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Multiple employer plans (MEPs) are emerging as a provider-based alternative to single-employer 401(k) plans, particularly for smaller employers. It seems likely that, as these MEPs accumulate assets, they will begin to be the target of the same sort of fiduciary litigation that has afflicted the single-employer 401(k) plan community.
In this introductory article to the topic of MEP fiduciary litigation, we review some necessary background on MEPs and on 401(k) fiduciary litigation generally, and then discuss some of how MEP fiduciary litigation may be different from the single-employer 401(k) plan fiduciary litigation of the last 15 years.
In our next article, we will discuss a recently filed (and relatively high-profile) MEP fiduciary case.
A MEP is a plan for employees of unrelated employers (other than a plan maintained pursuant to a collective bargaining agreement – those are generally multiemployer plans).
Just who – what sorts of organizations – may maintain a MEP had for some time been an issue because, under ERISA, a retirement plan must generally be established by an “employer,” and DOL took the position that a plan established (e.g., by a provider) for a group of otherwise unrelated employers did not meet that ERISA “employer” test.
DOL had, however, for some time allowed (under sub-regulatory guidance) a MEP to be established by a group of employers that had a “commonality of interest,” e.g., a trade association. In July 2019, DOL finalized a regulation formalizing the criteria that would apply to this sort of “closed MEP.”
That rule generally only allowed closed MEPs to be established for a (non-provider-based) “bona fide group or association of employers.” That group or association must “have at least one substantial business purpose unrelated to offering and providing MEP coverage.” And the employer members must either be (1) in the same trade, industry, etc., or (2) in the same region of a single state or metropolitan area.
Finally, the group or association sponsoring the closed MEP could not be “a bank or trust company, insurance issuer, broker-dealer, or other similar financial services firm (including a pension record keeper or third-party administrator).”
Obviously, a purely provider-based plan, e.g., one offered by a mutual fund company or major 401(k) recordkeeper, or a plan for employers with no “commonality of interest,” would not qualify for MEP treatment under DOL’s 2019 regulation.
In December 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act that included a provision authorizing these sorts of “open MEPs” – that is, provider-based DC plan MEPs for (truly) unrelated employers. This SECURE Act provision went into effect in 2021, and we are beginning to see providers offering these sorts of arrangements.
Before we turn to the issues that may arise in MEP fiduciary litigation, let’s review the basic features of single-employer 401(k) plan fiduciary litigation that have emerged over the last 15 years.
The reason there have been more participant lawsuits against DC/401(k) plan fiduciaries than against DB plan fiduciaries is that in DB plans, imprudent fiduciary judgments – that may result in, e.g., high costs or fund underperformance – generally must be made up by the employer/sponsor, who is the “ultimate” plan fiduciary. And, obviously, there’s no point in the sponsor suing itself.
But in a DC plan, these sorts of losses directly affect participant benefits – even though plan fiduciaries (generally) remain creatures of the employer/plan sponsor. This dis-alignment of interests is why regulation of DC fiduciary conduct is handled, in our system, mainly by the Department of Labor and (I would argue, even more so) by the courts.
The resulting “flood of DC litigation” that we have seen in the last 15 years has focused on a relatively narrow set of issues: First, 401(k) plan fees, including investment management fees, recordkeeping fees, and revenue sharing. And second, fund performance, particularly the performance of actively managed funds (generally with a fee claim thrown in) and target date funds (which generally have the most assets).
As DC plan sponsors know well, this effort at enforcement-by-litigation has involved mainly (indeed, nearly entirely) lawsuits by plaintiff participants against plan sponsors and sponsor fiduciaries (e.g., the typical plan fiduciary committee), and not on providers. And, given lawsuit economics, most of the suits have been brought against large employers with large plans.
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As MEP solutions begin to accumulate participants and assets, it is (as we said at the top) inevitable that plaintiffs' lawyers will train their sights on MEPs as a fiduciary litigation target. Indeed, they have already begun to do so.
Let’s now turn to a couple of issues that are unique to MEP fiduciary litigation: (1) the identification of the responsible fiduciary and (2) comparability, e.g., the comparison of fees under any given MEP to the fees paid by other plans.
When considering the possibility of a MEP fiduciary lawsuit, the first question is, who, in the MEP structure, are fiduciaries who might conceivably have fiduciary responsibility for the “money” issues – fees and fund performance. Let’s begin with recent regulatory and statutory guidance on this issue.
DOL’s 2019 regulation provided that: (1) The MEP sponsor (e.g., a trade association) is generally the ERISA plan Administrator and Named Fiduciary. (2) The adopting employers are, however, responsible under ERISA’s fiduciary rules for “choosing and monitoring the arrangement and forwarding required contributions to the MEP.”
The regulation also provides that the group or association must be controlled by its employer-members and that the employer-members that participate in the plan control the plan.
