Form 5500.  Under the proposed statutory language, retirement plans participating in a group arrangement could rely upon a single annual report filed by the common Plan Administrator, subject to requirements similar to that required of the GIA under 2520.103-2. This includes a single audit report by a single IQPA selected by the Plan Administrator.

Why is this going to be more impactful than MEPs?

Well, MEPs are hard to do. They are odd arrangements, subject to their own terms and conditions. In addition to the cross counting of years of service between participating employers, they require a centralized authority under the control of the members. It is also quite a task to remove an uncooperative MEP member.

Fintech provides us an out from all of this. Advances in technology really do permit us to aggregate plans on combined platforms in ways which replicate MEPs-without the arrangement actually being a MEP. Aggregating plans enable you to avoid all of those  problems that the MEP language in RESA and SECURE is awkwardly trying to address; and you avoid the logistical problems inherent in MEP operations.  You can aggregate plan documents, service agreements, investment platforms, investment advice all in a well priced package providing those advantages of scale which so often elude small plans.

The one thing that fintech CAN’T fix, however, is that each of the plans in the arrangement must currently file their own Form 5500s.  The RESA and SECURE language fixes this by allowing these arrangements to file a combined 5500. I suspect that this arrangement will be more welcome in the TPA community than a MEP. The central fiduciary under these arrangements is actually the Plan Administrator, not a lead sponsor, and the arrangement (except for the common Plan Administrator) already mirrors many of the existing  business practices of TPAs.

Here’s the proposed statutory language from SECURE, which is similarly found in Section 202 of RESA. It is striking in its simplicity, especially when compared to the MEP provisions:


(a) IN GENERAL.—The Secretary of the Treasury and the Secretary of Labor shall, in cooperation, modify the returns required under section 6058 of the Internal  Revenue Code of 1986 and the reports required by section 104 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1024) so that all members of a group of plans described in subsection (c) may file a single aggregated annual return or report satisfying the requirements of both such sections.

(b) ADMINISTRATIVE REQUIREMENTS.—In developing the consolidated return or report under subsection (a), the Secretary of the Treasury and the Secretary of Labor may require such return or report to include any information regarding each plan in the group as such Secretaries determine is necessary or appropriate for the enforcement and administration of the Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974.

(c) PLANS DESCRIBED.—A group of plans is described in this subsection if all plans in the group—

(1) are individual account plans or defined contribution plans (as defined in section 3(34) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002(34)) or in              section 414(i) of the Internal Revenue Code of 1986);
(2) have-

(A) the same trustee (as described in section 403(a) of such Act (29 U.S.C. 1103(a)));

(B) the same one or more named fiduciaries (as described in section 402(a) of such Act (29 U.S.C. 1102(a)));

(C) the same administrator (as defined in section 3(16)(A) of such Act (29 U.S.C. 1002(16)(A))) and plan administrator (as defined in section 414(g) of the Internal Revenue Code of 1986); and

(D) plan years beginning on the same date; and

(3) provide the same investments or investment options to participants and beneficiaries.

A plan not subject to title I of the Employee Retirement Income Security Act of 1974 shall be treated as meeting the requirements of paragraph (2) as part of a group of plans if the same person that performs each of the functions described in such paragraph, as applicable, for all other plans in such group performs each of such functions for such plan.

One of the more curious results of the failure of the Bipartisan Budget Act of 2018 to amend 403(b)(11) to provide for the same hardship relief that was granted to 401(k) plans is that the “hardship” distribution of 403(b) QNECs and QMACs aren’t really hardship distributions.

This has a very real practical and operational effect.

The IRS describe the rule  well in its preamble to their proposed regulation on the new hardship distribution rule:

“Section 1.403(b)–6(d)(2) provides that a hardship distribution of section 403(b) elective deferrals is subject to the rules and restrictions set forth in § 1.401(k)– 1(d)(3); thus, the proposed new rules relating to a hardship distribution of elective contributions from a section 401(k) plan generally apply to section 403(b) plans. HOWEVER (emphasis mine) Code section 403(b)(11) was not amended by section 41114 of BBA 2018; therefore, income attributable to section 403(b) elective deferrals continues to be ineligible for distribution on account of hardship.”

