DOL Final Rule Reduces 401(k) Headaches for Small Employers

A new regulation implemented by the Department of Labor will make it easier for unrelated employers to reduce costs and duties of offering 401(k) packages to their employees by joining together in a single defined contribution retirement plan. 

Under the new rule, which will take effect Sept. 30, businesses in the same geographical area will be able to band together to provide a retirement plan, regardless of their industry. If the businesses are not in the same area, they can team up if they are in the same industry. 

Experts say defined contribution multiple-employer plans (MEPs) will help employers provide retirement plans to employees thanks to certain advantages, including an increase in funds under management, which lowers fees and allows employees’ assets to grow more over time. 

“The purpose of this rule and the reason we wrote this rule is because there are a lot of smaller employers in particular that would like to set up a 401(k) plan for their workers, but they don’t for a number of reasons. One is expense; probably an even larger problem of concern to a smaller employer is the administrative [duties], the paperwork and the IRS filings that go along with offering a 401(k),” said Preston Rutledge, assistant secretary of labor for the Employee Benefits Security Administration. 

The DOL went public with the regulation on July 29 and will take effect Sept. 30, 2019. Here’s a breakdown of what it means and how it works. 

What is an MEP?

An MEP, or multiple employer plan (also referred to as an association retirement plan), is a group retirement plan managed by two or more unrelated businesses. The plan presents an attractive option for an employer because it reduces some of the “responsibilities of sponsoring or administering its own plan,” according to the DOL. 

The plans will be offered through organizations such as local chambers of commerce or specific firms that manage human resources for businesses.

“Many small businesses would like to offer retirement benefits to their employees, but are discouraged by the cost and complexity of running their own plans,” acting secretary of labor Patrick Pizzella said. “Association retirement plans offer valuable retirement security to small businesses’ employees through their retirement years.”

The DOL also says another benefit of an MEP is that it can “reduce the employer’s cost of sponsoring a benefit plan and effectively transfer substantial legal risk to professional fiduciaries responsible for the management of the plan.”

An MEP also allows smaller businesses to give their staff access to the same low-cost funds as large employers offer because participants and assets are pooled into one large plan. 

“Open” MEPs vs. “Closed” MEPs

Before the DOL issued the final rule, only “closed” MEPs were allowed. This meant that only employers who shared common interests and/or organizational relationships were authorized to enter into an MEP together. 

“Open” MEPs mean employers of different industries to join together as long as they are in the same city, county, state or multistate metropolitan area.

A recent survey by Empower Retirement found that around 66% of small businesses who do not currently offer a retirement plan will likely consider an open MEP. 

What is the SECURE Act?

A federal legislation proposal similar to the new rule is currently awaiting action in Congress after being passed by the House in May. The SECURE Act, which stands for Setting Every Community Up for Retirement Enhancement, includes a section that would allow companies to team up for a plan without having any kind of commonality, other than the plan itself.

Remember this is not official legal advice. If you have any concerns, it’s best to consult an employment lawyer. 

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