Can Multiple Employer Plans Help Close the Retirement Coverage Gap?

As only about half of U.S. private sector workers are covered by an employer-sponsored retirement plan at any given time, a lack of consistent coverage is a major threat to the nation’s retirement income security.

This lack of access to workplace retirement plans is largely driven by small employers who often cannot afford to sponsor their own plans or take on the administrative burden required when managing a plan. Multiple employer plans and, more recently, pooled employer plans, have the potential to help smaller employers offer a retirement plan to their employees. But it remains to be seen whether these arrangements will lower enough of the cost and burden to small plan sponsors to significantly increase coverage.


Origins of MEPs, PEPs

To lower the cost to small employers of providing a retirement plan, with the goal of reducing the coverage gap, the Setting Every Community Up for Retirement Enhancement Act of 2019 made MEPs less restrictive and potentially more attractive to this group of employers.

According to a recent paper by the Center for Retirement Research at Boston College, unlike single-employer plans, a MEP is a retirement plan adopted by two or more employers and administered by a MEP sponsor. A MEP can be either a defined benefit or defined contribution plan, but the majority are 401(k)-type DC plans. By allowing employers to offer a plan jointly, the MEP sponsor takes on the fiduciary burden and spreads the administrative, compliance and cost burdens of offering a plan across multiple employers.

Participating employers in a MEP still have fiduciary responsibility, but it is limited to selection and oversight of the person or entity operating their plan.

Anqi Chen, a senior research economist at the CRR, says MEPs have been around for a long time (they were authorized by the Labor Relations Act of 1947, but the SECURE Act made them more widely available), but they have not really “moved the needle” in terms of expanding retirement plan coverage.

“Right now, most of the gaps in coverage are among small employers,” Chen says. “Among the many other things that a small business has to consider, offering a retirement plan is just not very high on their list.”

Chen adds that because workers at these small companies tend to be lower earners, not having access to retirement saving is detrimental to their financial security.

Two of the main restrictions that initially limited the adoption of MEPs included the requirement that employers had to share a “common bond” and that the whole MEP could lose its tax-qualified status if one employer within the group was not in compliance—otherwise known as the “bad apple” rule. However, the SECURE Act removed the “bad apple” restriction and authorized PEPs, which are not limited to employers with a common bond.

PEPs can only be established by a pooled plan provider, and that entity takes on the role of named fiduciary and is in charge of plan administration, compliance and auditing. As in a MEP, the participating employers must monitor the pooled plan provider as part of their fiduciary duty.

“I think because [the SECURE Act] got rid of the bad apple restriction, there was a lot of excitement about how MEPs could really help encourage small employers [to offer a plan], because it really cuts back on their fiduciary responsibility,” Chen says.

‘Keeping an Eye’ On the Pooled Plan Provider

But even though the PPP takes on most of the fiduciary responsibilities in a PEP arrangement, Chen says the employers still have to “keep an eye” on the provider to ensure they are not charging high fees or offering expensive funds.

“For a small employer, even though it’s much less [of a responsibility] than before, that still might be a very daunting task,” Chen says. “On the cost side, there’s arguments for potential cost savings, but we don’t really have a lot of data. … You could have cost savings, because you’re pulling together a bunch of small employers, but there could still be extra costs there, because it’s still administratively more complicated a plan [available] to 100 employers than to one employer.”

Angela Antonelli, a research professor and the executive director of the Center for Retirement Initiatives at Georgetown University, says “only time will tell” whether PEPs can actually alleviate costs for small employers.

“There’s still a lot we don’t know yet because providers are continuing to innovate, collaborate and work out the kinks,” Antonelli says. “At the end of the day, a PEP is going to be attractive if with the economy of scale it’s going to be able to compete on cost and burden reduction. That should be a benefit of pooling.”

According to a 2022 Transamerica survey, among employers not currently offering a plan and unlikely to offer a plan in the next two years, almost 30% said they would consider joining a MEP, PEP or group of plans that handle the fiduciary and administrative duties at a reasonable cost instead of offering their own plan.

Natalya Shnitser, an associate professor and research scholar at Boston College Law School, says she thinks these plans have the potential to expand access to retirement savings, but employers need to ensure they have the information necessary to periodically monitor and benchmark the PEP arrangement.

“A lot of these PEP arrangements are popping up, and on the part of the individual employer that’s considering joining, I think it’s important to recognize that there’s still this ongoing responsibility,” Shnitser says. “Once there’s a degree of outsourcing that’s happened … what employers would not want to do is set it and forget it.”

The Cost of Leaving a PEP

Shnitser says another issue for plan sponsors interested in joining a PEP to keep in mind is the cost of switching from one PEP to another. She says this process could be costly and administratively difficult to do if an employer is, for some reason, unhappy with the current PEP and wants to get out of it.

“Certainly, one could imagine that there would be a lot of inertia around switching from one PEP to another, particularly [because] once [the plan] is outsourced, somebody else is handling it,” Shnitser says.

According to the CRR paper, if an employer grows bigger and wants to convert to a more customizable single-employer 401(k) or if it finds that their chosen PPP is not providing adequate services, it may be difficult and time-consuming to terminate its portion of the PEP. While the SECURE Act requires that employers or participants leaving a plan are not subject to “unreasonable restrictions, fees or penalties,” it is not clear what “reasonable” means. For example, MEPs generally have to be spun off into a separate SEP before being terminated. According to the CRR, this process takes time and legal paperwork.

Additionally, sponsors need to consider how the fees associated with a PEP are split between the employer and employee—particularly for small plans, for whom fees tend to be higher.

“Some PEP sponsors advertise plans that have minimal fees for employers. However, retirement plans are not free,” the CRR paper stated. “Plans that are free (or almost free) to the employers invariably pass on costs to plan participants.”

If higher costs are passed on to employees, the question plan sponsors need to consider is how much higher the employee fees are relative to single-employer plans. If employee costs are substantially higher, PEPs could erode retirement savings for the most vulnerable workers and expose employers to excessive fee lawsuits, according to the CRR.

Communicating With Small Employers

Antonelli says another piece of the puzzle is simply communicating with smaller employers that options like MEPs and PEPs are available.

“At the end of the day, the two big factors for small employers are: low cost and low burden,” Antonelli says. “Another factor for small employers, too, is they tend not to act, and a big reason they don’t have an employer-sponsored plan is just because it’s overwhelming to evaluate all the options and make a decision about what kind of retirement plan is right for [their] business.”

Antonelli says the challenge for the industry and financial advisers going forward is taking the “tools in the toolbox,” which have been expanded upon in the SECURE 2.0 Act of 2022, and communicating with small employers about the new options and explaining why they should adopt a plan.

“I think a lot of people ask questions of the industry like, ‘How are you going to reach out and market [these options] to small business?’” Antonelli says. “‘How are you going to communicate with them and explain the differences across all these different options that you have available and help them make the right decision?’ So that’s a challenge for the industry.”