State Retirement Plans (2.5 of 3) Carrots instead of Sticks — marketplaces, prototypes and “closed MEPs”
This is Part 2.5 of a 3-part series on state retirement plan legislation. Part 1 was an Overview. Part 2 focused on recent Department of Labor guidance making it easier for states to get a bit heavy-handed by mandating retirement plans for certain employees. This Part 2.5 focuses on additional DOL guidance clearing the way for states to build infrastructure for employers who want to offer retirement plans to their employees. It’s sort of like ACA-exchanges but with no employer mandate.
Here’s the refresher:
- Retirement security is a big deal and a crisis that is on the very near horizon—probably already here. See Part 1 for some cites.
- There isn’t much appetite at the federal level to get in this game.
- So states seem to be doing policy here. It’s a little like what happened in the health care space.
- Some states (like Illinois, etc.) are getting very prescriptive, mandating retirement plans for employees. See Part 2.
- Other states are looking at ways to make it easier for employers to offer retirement plans. That’s where we are for today’s post.
ERISA Preemption. So here we are back at ERISA preemption. We have to touch on this because it looms large in this series. ERISA preemption generally tells states not to mess with ERISA plans. (Here’s a link to ERISA section 514 on the amazing Cornell Legal Information Institute site.) And just about any broad-based retirement plan sponsored by an employer is an ERISA plan. The irony here (at least to ERISA lawyers) is that the state legislation itself might viewed as preempted. Not so, says the Department of Labor, both in the proposed regulations discussed in Part 2 and in the Interpretive Guidance discussed here.
The sort of state involvement we’re talking about today has states dangling carrots out to employers who don’t currently sponsor a qualified retirement plan. And the state ideas come in a few different flavors:
- Marketplaces. The DOL Interpretive Bulletin points to Washington State as an example for this one. Here’s a link to the legislation. (wa.gov) This is probably the easiest one to understand. A State establishes a web-based exchange of preferred providers for retirement plans of all sorts — from qualified plans to SIMPLE-IRAs. The benefit is that the vendors on the exchange have been subjected to some scrutiny by the state. (There’s no indication from the DOL that this creates any sort of presumption that the vendors would be acceptable to a fiduciary, but one might guess that it would be a good fact in any such litigation.) Not surprisingly, the DOL gives this sort of approach a thumbs up, noting that all the typical ERISA requirements would apply to the plans and, presumably, the individual employers. Think of these as ACA insurance exchanges for employers without an employer mandate.
- Prototypes. This one has a little more State involvement. The example here is a prototype plan established by the State of Massachusetts for the benefit of small nonprofit organizations. Here’s a link to the legislation. (Commonwealth of Mass) Prototype retirement plans are seen most often at financial institutions. They tend to be loss-leader vehicles to attract small retirement plan customers. Again, the DOL says OK. But wait … there’s more. The DOL also says “OK” to variations that would have the State assuming some responsibility (and liability) for the plans. For example, the DOL says the employer could appoint the State as the plan’s “named fiduciary” or “plan administrator.” The DOL even goes on to say that the state might designate low-cost investment options for the plan, suggesting that at least some investment selection liability could be shifted to the State.
- Closed MEPs. We think this is where the DOL reached a bit in order to get to “yes.” We’re pretty sure some of our friends in the vendor business would agree. Be patient. This one takes some explaining. There’s this thing called a “MEP.” That’s short for “multiple employer plan.” This is a sort-of alien creature, viewed one way by the IRS and another by the DOL. It’s the DOL we are concerned with here. MEPs are retirement plans sponsored by more than one employer. (They are NOT multiemployer plans.) MEPs come in several flavors. Here are examples from both ends of the spectrum.
- A so-called “Closed-MEP” might be established by a sponsor organization, such as a state medical association for the benefit of small clinics in the state. The Medical Association has no ownership or “common control” with the clinics or the physician-owners. But it wants to establish the plan to make life easier for its association members. In the DOL’s parlance, there is likely a common “nexus” in this example that ties the various clinics together. That means the MEP will likely be a “closed MEP.” Closed MEPs are often preferred because they are treated under ERISA as single plans and the sponsoring organization (in our example, the State Medical Association) can assume liability that would otherwise be placed on the individual employers. Administration of a “Closed MEP” is easier too in that there is only one Form 5500 filing required, a single SPD, etc.
- On the other end of the spectrum we have an “Open MEP” where there is no common “nexus” of interest. You might find an open MEP at a financial company that, as part of its business model, sponsors a MEP for any client that wishes to adopt the plan. “Open MEPs” don’t create an opportunity to shift liability to the plan sponsor and they leave various administrative tasks such as Form 5500 filings and SPD distributions in the hands of the sponsoring employers.
We don’t know where this all goes, but we are watching closely. These developments on the horizon could quickly turn into a trend that could impact employers large and small. Watch for some more editorial comments in Part 3 which will be posted in a few days.