MEPs, PEPs & PPPs
by PETE SWISHER | September 15th, 2021
The retirement industry got two new plan types via the SECURE Act—pooled employer plans (PEPs) and “groups of plans” (GoPs). But proposed regulations issued on Sept. 14 might effectively kill the GoP provision as a useful product tool. This piece reflects the author’s first look at the proposed rule, not a detailed analysis.
On Sept. 14, the Department of Labor (DOL), working in concert with the Department of the Treasury, issued proposed regulations updating Form 5500 filing requirements and instructions. As part of the package of guidance, the Departments addressed the audit requirement in GoPs by killing the hopes of those who expected a GoP to have a single consolidated audit like that of multiple employer plans (MEPs).
From the Preamble to the “notice of proposed forms revisions”:
“After carefully considering [multiple] issues, the Departments decided to propose that a large plan that elects to participate in a DCG [Defined Contribution Group—what we are calling a GoP] must continue to be subject to an IQPA [independent qualified plan accountant] audit and that the audit report for the plan would have to be filed with the consolidated Form 5500 of the DCG reporting arrangement.”
Why it Matters—MEP Audits Are Consolidated
In a MEP, historically, there is typically a single audit for the entire plan under which each participating employer must undergo its portion of the audit roughly once every three years as part of a sampling routine under generally accepted accounting standards (GAAS). The practical effect of the plan-wide MEP approach is that both cost and workload for employers are dramatically reduced in a MEP—often 80% or more. Fans of the GoP concept were hoping that similar time and money savings would apply to GoPs.
The Rumor of the Death of GoPs May Be Exaggerated
A GoP is nothing but a specific type of service bundle that is eligible for an alternative filing method for the Form 5500 starting in 2022. The fact that this alternative method may not offer any utility doesn’t change the fact that the arrangement itself might still be effective. If it makes sense to offer a program in which every employer has the same funds, fiduciaries, and plan year, there is nothing stopping a vendor from offering it.
The logical alternative to a GoP is a PEP, and the DOL’s proposal—if it is finalized—will likely increase usage of the PEP structure. But some vendors—including some large ones, who are concerned about cannibalization of their existing books of business, among other issues—are not enthusiastic about PEPs. The GoP structure solves problems for vendors who are concerned about fiduciary burdens, build complexity, and the ability to price individual plans however they want versus according to a set fee schedule.
The bottom line is that, while the “group of plans” consolidated Form 5500 might turn out to be useless, many service providers will still pursue a group structure that is not a MEP. MEPs will have the edge in several ways, including with respect to the audit requirement, but service bundles may be the product choice for business reasons in many cases.
Call for Comments on the 1,000/100 Rule
The SECURE Act included possible relief for startup MEPs in that no audit would be required as long as the MEP had fewer than 1,000 eligible participants and no individual participating employer had 100 or more—the “1,000/100 rule.” But the SECURE Act did not create this rule explicitly—it simply stated, “The Secretary of Labor may allow simplified annual reports”—emphasis on “may.” In point of fact, the Secretary is not publishing such a rule at this time but is soliciting comments on whether it should.
Blanket Reduction in Audit Threshold
For those inclined to dislike audits and audit costs, good news was included with the proposal: a blanket reduction in the number of employers who qualify as large plan filers. (For the record, I am a big fan of audits if used wisely, though not crazy about the costs, which sometimes rival the entire cost of recordkeeping—which seems counterintuitive.) The mechanism is a simple rule change: instead of defining “eligible participants” for audit purposes to include all participants with balances plus all eligible employees who do not participate or have a balance, the new rule would only count those with balances. This change would apply across the board to all plans. The number of plans requiring an audit would therefore decrease.
The Single Trust Requirement
Another unexpected component of the proposal is that GoP assets must not only have a single trustee, as required by SECURE, but must also be held in a single trust. This “single trust” requirement is not mentioned in the statute but is consistent with the DOL’s approach to master plans. Sub-trusts are allowed, which should simplify the mechanics, but the requirement nonetheless would necessitate some retooling by institutional trustees and custodians. Moreover, it is possible that the SEC would view such a trust as not being a “single trust” for purposes of being exempt from registration under the ’33 and ’40 Acts, the effect of which would be that the trust must be a collective investment fund (CIF, often referred to informally as a CIT), with the attendant structural and compliance requirements and costs.
The industry has 45 days during the comment period to attempt to change the Departments’ minds. No odds are offered on the likelihood of success. Assuming the proposal stands and is finalized, it would appear that, while “exchange,” “aggregated” or similarly named group service bundles might remain alive and well, the actual GoP provision under Section 202 of the SECURE Act would probably slip quietly into the night. And PEPs might get an additional boost.