The comment letters on a Department of Labor multiple employer plan (MEP) rule intended to increase access to workplace retirement plans reveal a sharp dissension between industry stakeholders and the country's largest consumer advocacy for retiree interests.

The DOL is currently considering the letters as it finalizes the rule, drafted under the direction of an Executive Order issued by President Trump. “It shall be the policy of the Federal Government to expand access to workplace retirement plans for American workers,” the Executive Order states.

To that end, Labor establishes conditions by which employers can join multiple employer plans, which allow groups of employers to achieve economies of scale by pooling workers under one defined contribution retirement plan.

Under the DOL's rule proposal, participation in a MEP is limited to employers associated by industry, or located within the same municipality or state.

And sponsorship of MEPs would be limited to Professional Employer Organizations or local Chambers of Commerce.

An insufficient approach

In what was a shock to many in the retirement services industry, Labor's proposal prohibited plan providers from sponsoring MEPs.

That prohibition relies on an exceedingly narrow interpretation of how the Employee Retirement Income Security Act defines an employer sponsor of a retirement plan, according to comment letters written by retirement plan providers, their advocates, and employer trade groups.

“Although the Department's regulatory efforts are commendable, the Coalition has serious concerns that the scope of the proposed regulation is too narrow, and its conditions are too restrictive, to meaningfully accomplish the Department's or the Administration's goals,” wrote attorneys for the Groom Law Group, writing on behalf of a coalition of investment managers, retirement plan recordkeepers, third-party administrators, and trustees.

The U.S. Chamber of Commerce, American Benefits Council, the SPARK Institute, and Insured Retirement Institute are among the employer and retirement industry trade groups that also take issue with Labor's proposed prohibition on service provider sponsorship of MEPs.

“We believe the Department's proposal is too limiting in defining permissible MEP sponsorship and, as a result, is unlikely to result in significantly greater retirement savings opportunities for working Americans, particularly those working for smaller employers,” wrote Prudential in its comment letter.

Phil Waldeck, president, Prudential Retirement, and a co-author of Prudential's comment letter, told BenefitsPRO that restricting service providers from sponsoring MEPs would result in a MEP provider market that will be too small to meaningfully close the access gap to workplace retirement plans. Labor estimates that 38 million workers lack access to retirement plans through their employers.

“The scale of this problem is huge,” said Waldeck, who commended the “creativity” regulators and legislators are applying to address the access gap. “PEOs play an important role in the marketplace today. But would we have enough market participants? And why would we not want service providers as part of the solution for coverage? I don't think this (Labor's proposal) would be sufficient to solve the problem.”

AARP says service providers would bring conflicts to MEP sponsorship

Labor's proposal cited the “statutory ambiguity” in how ERISA defines employers in determining which entities can serve as fiduciary sponsors to MEPs, and which cannot.

The proposal did not say it was prohibiting retirement plan service providers—insurers, broker-dealers, recordkeepers, trustees, and third-party administrators—because of their conflicts of interest.

But that is the reason AARP gives for its support of the prohibition on service provider sponsorship of MEPs.

“AARP strongly supports the Department's requirement that the MEP act in a fiduciary capacity and financial service firms be prohibited from sponsoring a MEP,” wrote AARP in its comment letter.

“MEPs cannot be successful if the plan provider is self-interested. While the financial services industry is expert at selling financial services, they almost always face conflicts of interest in prudently determining which retirement investments and charges are appropriate. Most financial service firms do not act in a fiduciary capacity for key retirement plan functions,” AARP's letter adds.

Prudential's Waldeck candidly acknowledged that a financial institution sponsor of a MEP could be conflicted.

“Those who are concerned about conflicts of interest raise fair questions,” said Waldeck.

But he was equally candid when speaking to ERISA's existing prohibitions on fiduciary self-dealing.

“We want to have a robust marketplace with real choice and action that moves us away from the status quo,” said Waldeck. “And we want to have robust protections in terms of regulation. Conflicts have to be properly managed. Labor and the IRS have the ability to structure the right approach. We would want the Department to evaluate the concerns of all constituents—including service providers and others—to manage conflicts.”

A number of comment letters to Labor suggest the agency could work with industry to craft a new prohibited transaction exemption to allow service providers to sponsor MEPs. Such an exemption could be written and implemented within a year, Waldeck said.

