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Litigation, scale push private colleges to adopt multiple employer plans

The movement to create multiple employer plans creates opportunity for retirement plan advisers

Apr 23, 2018 @ 10:22 am

By Blaine F. Aikin

Pioneers circled their wagons for mutual protection, and a new trend emerging in the 403(b) space employs a roughly similar tactic. Small and independent, nonprofit private colleges — in search of ways to improve the retirement outlook for faculty and staff, and mindful of regulatory and litigation risks — are banding together at the state level to establish multiple employer plans, or MEPs.

State associations of independent private colleges in both Virginia and Wisconsin recently established MEPs using 403(b) plans, blazing a trail that others may want to follow. Pennsylvania and New York are reportedly exploring their own MEPs.

Retirement advisers should take note of this development in the niche 403(b) market. There is more than $200 billion invested in the more than 5,000 403(b) plans established for public K-12 and higher education institutions. Moreover, it is a market in need of, and generally receptive to, professional advice. A TIAA survey of higher education employees showed half of university employees sought advice from a financial adviser within the past year, 39% of whom used an adviser working with their institution's retirement plan.

Forming a MEP is like organizing an old-fashioned farming co-op. By combining retirement plans, costs go down and the quality of services goes up. MEPs offer a turnkey process for establishing a plan document, reporting to the IRS, obtaining an independent audit and managing other administrative and compliance duties.

The combined resources of a MEP can give the schools collective access to a broader range of potentially higher-quality service providers and the ability to negotiate lower costs and better terms. It can also open the door to value-added services, such as more robust employee education, innovative tools and techniques to increase plan participation and access to personalized advice. And yet each school retains a degree of flexibility to tailor the plan to its circumstances and needs.

Taking note of the legal assault on big schools from class-action lawsuits, small schools see MEPs as an attractive way to pool resources to put stronger fiduciary protections in place. Some 17 nationally known universities and colleges, including prominent institutions such as Yale, Princeton, Duke and the University of Chicago, are fighting class actions in which plaintiffs allege, among other things, that plans imposed excessive fees and had too many record keepers and investment options. As these cases work their way through the courts, only one has been dismissed.

While 403(b) plans for public-sector non-profits are not subject to ERISA, private-sector plans are. The fiduciary frontier can be particularly unnerving for small private schools as they read the headlines about their larger brethren being hauled into court for alleged breaches of ERISA requirements.

Concern with potential class-action litigation is not the only factor driving small colleges to form MEPs. With scale comes buying power and potential efficiencies. At a time when school resources are stretched ever thinner, centralization of services has strong economic appeal. The Virginia plan will cover 14 schools with over 9,500 employees and $400 million in assets. The Wisconsin plan will begin with two schools — although with 24 members in the association, it has room to expand.

Big MEPs may result in some added visibility to litigators; however, plans the size of the Virginia and Wisconsin MEPs pale in comparison to the single-sponsor behemoths under siege in the courts. New York University, for example, has more than 16,000 participants and $2.4 billion in assets; Yale's plan has roughly the same number of workers and some $3.6 billion in plan assets. Moreover, given that better management of fiduciary obligations is a motivating factor behind setting up a MEP, the schools should be better able to steer clear of fiduciary breaches that can capture the attention of regulators as well as litigators.

Better fiduciary governance, improved plan attributes and lower costs are key factors in the formula for high-quality plans. The competition to attract talent to colleges' faculties is intense, and a top-notch retirement plan can help seal the deal.

Federal policymakers are also paying more attention to MEPs. The Small Business Add Value for Employees (SAVE) Act introduced last year encourages small businesses to sponsor retirement plans by easing requirements and includes changes to broaden the appeal of MEPs. The Department of Labor is also reported to be interested in regulatory reform measures for MEPs.

For pioneering small private colleges, at least, MEPs are attracting attention and gaining momentum. It may be time for enterprising retirement advisers to explore this territory as well.

Blaine F. Aikin is executive chairman of fi360 Inc.

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