This means that

“Amounts attributable to QNECs and QMACs may be distributed from a section 403(b) plan on account of hardship only to the extent that, under § 1.403(b)–6(b) and (c), hardship is a permitted distributable event for amounts that are not attributable to section 403(b) elective deferrals. Thus, QNECs and QMACs in a section 403(b) plan that are not in a custodial account may be distributed on account of hardship, but QNECs and QMACs in a section 403(b) plan that are in a custodial account continue to be ineligible for distribution on account of hardship.”

This also means that a 403(b) QNEC and QMAC distribution is NOT accomplished under 403(b)’s hardship distribution rules. Instead, it is made under Reg 1.403(b)-6(b), under which amounts NOT attributable to elective deferrals can be distributed. The rule, under the 2007 regulations, is that such amounts in an annuity contract can be distributed upon the occurrence of a “stated event.” The plan can choose this “stated event” to be a number of things, including the attainment of a certain age or upon disability. It is simply a permitted in-service withdrawal, not a hardship distribution.

This seems to me to have at least four operational effects:

  1. First, it means that these amounts CAN be rolled over, unlike a 403(b)(11) distribution of elective deferrals, which cannot be rolled over.
  2. Secondly, the plan document language which will need to be amended is NOT the hardship section. Rather, it is the in-service withdrawal section of the plan document.
  3. Thirdly, and related to #2, the “financial need,” “deemed hardship” and other rules required of hardship distributions by statute or regulation will not apply as a matter of law, but only as a matter of chosen plan operational rules-which also gives you flexibility on the design of the plan language.
  4. Finally, the 402(f) notice needs to properly identify the tax attributes of this type of distribution, that is, that it can be rolled over.

This is what I could flush out as being the differences, but I also invite you to explore whether or not there are any other practical ramifications arising from this treatment. It is possible that it could impact things like disaster relief or other such provisions in the future, which calls for special treatment of hardship distributions-because this is, simply, not a hardship distribution.

This link is to the TAG Resources’ comment to the proposed MEP regulation which was filed with the DOL last week.

The comment letter addresses the DOL’s main concern in initially prohibiting non-PEO commercial enterprises from becoming MEP sponsors. The Department is concerned that allowing any commercial enterprise to sponsor a MEP  would turn ERISA into a purely “commercial” statute; that without the sort of employment sort of relationships that PEOs brings the table, ERISA is reduced from providing employment-based protections to merely a sort of “commercial insurance” set of rules.  The Department referred to the Association Health Plan (AHP) regulations to make that point. The Department wants the MEP sponsor to perform a “substantial employment function” to preserve ERISA’s fundamental employment-based purpose, and does not see how that exists in commercial practice. This is why, by the way, the DOL virtually pleaded for comments, to gather more information this point.

What we pointed out in that comment letter that this concern is really alleviated in the retirement plan market by three different circumstances:

  1. Unlike the AHP sponsor, the MEP sponsor itself is, after all, still a retirement plan Sponsor, and is  subject to the MEP service crediting rules for participation, vesting and benefit accrual (under ERISA Sections 202,  203 and 204-which AHPs, by the way, are not). This means that the Sponsor’s  own employees are affected by the adoption of the MEP. The MEP sponsors may not have to cover their employees by the MEP, but they sure have to count  and credit hours for its own employees (and those who work for participating sponsors) under the MEP. This becomes important if its employees go to work for a participating employer, or an employee of a participating employer goes to work for a MEP sponsor.  Consider the practical  impact on this should a large financial service company adopt a MEP.
  2. Ask any employer who has gone through a DOL audit or investigation: the Department views  maintaining a plan as a very serious employment based responsibility. Think of the employment related questions a sponsor needs to answer in an audit. Then just read the plan document, and see all of the employment related involvement which is required of  the named fiduciary, the plan sponsor, the plan administrator, and all of the non-fiduciary tasks which must be completed to make a plan work. Just think of the employment related issues that arise in the completion of the compliance side of an audit. Our point is that maintaining the plan is, in itself, a “substantial employment function” which the DOL says needs to be maintained in order to create that employment relationship necessary to act on behalf of the employer. Maintaining a plan on behalf of another is actually a heavy lift.
  3. Finally, the DOL made much about the mere “commercial” relationships that non-PEOs  bring into play, which somehow make it less tenable for them to perform the MEP sponsor task. That line of thinking overlooks the fact that PEOs are themselves commercial entities, and that they are looking after their own pecuniary interests-not the participating employers-when they sponsor a MEP, just like every other business. No, the real concern should be, and always has been, whether the pecuniary interest of the fiduciary overwhelms (and becomes primary over) the interests of the plan and the participants in its dealings with the plan. However, the operation of the prohibited transaction rules prevent this from being so. So, for example, a large financial service company which sells investment platforms is going to find it very difficult to make MEP sponsorship profitable, as the prohibited transaction rules will severely limit its ability to profitably make its platform available in the MEP it sponsors.

