Morningstar - Summer 2019 - 22

Dispatches

through the plan. These improvements would
make small-employer retirement plans better and
might even expand the number of employers
willing to extend retirement plans to their workers.
Labor Department's Proposal Is Limited
Last year, the Department of Labor proposed
expanding MEPs-at least somewhat.
The proposal isn't comprehensive enough to create
sweeping changes. Nonetheless, if finalized,
it could induce a few more entities to offer plans,
possibly increasing retirement coverage
and improving the quality of the retirement plans
for some small businesses. The most significant
impact of this proposal might be that it
gives professional employer organizations (which
offer companies a way to outsource human
resources services) a leg up in offering
MEPs and might encourage more employers to
join such organizations.

The reason the Labor Department's proposal is so
limited is that to introduce MEPs on a broader
scale, Congress must amend a few parts of the
Employee Retirement Income Security Act. At
least, that is the Labor Department's longstanding
view of its authority under the law.
As a result, the Labor Department's proposal
doesn't empower insurance companies, broker/
dealers, recordkeepers, or third-party
administrators to offer plans. In contrast, most of
the bills pending in Congress contemplate
such entities becoming "pooled service providers"
to offer and market MEPs.
The Labor Department's proposal would expand
the availability of MEPs in two novel but
incomplete ways. First, the proposal empowers
professional employer organizations to offer MEPs.
Second, the proposal provides additional guidance
to employer groups and associations and
makes it clear they can act as employers in running
a MEP for their members.
Still, the Labor Department's proposal would bar
any completely unrelated companies from
forming MEPs. However, it would make it easier
than it is today for companies to band
together to offer retirement plans. For example,
the proposal clarifies that associations of

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Morningstar Summer 2019

employers in the same trade, industry, line of
business, or profession can offer MEPs.
And the proposal empowers associations of
unrelated businesses in the same city,
metropolitan area, or state to offer a MEP. That
means that local chambers of commerce
(which are geographically based associations)
could more easily sponsor a MEP under
the proposal.
Just as notable as what's in the proposal is what
isn't. The proposal doesn't address the "one
bad apple" provisions that have discouraged plan
sponsors from joining MEPs. The one-bad-apple
rule means that if one employer maintaining the
MEP fails to satisfy all the requirements of
ERISA, then the plan could lose its tax preferences
for all the other employers. The Treasury
Department has said it would address this rule,
but it's unclear to what extent the department
could fix it without congressional action.
Legislation Would Be Much More Sweeping
Several bills in Congress-most notably the
Retirement Enhancement and Savings Act-
contain a proposal for "open MEPs," which would
go much further than the Labor Department's
proposal by eliminating two barriers that
prevented employers from joining MEPs. First, the
legislative language would remove the common
nexus requirement, enabling unrelated employers
to come together to offer a retirement plan.
Second, the language assures employers that the
entire MEP will not lose its tax-favored status
due to the actions of just one member employer.
The legislation also creates a new entity: a pooled
plan provider that will act as an administrator
of the plan and serve as a fiduciary.

Open MEPs would be an exciting policy change,
but it is far from clear how they would work
in practice. How appealing open MEPs are to small
employers and how effective they are at improving
the quality of retirement plans depend a lot
on how the industry reacts-and at least a little
on how regulators nudge MEPs along. Further,
regulators will have to balance concerns about
ensuring these plans are sound and well-regulated
with making certain they are appealing
enough so that the industry promotes and uses
them. This leaves major questions unanswered:

Can open MEPs reduce administrative costs?
The big question is, will open MEPs reduce
administrative costs by more than they
add to them, given the inherent complexity of
maintaining a plan with many employers?
Currently, according to our analysis of the Form
5500 (a required annual retirement plan
filing), small plans pay around four times as much
for administrative costs as do large plans,
and that number does not necessarily capture
administrative costs that participants pay indirectly
through fees for investments that are shared
back with retirement plan service providers.
Policymakers hope that open MEPs will drive down
costs as they help small employers form a larger
plan. However, there are some key challenges that
regulators and the industry will need to address
to see this theory work in practice in a system
with a lot of moving parts, particularly as the Labor
Department tries to reduce administrative
costs while ensuring the MEPs are well-regulated.
Would open MEPs reduce fiduciary liability, and if
so, for whom?
The MEP legislation is clear that each employer
retains fiduciary responsibility for the selection and
monitoring of the pooled service provider-
so the legislation does not reduce employers'
fiduciary liability in that sense. However, unlike the
relationship between single-employer plans
and their service providers, the pooled service
provider would be a named fiduciary of the
plan as well as the administrator of the plan. The
pooled service provider, in turn, will be able
to outsource investment decisions to another
named fiduciary.
While the arrangements that let a so-called 3(38)
fiduciary (named after the section in ERISA)
help select a plan's investment lineup are already
available, these fiduciaries may be much more
widely adopted as part of an open MEP as the cost
for high-quality advice is spread out over more
employers. The extent to which the MEP legislation
will relieve small employers of fiduciary obligations
depends on how MEPs evolve and what kinds of
guidance and regulations the Labor Department
promulgates-if any. For example, the department
Morningstar - Summer 2019

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