He also cautioned that MEPs, with or without service providers as sponsors, will not completely close the coverage cap on their own, a sentiment others in industry have expressed as Congress and Labor have moved to increase their availability. But they do represent a bipartisan opportunity to make progress, which Waldeck says would be greater with a robust MEP market that includes service providers as sponsors.

AARP backs RESA, which doesn't prohibit service provider sponsors

In a notable endorsement, AARP backed the Retirement Enhancement Security Act when it was reintroduced in the House last year.

RESA's language on Open MEPs “absolutely contemplates” service providers sponsoring MEPs, said Michael Kreps, a principal at the Groom Law Group.

“There is no question that everyone that worked on that legislation assumed service providers would sponsor MEPs because the legislation doesn't say they can't,” said Kreps, who co-authored Groom's comment letter to Labor.

“But RESA was also 100 percent clear: sponsors of MEPs have to be fiduciaries,” added Kreps, who served as the senior pensions and employment counsel for the Senate HELP Committee from the 110th to the 114th Congress. “No one on the Hill talked about excluding service providers.”

Language in RESA does not explicitly name the financial institutions that could qualify as fiduciary sponsors of MEPs. BenefitsPRO asked AARP if it understood RESA as allowing service provider sponsors of MEPs, and if so, how the advocacy explains its support for RESA and Labor's proposed prohibition on service provider sponsors.

“AARP accepts that financial service firms may be willing to act as fiduciaries even though it may be difficult for them to evaluate investments, fees and conflicts without any bias,” said David Certner, legislative counsel and director of legislative policy for government affairs at AARP, in an email.

“That is why, in addition to requiring the MEP provider to act as a fiduciary, AARP in our comments also urged public transparency of all MEPs, providers, investments and fees,” added Certner, who authored AARP's comment letter to Labor.

Certner also said AARP supports Open MEPs, “provided the entity operating the MEP is required to act as a full fiduciary, meaning prudently selects and monitors all investments, negotiates reasonable fees and minimizes conflicts of interest.”

The case for “Vandelity”

In its comment letter, the Lubbock Chamber of Commerce, which represents nearly 1,900 businesses with 79,000 employees in west Texas, urged Labor to finalize its proposed rule “as quickly as possible.”

The Lubbock Chamber could be a MEP sponsor under the proposed rule—it was one of the first Chambers to sponsor an association health care plan after Labor finalized that rule last year.

If it sponsors a MEP, the Lubbock Chamber would be the fiduciary responsible for overseeing plan administration, including selection of service providers and investments.

That would seem to introduce new responsibilities for the Lubbock Chamber, which has 13 employees, none of whom have reported experience administering 401(k) plans or designing plan menus.

Ostensibly, those responsibilities would be outsourced. In one imaginable scenario, a third-party fiduciary advisor could be hired to select a recordkeeper to administer the MEP, and to select prudent investments.

That arrangement raises potential questions of efficiency relative to a service provider sponsoring a MEP. And it also potentially raises questions regarding MEP participants' ultimate protections.

Take a hypothetical service provider—call it “Vandelity.” The firm manages trillions through its proprietary mutual funds and has an established 401(k) recordkeeping arm. Under Labor's proposal, Vandelity can't sponsor a MEP. But it and other similarly capable firms would be needed to administer a plan sponsored by the Lubbock Chamber.

Under that arrangement, Vandelity would not have to act as a fiduciary if it were chosen as the recordkeeper. Were Vandelity allowed to sponsor a MEP, it would bear full fiduciary responsibility.

ERISA would prohibit Vandelity from self-dealing if it were a MEP sponsor. The hypothetical firm would undoubtedly draw the ire of regulators and the plaintiffs' bar were it to frontload an investment menu with its own mutual funds.

A core argument service providers are making to Labor is that they have the capability to most efficiently sponsor a MEP, and that ERISA's prohibited transaction protections offset the conflicts service providers bring to the table. In effect, service providers are most capable of fulfilling fiduciary duties to prospective MEPs, they argue, and to best leverage the model to close the retirement plan access gap.

As Groom Law's Kreps put it: “The fiduciary standard is only as good as the people that stand behind it.”

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