For all of these reasons, any company- whether or not it is a large financial service company or a smaller service provider-who can meet all of the MEP sponsor compliance rules should be permitted to sponsor a MEP, and the marketplace would be better for it. And ERISA would maintain its validity as a strong, employment based set of laws.

The DOL Advisory Opinion 2018-01 on the Retirement Clearinghouse shows the challenges presented by auto-portability in general, and specifically in the use of these types of IRA programs to accomplish it. The specific program, as described in the Advisory Opinion sets up a series of automated transfers of those “small amounts” forced out from retirement plans and into IRAs.  Ultimately, the program’s goal appears to be to prevent leakage of those small amounts by using fintech to facilitate those forced rollovers following the participant from employer to employer.

One of these steps in making the program work is the “automated” transfer from the “forced out” IRA into the new employer’s plan of the IRA owner, which the system found.

Here’s the difficulty, which is inherent to bulk IRA programs: IRAs are individually owned investment contracts, which are under the control of the former participant-even though they are set up by the former employer.  The program attempts to be able to make the transfer transfer to the new plan from the IRA through a “negative consent” notice and approval process. The participant will be notified of the transfer and, if they do not object, the funds will be transferred from the IRA to the new employer’s plan.

It appears from the Advisory Opinion that the program sponsor may have requested the DOL to rule that the negative consent would relieve the program’s sponsor from any fiduciary obligations related to that transfer. Even if it was not specifically requested, the DOL made it clear that negative consent will not suffice to relieve the program’s sponsor from the fiduciary obligations related to the decision to move the money from the IRA to the new plan. I don’t need to detail what fiduciary steps would then be required to make that happen.

This ruling on negative consent related to “plan” assets (which includes IRA monies) is actually a big deal, of which we should all take note when dealing with auto-portability.

Then there is that nasty problem of securities laws and other state laws which further complicates these types of efforts.  IRAs, unlike 401(k) plans, are NOT exempt from securities laws; nor are the investments held under the IRA (unless they are otherwise exempted securities, like certain bank deposits or fixed annuity contracts); nor is state law preempted. The question one always needs to consider when dealing with programs like this is how a fiduciary which is not appointed by the individual IRA holder has any legal authority to do ANYTHING with a registered security (or even any other investment) after it is set up by the original employer, as the investments are legally owned by the former participant. How can you effectively manage these arrangements?

It gets complicated.

My point is this: we are so accustomed to the exempted and preempted status of dealing with plan money, it is easy to overlook the fact that there is a whole range of other laws which come into play when dealing with IRA based auto-portability programs   It is, by the way,  similar to the sorts of problems we continue to have with 403(b) accounts  (which are also non-exempt securities), their related asset allocation models and related issues-a point on which I had previously blogged.

It’s worth repeating: It gets complicated.



The key to the DOL’s proposed MEP regulation is not so much the helpful and appropriate hemming in of the “commonality and control” requirements (those rules will apply only to group or association MEPs); nor is it that certain PEOs can generally be “employers” when acting indirectly on behalf of their clients in sponsoring a MEP; nor is it in the likewise helpful notion that participating employers are not co-sponsors (though they still retain certain fiduciary obligations with regard to the MEP); nor is it in the DOL’s new-found willingness to recognize important policy differences between MEWAs and a retirement plan MEP.

The key to the regulation is, instead, the DOL’s extensive request for comments. The mere fact that the reference to wanting comments appears on no less than 18 of the “pre-publication” pages is in itself telling.

For what is the Department asking comments? It has identified are two major, unresolved issues. The first is what should constitute a “corporate MEP.” We all are familiar with those arrangements, the most prominent being a single plan covering employers of what used to be a controlled or affiliated service group.

The second, however, is what seems to be the focus of the Departments attention: pooled employer plans, the classic MEP of unrelated employers which the Department declined to recognize in its seminal Advisory Opinion, 2012-04. The DOL has initially decided not to include this category of MEPs in the proposed safe harbor because it “implicates different policy concerns” than PEOs. And it is this upon which it appears to be seriously seeking comment.

