While many proponents of the Setting Every Community Up for Retirement Enhancement (SECURE) Act are calling open multiple employer plans (MEPs) a game changer for the retirement plan industry, MassMutual has just issued a white paper detailing what employers might want to consider before joining an open MEP.
Certainly, the legislation would help the nearly 40 million Americans employed by companies with fewer than 100 employees that do not offer a retirement plan, MassMutual says in its report, “Open Multiple Employer Plans: What Open MEPs May Mean for Your Business.” Fifty-three percent of businesses with fewer than 50 employees do not offer a retirement plan.
A recent Nationwide survey of business owners with 500 or fewer employees found that 59% think the SECURE Act would have a positive impact on their ability to offer a 401(k) plan. Eighty-four percent think it would make it easier for them to offer a 401(k) plan.
Eighty-eight percent think offering a 401(k) plan provides both their businesses and their employees tax advantages, and 88% think it helps them recruit top talent. Just slightly less, 86%, think it helps with employee retention.
“Open MEPs would streamline plan administration and fiduciary oversight for sponsors,” Caroline Boyd, head of strategy for MassMutual’s Workplace Solutions, tells PLANSPONSOR. “One of the biggest benefits of open MEPs for an employer is that they can reduce their liability depending on which model they choose—3(38) or 3(21) fiduciary oversight and/or 3(16) plan administration.”
Boyd reminds sponsors that open MEPs do not absolve them completely of fiduciary responsibilities. “One of the myths about open MEPs is that you can shift all of your fiduciary liability to the plan provider,” Boyd says. “But it’s really a shared fiduciary liability. Employers are still going to be responsible for getting the right payroll information to the sponsor and for handling distributions, loans and hardship withdrawals.”
This is why MassMutual recommends sponsors entering an open MEP hire an experienced third-party administrator to handle 3(16) responsibilities, Boyd says.
In addition, MassMutual says in its white paper, “Open MEPs are likely to come in many ‘models,’ as plan providers create their own version of a multiple employer plan. Pricing will depend on the size of the plan, its design and the level of services provided.”
Further, since open MEPs will join together dozens of businesses from disparate industries, they could end up being complicated to manage and instead of lowering plan administration costs, they could increase them, Boyd says. One estimate says they will increase costs by four basis points, she notes.
MassMutual warns that the details of how open MEPs will work has yet to be determined: “Proponents sometimes describe Open MEPs as an easy-to-use, low-cost, turnkey solution for smaller employers who have been traditionally underserved by the retirement plan market. In our view, it is too soon to gauge how well open MEPs will deliver on all aspects of this promise.
“For starters, until the SECURE Act is signed into law, the DOL [Department of Labor] issues regulations and guidance, and retirement plan providers begin creating their own open MEP models, there is no way to know the specifics of how open MEPs will operate, the degree to which they will actually offer fiduciary and administrative relief, and whether they will provide the cost savings that some are suggesting they will,” MassMutual continues.
Indeed, Tom Reese, an investment adviser with Conrad Siegel, says the SECURE Act does not make it clear as to how much fiduciary responsibility will shift to a third party.
Two influential Republican Senators have published a white paper outlining a proposed plan to address the multiemployer pension funding crisis.
The Senators, Finance Committee Chair Chuck Grassley, R-Iowa, and Senate HELP Committee Chair Lamar Alexander, R-Tennessee, say their proposal represents a realistic and balanced approach to solving the union pension funding crisis. As PLANSPONSOR has previously reported, union multiemployer pension funds are not universally stressed, but many are.
Data provided by the Pension Benefit Guaranty Corporation (PBGC) shows that around 125 multiemployer plans are in so-called “critical and declining” financial status. Such plans report that they will become insolvent over the next two decades. As pointed out by Senators Grassley and Alexander, several very large union plans—including the United Mine Workers Pension Fund and the Central States Pension Fund—predict that they will become insolvent in the next few years.
Given the severe economic consequence that would be experienced by both union pensioners and the broader economy should a wave of large union pension defaults occur, parties on both sides of the aisle agree legislative action is needed. While it remains to be seen whether Senate Republicans will rally behind this sweeping new proposal, it is clear that Democrats in the House have favored the Butch Lewis Act, which takes a fundamentally different approach to solving this crisis.
Partitions, Co-Payments and Actuarial Honesty
Grassley’s and Alexander’s sweeping plan is outlined in a white paper published on the Finance Committee website. In simple terms, to help the “sickest plans” recover their financial footing, the proposal creates a special “partition” option for multiemployer plans. The Senators say this is not in fact a new concept. Rather, the proposal would expand on the PBGC’s existing authority.
According to the Senators, partitioning permits employers to maintain a financially healthy multiemployer plan by carving out pension benefit liabilities owed to participants who have been “orphaned” by employers who have exited the plan without paying their full share of those liabilities. They argue that removing orphan liabilities allows the original plan to continue to provide benefits in a self-sustaining manner by funding benefits with contributions from current participating employers. In effect, partitioning creates a “healthy pension” that continues to meet all of its obligations to retirees, the Senators say, and a separate “sick pension” that requires attention and assistance from the PBGC.
The Senators say “a limited amount” of additional federal taxpayer funds would be needed to support the PBGC in this capacity. And because taxpayer dollars would be at risk if the sickest plans fail to move to fully funded status, the proposal also includes a number of plan-governance reforms to strengthen multiemployer plans.
