It’s Time for 401(k) Plans to Become Part of the Sharing Economy
By Charles G. Humphrey
Anyone who works with small 401(k) plan sponsors knows that they have none of the time, patience, skills or desire to be plan administrators or ERISA fiduciaries. Regardless of this, the law tasks them, whether they ignore them or not, with significant responsibilities and creates financial risks for them.
Over the last few years there have been those of us in the industry who have advocated for a better way – one that eliminates the fiduciary dysfunction we currently see in the small employer market. The better way is through the aggregation of the plans of unrelated 401(k) plan sponsors into single plans called multiple employer plans.
Terry Power of the Platinum 401(k) and Pete Swisher of Pentegra are huge and continue to be effective advocates of this highly beneficial way of providing 401(k) plan benefits.
This better way has the following objectives:
Reduce the employer’s exposure to fiduciary liability as much as possible
Put plan administration burdens entirely on a professional administrator with benefit plan expertise
Keep the expenses of the arrangements at economical levels through the aggregation of the plans of unrelated employers.
You might call this better way the sharing economy or the “Uberification” of 401(k) plans.
We were almost there five years ago. But the then the U.S. Department of Labor decided, in two advisory opinion letters issued in 2012, that so-called open multiple employer plans (plans with participating employers who are related to each other only because they participate in the plan) had to be treated as separate, single employer plans under DOL rules. Under DOL rules annual reporting, audit, and bonding purposes is done on a separate employer-by-employer basis even though the employers are on the same administrative platform. The air went out of the balloon for open multiple employer plan arrangements in that year.
Multiple employer plans are distinct and different from multiemployer plans that are created for union members under collective bargaining agreements. I am focused on multiple employer plans in this piece.
RESA would bring open multiple employer plans back to life in the form of an arrangement called a “pooled employer plan” or PEP.
There things sat until last year when a truly miraculous bill came out of Senator Orin Hatch’s Senate Finance Committee on a non-partisan 26-0 vote. Called the Retirement Enhancement & Savings Act or RESA (Senate Bill 3471), the bill would achieve the “better way objectives’ mentioned above. Not only that, it would do it in a way that is flexible and fair and allows unrelated employers to band together to create economies of scale, reduce their own individual burdens, and limit their own fiduciary responsibilities.
How can small employers reap the advantages of RESA?
It’s pretty easy. They must sign up for (participate in) and arrangement called a “PEP” that has the following characteristics:
The provider of the arrangement must agree to be the administrator of the plan and the plan’s “named fiduciary” under ERISA. These folks are called “pooled plan providers,” or “P3s.”
The provider must agree to appoint a trustee to handle plan funds and who is responsible for the collection of contributions.
The provider of the arrangement must explain to participating employers what their own responsibilities are as to the plan.
Do PEPs impose any responsibilities on participating employers?
Yes, but they are limited.
They are these:
They are responsible for the initial selection of the pooled plan provider as a plan fiduciary under ERISAThey are responsible for the transmission of census and compensation date to plan
They are responsible for the remission of contributions.
They may have some responsibility for the transmission of some communications to employees regarding the plan.
The extent of the responsibility should be clearly set out in plan agreements.
What about plan design flexibility? Is that lost in a PEP?
There is no reason it should be. Individual employers will have the freedom to design eligibility, contribution, and vesting features, as they like, subject to any contractual and administrative limitations of the P3.
What about plan investments?
The P3 would provide a menu of investments offered to the employees of participating employers that it selects.
Pooled employer plans will fundamentally alter the smaller plan market for TPAs, advisors, and others if RESA becomes law.
If RESA becomes law, when will it become effective?
January 1, 2020 is the currently proposed effective date.
Will RESA become law?
Nobody really knows. The bipartisan fashion in which RESA came out of the Senate Finance Committee last falls augers well for passage. Some have said it could be attached to the next continuing resolution in April and become law in that way. On the other hand, Congress has more pressing matters before it. So the bill may fall by the wayside as it did late last year when Congress simply ran out of time to take it up.
Contact me with your ideas. I chair an American Bar Association committee that is closely following this legislation. We like to get constructive ideas and thoughts before Congress.
If you have any thoughts on this important piece of legislation, please contact me at firstname.lastname@example.org or 978-688-2162.