Multiple-employer plans, or MEPs, are all the rage these days, and some variation of the offering is expected to become law in the near future. MEPs allow smaller companies to partner up, thus becoming "larger" plans, and are marketed as providing sponsors with reduced fiduciary liability, administrative responsibility and cost.
However, there are also some restrictions around MEPs, namely that they provide a one-size-fits-all solution in a world where customization has become king. For that reason, there has been a movement toward the de-adoption of MEPs that is not only very real, but also sheds light on why MEPs are a good option for some plans and a poor fit for others.
First, MEPs are more complex than single-employer plans, especially from an administrative perspective. More moving parts can lead to more administrative errors that can be expensive and time-consuming to correct. MEPs may also require tracking of service and other offerings across all employers in the plan, which small employers may not be equipped to handle.
Furthermore, by definition, using a MEP means that participating employers have limited design and investment choices. MEPs may require all employers to adopt the same plan provisions and investment options even though the features that are suitable for some participating employers might not be right for all of them. For instance, an employer with many seasonal employees, who would otherwise be excluded from plan participation due to being part-timers, may be required to contribute a match in a MEP safe harbor plan because it signed on to a MEP alongside employers with different workforce demographics.
Perhaps most significantly, MEPs are more prone to abuse than single-employer defined-contribution plans. MEPs may have inadequate oversight because each participating employer has delegated so much responsibility to the employer that controls the MEP. And while the Retirement Enhancement and Savings Act will eliminate the much-despised "one bad apple" rule — which requires plan sponsors to bear financial and other risks for other participating employers that fail to satisfy their compliance requirements — it does not address the day-to-day mechanics of how MEPs will be monitored for prohibited transactions, misuse of plan assets and excessive fees.
So while MEPs can open up retirement plan options for very small companies — typically 15 employees or less — once an employee base is over that threshold, the unique needs of the company really come into play.
Take some real-world examples from companies we've connected with in the past few months. In one instance, a company wanted to include certain environmentally and socially responsible investment options in its lineup. Since MEPs don't have flexible investment options, the company was not able to add the options without moving to an independent plan.
Another consideration is plan design. For one company, this became an issue when it wanted to facilitate profit-sharing and, in doing so, add a more flexible eligibility investing schedule than its MEP supported.
Hidden fees is another issue we've seen. We spoke with an employer de-adopting its MEP who was not told up front that it would cost an additional 25 basis points to add in revenue sharing.
Small companies can learn a lot by asking the right questions and thinking about their short- and long-term vision for their 401(k) plans. After all, the goal is to best support employees not just today, but for their future as well.
Aaron Schumm is the founder and CEO of Vestwell.