The DOL is looking for insight on where you draw the line between a service provider purely serving its own narrow commercial interest (such as in the sale of DCIO products) and one which involves the service provider bearing some measure of the employer’s employment based legal obligations. According to the DOL, failing to draw this line correctly “would effectively read the definition’s employment-based limitation” out of the ERISA.

The DOL proposes drawing this line at the “substantial employment function.” Staff is clearly comfortable that PEOs which meet its criteria do perform a substantial employment function, even though still engaged in a pecuniary commercial enterprise.

This standard seems appropriate, and well founded in law-at least for “non-corporate” plans.

The question really to be answered whether a pooled service provider (lets call it the “PSP”) is performing a substantial employment function, as well, when sponsoring and controlling a retirement plan covering a client’s employees. The PSP, in doing so

  • performs most of the retirement plan obligations of a plan sponsor;
  • while being legally responsible for the employer’s formal 3(16) responsibilities and acting as the named fiduciary;
  • while performing the vast majority of the 3(21) administrative functions under the plan and maintaining the ERISA processes required under the plan;
  •  while having the authority to name other fiduciaries, including the 3(21) and 3(38) investment fiduciaries.

The satisfactory performance of these obligations requires the PSP to be integrally involved in the client employer’s employment practices. Think simply, for example, of the work that goes into hiring of the plan’s auditor and supporting all of the work and review necessary to completing the audit. The auditor’s management letter addresses the PSP activities.

These functions make the PSP much more like a PEO than a DCIO, and perhaps makes it even more closely aligned to the employer than the PEO. In fact, the Open MEP had its origins in the PEO industry, with the PSP willing to take on employer legal obligations that the PEOs were unwillingly to, themselves, bear.

DCIOs, on the other hand, draw strict limits on their liability, and strive to keep their involvement with their client employer’s employment relationships at a minimum (if extant at all). In contrast, an effective PSP needs a substantial and ongoing relationship with the employer in order to even adequately perform is function.

The DOL itself states in its proposed regulation that “access to an employment-based retirement plan is critical to the financial security of aging workers.” This makes it hard to argue that taking on the responsibility for employer-based retirement plans is not a substantial employment function.

One of the key  EBSA National Enforcement Projects (that is, a project driven by the national, not the regional, EBSA offices) is the “Plan Investment Conflicts Project.” You’ll hear DOL staff refer to it as the PIC project, and many of you have already run into it-maybe even without knowing it. It is the “next generation” of fiduciary compliance programs that the DOL has developed over the years, with this one building on those past programs which had looked at compensation conflicts, 408(b)(2)  compliance and 404(a)-5 disclosures.

What makes this program different? It appears to be using standard, plan level investigations to instigate reviews of selected practices of large financial service companies, as opposed to having to open large service provider investigations to get to the answers being sought.  To most plans, what their investment platform provider does in the operation of its plan is just a black box. What it takes to actually run these platforms in today’s market requires a high level of technical sophistication which is well beyond the ken of most plans to understand, much less review.

There is also a critical  dearth of public information out there which plan fiduciaries would need were they to do a significant review of those platforms. For example, did you realize that the Schedule C to the Form 5500 does NOT require the platform to disclose the amount of revenue sharing the provider receives from the plan investments? Schedule C merely requires that a formula be described,  and the typical fiduciary has little ability to generate an accurate number from that formula (the proposed Form 5500 revisions, now on hold, would have remedied that). Another example is the use of sub-transfer agent fees. The SEC Rule 30e-3, discussed in my last blog, also seeks to find more information on how mutual fund  sub transfer agent fees (including those generated off of ERISA plan investments)are being utilized, and to whose benefit. That information is not currently available to the fiduciary.

There has been some frustration in the past on DOL audits, where  the investigator would often feel the need to hold someone  responsible for something that was clearly under the control of the plan asset investment platform and not the plan itself. What seems to be happening now is that a practice of the investment provider which  is uncovered in a plan audit may be referred to the EBSA National Office, where its resources  are used to coordinate and assist in reviewing the practice of the platform-including between EBSA Regional Offices.

This Project is actually consistent with the growing notion that retirement plan investment platforms have become commodities, and sophisticated ones at that, for which the platform should bear greater  responsibilities instead of the sponsor. That notion has begun to take root, for example, with it showing  up in proposed MEP legislation.  However, re-balancing these responsibilities will not be an easy task and may eventually  require either statutory or regulatory change. But it does looks like the question is now being joined.