Multiple Employer Plans: A Good Fit for the Franchise Industry

Article originally featured in Franchising World, January 2016 issue

Franchisees struggling to provide cost-effective retirement planning options for their employees should consider a multiple employer plan (MEP) for their 401(k) platform. These plans:

  • Take advantage of economies of scale and group purchasing power to offer reduced costs and improved benefits to participating employers and employees
  • Can relieve employers of many administrative burdens associated with sponsoring a qualified retirement plan
  • Transfer certain fiduciary duties and liabilities from the employer to the MEP plan sponsor

If you haven't considered a MEP for your 401(k) platform yet, I think those are three compelling reasons you might want to take a look.

What is a MEP?

A MEP is a single retirement plan – such as a 401(k) or pension plan – maintained by two or more employers. They may be sponsored by trade groups, professional employer organizations (PEOs) or third-party plan sponsors, or co-sponsored by a group of employers. MEPs should not be confused with "multiemployer plans," which are commonly seen among unionized companies.

In a MEP, individual employers remain responsible for ensuring that the plan is functioning properly and for conducting nondiscrimination testing on their own employee group. But the MEP assumes many fiduciary and administrative responsibilities, including responsibility for investment monitoring, annual audits, Form 5500 filings, trustee functions, and other administrative duties.

What are the benefits?

MEPs offer a number of significant benefits, including:

Cost savings. As I already noted, MEPs often enjoy economies of scale, enabling them to get better pricing on products and services. Perhaps more significant: participating employers save money by sharing the cost of annual audits. (Individual employers continue to bear the cost of certain other administrative tasks, though).

Improved benefits. By creating larger asset pools, MEPs may attract higher-quality money managers and other advisors, and provide access to investments that otherwise would be unavailable to participating employers on their own.

Time savings. Even if a MEP offers no cost or benefit advantages, the time savings alone may be reason enough to consider it, especially for a small employer. By shifting time-consuming administrative tasks to the MEP, the employer can devote more time to running the business.

Sophisticated technology. MEPs may offer access to sophisticated technology, such as online enrollment, account management and communication tools. This can be a big advantage for franchisees – particularly those with employees spread over multiple locations and high levels of employee turnover – making it easier to keep employees informed and boost participation in the plan.

Reduced liability. Typically, MEPs assume many of the fiduciary duties associated with sponsoring a qualified plan. But they don't relieve participating employers from liability altogether. For example, employers have a fiduciary duty to their employees to select a MEP that meets their needs and, over time, to ensure that the MEP functions properly and continues to meet employees' needs.

Handle with care

If you're contemplating a MEP, it's important to choose a plan carefully. As noted above, employers continue to owe fiduciary duties to their employees in selecting and monitoring a plan. So it's critical to conduct thorough due diligence before outsourcing retirement plan administration to a MEP. Be sure that the plan sponsor and any third-party administrators or advisers are qualified and that they:

  1. Have a good reputation in the marketplace
  2. Have filed the necessary paperwork to assume fiduciary responsibility for the plan
  3. Have the systems, processes and staff in place to meet their compliance obligations.

MEPs do come with some unique risks you need to be aware of. Because you are participating in a plan that allows multiple unrelated employers to participate, there is a risk that one employer in the plan could potentially "taint" the plan for other employers. This is known as the IRS's "one bad apple" rule, where an employer that fails to meet certain qualified plan requirements may jeopardize the MEP's tax-qualified status. There's been talk in Congress about eliminating the rule, but it's uncertain whether (or when) such legislation will be passed. Because of this, you'll want to:

  • Investigate utilizing a MEP just as you would any other investment platform/record keeper
  • Ensure you are working with a reputable organization willing to take on fiduciary responsibility for the MEP and its underlying participating employers

Not all MEPs are created equal, so be sure to review their fees, services and benefit offerings. Look for a plan that gives participating employers some flexibility in plan design. Although most MEPs offer a single menu of investment options, many of them offer flexibility in establishing eligibility and vesting criteria, and setting the level of matching contributions.

Focus on what matters

Many franchisees are smaller businesses that can't afford to invest a lot of time and money into setting up and running a qualified retirement plan. The right MEP can help these businesses attract and retain employees by offering valuable benefits at a reasonable cost, while allowing management to focus on growing the business – which is as compelling a reason as any to look at MEPs.

About the Author
Principal Gerald Wernette directs the consulting services area for Rehmann Retirement Builders. He has provided retirement plan strategies to industries ranging from professional services to manufacturing, and from one-person firms to organizations with over 1,500 employees.

Securities offered through Royal Alliance Associates, member FINRA/SIPC. Investment advisory services offered through Rehmann Financial, a Registered Investment Advisor not affiliated with Royal Alliance Associates. 

 

Published in Franchise

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