29 Mar 401(k) Models: MEPs, The Open MEP®, and The Prototype Plan™
Who should use which?
President Obama has recently joined in the conversation around providing employees of small and medium sized companies retirement plans. He is specifically expressing support of “The Open MEP®” concept. The President rightly feels that the benefits of this program far outnumber any negatives and this program can indeed be a key ingredient to solving the dilemma of having over 50% of small and medium company’s employees not covered by a company retirement plan.
But what really is the difference between a MEP, an open MEP, and a prototype aggregated plan and where should each optimally be used?
MEPs
Sometimes called “closed MEPs”, MEPs have been around for many years. The MEP has the benefit of allowing a large number of companies to band together to receive a higher level of service at a lower cost for their 401(k) needs. There is a single 5500 for the entire MEP, rather than for each member, and there is only one audit.
Makes sense – right? Well not always. If you have a number of large plans and small plans in a MEP, there can be problems. Large plans (over 125 employees) require that a yearly audit of their plan be performed. Smaller plans do not have that requirement. So if you are a small plan in a MEP that also has large plans, you will have to pay a share of an audit that you have no need for. You are simply paying to help the big boys.
By the same token, small 401(k) plans are often out of compliance with the Department of Labor and IRS (roughly 75% according to the DOL). This is largely because small companies simply don’t have the human resources to handle all the administrative requirements the DOL and IRS have for compliance. These compliance issues can range from simply overlooking things to intentional use of retirement funds for illegal purposes. So if you are a larger employer in a MEP, and one of these smaller employers are deemed non-compliant, the resulting fines and penalties will be shared by everyone in the MEP (the so called “Bad Apple” rule).
For groups offering MEPs (industry groups, associations, PEOs, etc.), a large concern is the 2012 DOL ruling that says MEPs and the companies in them must exhibit “commonality and control”. Industry groups or associations can show commonality, but not control. PEO’s often can’t even exhibit the basic commonality.
Another large concern regarding the structure of MEPs, is that the MEP head or plan sponsor carries fiduciary liability for all members of the MEP. This can create a huge liability for industry groups, associations, PEOs, and others who run a MEP.
The Open MEP®
The Open MEP® was created, developed, and trademarked by TAG Resources, a Knoxville TN 401(k) provider. TAG is the largest “end to end” 401(k) provider in America.
The Open MEP® concept created by TAG, allowed companies that did not exhibit “commonality” to band together and utilize the aggregation of assets to leverage better cost, to provide a better service model, and to provide fiduciary protection. TAG offered small plans the advantages of “scale” in investments, auditing, and fiduciary compliance.
Prior to 2012, The Open MEP® was extremely popular with small and medium sized businesses. Over 40% of the plans written by TAG Resources in The Open MEP®, were startup plans at small businesses. The Open MEP® gave first-time opportunities for many small businesses to offer their employees retirement plans.
The Open MEP® solved most of the problems experienced by plan sponsors in a closed MEP. Commonality and control were not deemed an issue by the DOL and the fiduciary liability problem was solved by providers like TAG Resources, who actually became a “named fiduciary” on the plan. TAG would perform the administrative tasks required for ensuring DOL and IRS compliance and they would accept the highest level of fiduciary liability responsibility available in the retirement industry.
In 2012 the DOL issued an Advisory Opinion Letter stating that The Open MEP® model did not meet the requirement for commonality and control. With the recent focus in the retirement industry on open MEPs, hopefully this ruling will be revisited soon with a different result that will positively impact small businesses and their employees’ retirement.
The Prototype Plan™
After the 2012 DOL ruling, many open MEP providers closed their doors. TAG Resources made adjustments to their service model and created an aggregated model, The Prototype Plan™, built around some of the similar concepts that made The Open MEP® so successful: aggregation of a large number of employers to enable a higher service level, a lower price, and great fiduciary protection. TAG essentially found they could provide most of the advantages of The Open MEP® in an aggregated model without the negative aspects of a closed or open MEP.
With The Prototype Plan™, TAG has the systems in place to complete a 5500 for each company while remaining the named fiduciary. TAG still assumes the fiduciary liability on all plans they run for their employer clients – a burden few in the industry are able to take to this magnitude.The Prototype Plan™ provides big advantages over closed or open MEPs, protecting the plan sponsor against fiduciary liability to the highest degree allowed by law.
So if The Open MEP® is deemed compliant with DOL regulations again and President Obama gets his way, what is the best solution for employers to offer their employees and get them into retirement plans?
The best solution is to allow large groups of employers to come together in a common group to enjoy better service, better pricing, and better fiduciary protection than single employer plans can offer. TAG Resources has the ability to blend two retirement programs to fit any group of employers who want to provide their employees with the chance for a happy retirement.
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