To help finance the partition relief and provide a stronger PBGC insurance guarantee to participants in the system, the reform proposal creates a new premium structure. The new structure includes raising the flat-rate premium to $80 per participant in a multiemployer plan, putting the multiemployer program on par with the single-employer guarantee program. The new premium structure also broadens the base on which premiums are assessed to more equitably spread the costs of insuring benefits and to ensure PBGC solvency.
Notably, the new structure applies a co-payment to active workers and retirees. The Senators say that, because of the broader contribution base, the co-payments should turn out to be significantly less than the amount of the typical benefit cuts retirees face under current law if their plan should fail. Older retirees and disabled participants will be protected, according to the Senators.
Among other provisions, the proposed reforms establish a variable-rate premium. This premium, which parallels the variable-rate premium that has long applied to single-employer plans, would be tied to a plan’s funding status to manage risks stemming from more poorly funded plans.
Other changes in the new plan would require plan trustees and actuaries to measure and project plan assets and liabilities “more prudently and accurately.” Further, the reform proposal also improves the so-called “zone” rules. Plans will be required to look farther into the future when estimating their financial status and institute a form of stress testing to check whether a plan can remain financially sustainable through potential economic and demographic stresses. Depending on its health, plans will have to bolster the steps they take when signs of financial hardship arise.
Looking to the future, the proposal includes a new option for sponsors of multiemployer plans to establish a new hybrid pension plan, called a “composite” plan.
Industry Reaction Is Swift, Cautious
Upon publication of the Senate Republicans’ proposal, various retirement industry stakeholders immediately shared their comments. Generally, strong support is being voiced both for the new proposal and for the Butch Lewis Act.
“The issuance of the Senate proposal reflects important progress because, taken together with the Butch Lewis Act, we now have the components of a potential proposal which policymakers, both Democrats and Republicans, can work through on a bipartisan basis to find a solution that they, along with employers and employees, can all support,” says Lynn Dudley, American Benefits Council senior vice president, global retirement and compensation.
Annette Guarisco Fildes, president and CEO of The ERISA Industry Committee, shared a similar take: “The ERISA Industry Committee applauds Senators Grassley and Alexander for moving forward to address the crisis in the multiemployer pension system. Since this crisis impacts plan sponsors of all sizes and across the country, it must be addressed comprehensively to ensure the protection of retirement benefits for millions of workers. The Senators’ proposal is an important first step to securing comprehensive reform that will benefit the multiemployer pension system.”
In offering a more skeptical view, Sean McGarvey, chairman of the National Coordinating Committee for Multiemployer Plans, still says his organization “appreciates the time and effort that Chairman Grassley, Chairman Alexander and their staff put into this proposal.”
“2019 is a critical year to enact reform legislation to rescue and modernize the multiemployer pension system,” he says. “Today’s proposal by Chairman’s Grassley and Alexander presents punitive requirements on plans, participants, employers, and unions which would cause harm to them and the 85% of the multiemployer system that are successfully meeting their obligations. We look forward to working with a bipartisan group of Senators and Senate leadership over the next four weeks to ensure that reform legislation rescues these failing plans, rescues the PBGC, and reforms the entire multiemployer system. Effective and balanced reform is needed to ensure that the job creating employers of America and their active workforce can continue to be the powerful economic engine for the nation and their families while providing lifetime pensions for blue-collar workers.”
As passed by the committee, the Act would provide funds for 30-year loans and new financial assistance, in the form of grants, to financially troubled multiemployer pension plans. According to the text of the legislation, the program is designed to “operate primarily over the next 30 years.”
During the committee debate, Democrats, led by current Chairman Richard Neal of Massachusetts, generally voiced strong support for the Act. They suggest that the dire financial situation faced by some multiemployer pension systems is chiefly due to the Great Recession and long-lasting market challenges that have particularly harmed manufacturing and other blue-collar industries. They say economic conditions in the last two decades have forced many employers that offer these pensions to go insolvent themselves, which in turn left the multiemployer pension plans with fewer and more financially stressed contributing employers.
Republicans, on the other hand, led by Ranking Member Kevin Brady of Texas, were quick to cite their worries about ongoing mismanagement and even maleficence on the part of union leaders and pension trustees. They argue a loan program will do nothing to solve the underlying problems that weakened many of the plans to begin with, and they commonly use the term “bailout” to describe the program.
For their part, Senators Grassley and Alexander do not support the Butch Lewis Act. They shared the following statement about the House’s preferred approach: “The House has essentially advanced a pure, no-strings-attached, bailout plan that would give taxpayer funds to plans in the hopes that they can somehow earn returns sufficient to keep them going. But the nonpartisan Congressional Budget Office tells us that the House’s proposal will not generate sustainability of pension plans or the PBGC. In contrast, the proposal we are releasing today addresses the immediate needs of the few multiemployer plans facing immediate crisis in a manner that protects participant benefits and ensures a sustainable multiemployer pension system for the long haul, all in a fiscally responsible way.”
Speaking to this disagreement, Senator Sharrod Brown, D-Ohio, says he is “glad to see Republicans in Congress have come forward with a pensions proposal of their own.”
“Just this week, the PBGC made clear that the longer we wait to solve this crisis, the more expensive it gets,” Brown says. “I have concerns with some of the provisions put forth by Republicans, but I look forward to working together with Chairman Grassley and Senator Portman to find a bipartisan solution. Wall Street destroyed our economy, and they got a bail out. These workers, retirees and small businesses did everything right. Congress has a responsibility to protect the pensions they worked hard for and earned. We need to act now, before it is too late. Failure is not an option for millions of Americans.”