As in DOL’s regulation, SECURE provides that the (open) MEP provider (“pooled plan provider”) must be “designated by the terms of the plan as a named fiduciary.” It also provides that:
[E]ach employer in the plan retains fiduciary responsibility for—
(I) the selection and monitoring … of the person designated as the pooled plan provider and any other person who, in addition to the pooled plan provider, is designated as a named fiduciary of the plan; and
(II) to the extent not otherwise delegated to another fiduciary by the pooled plan provider and subject to the provisions of section 404(c) [with respect to participant direction of investments], the investment and management of the portion of the plan’s assets attributable to the employees of the employer (or beneficiaries of such employees).
(We are, for the moment at least, going to pass on the issue of whether DOL’s regulation can be applied to open MEPs authorized by SECURE, or SECURE’s rule can be applied to closed MEPs under DOL’s regulation.)
We would argue that the general formulations under DOL’s regulation and SECURE leave room for courts to expand, limit, or re-assign fiduciary responsibility to different entities depending on the facts (e.g., the formal and practical structure of specific MEPs). And primary responsibility will likely fall on those persons who had actual signoff authority on the key issues of fees and fund inclusion in/removal from the plan fund menu. There may also be other fiduciaries who have derivative co-fiduciary or appointment/monitoring responsibility.
In a MEP structure, who might those fiduciaries be? We would identify at least four different persons who could be targeted in any possible MEP fiduciary litigation: the MEP provider; the MEP governing board; an independent fiduciary designated under the terms of the MEP (or by the governing board); and the employers participating in the MEP.
As a first cut, it would seem that each individual participating employer could be targeted for a MEP lawsuit claiming, e.g., that the MEP’s recordkeeping fees are too high. Indeed, such a lawsuit seems to be contemplated under item (II) in the SECURE language quoted above.
A provider (notwithstanding that it is a “named fiduciary”) might plausibly argue that any lawsuit brought against it and claiming that its fees are too high should properly be brought against the employers who selected this particular MEP (with those fees attached).
Such an approach – targeting the employer — would, however, present some serious problems for plaintiffs' lawyers. 401(k) plan fiduciary lawsuits have to date generally been brought as class actions with respect to a (generally large) single employer’s plan and against a very limited set of deep-pocket defendant-fiduciaries. That kind of lawsuit is relatively easy to bring.
MEPs are (it is anticipated) going to be large collections of relatively small employers. It will probably be a more difficult task for a plaintiff's lawyer to separately bring lawsuits against the (conceivably hundreds of) employers in a particular MEP. Moreover, different employers may have different stories about and different defenses to their decision to participate in a particular MEP. Plaintiffs' lawyers will no doubt seek some way to consolidate these claims, but employers (and the MEP provider) are likely to resist that sort of consolidation.
It’s conceivable, faced with this small and dispersed defendant's challenge, that plaintiffs' lawyers may try to argue that the MEP provider may be sued as a fiduciary that has effective control of the MEP, whatever the documents may formally say.
This prospect presents, in the first instance, an issue for the organizations establishing the MEP – they have a litigation-related incentive to devolve, to the extent possible, responsibility for review of the issues of the recordkeeper’s fees and fund menu selection/review to participating employers. At least formally. Obviously, MEP economies of scale will only work if there is only one recordkeeper and are likely to require some limit on investment customization.
The most obvious fiduciary target in a MEP is its board of directors – in the ordinary course, the board or its delegate would have control over plan management, including, e.g., retention of a recordkeeper. It’s not clear, however, that MEP board members will have the necessary deep pockets to attract the attention of litigators. Board members’ indemnification rights and fiduciary liability insurance will be an important factor here.
One feature of single-employer 401(k) plan litigation is plaintiffs' complaints that include a dollar-for-dollar comparison of, e.g., recordkeeping fees under the target plan and an allegedly similar plan (with lower fees).
This proof-strategy (allegedly showing that the target plan’s fees are excessive) may be more difficult to execute in the MEP context. A given MEP’s cost structure may not be the same as single-employer plan cost structures or even the cost structure of other MEPs. Indeed, it is likely that the need to, e.g., reconcile payroll from hundreds of different employers will make MEPs significantly more expensive than similar-sized single-employer plans.
And many other compliance issues may have to be handled on an employer-by-employer basis, even assuming that the plan requires “safe harbor” nondiscrimination testing. Adding (uniquely) to a particular MEP’s costs and reducing the credibility of comparisons with other plans.
Until we get more clarity on how courts will allocate fiduciary liability, sponsors considering participation in a MEP should pay close attention to how the MEP handles those two critical issues – fees and fund performance. Not just whether a MEP’s fees and fund performance would currently pass a prudence test, but also whether, e.g., the process for review of fees and performance is adequate.
Retention of an independent fiduciary may make some of these issues go away – depending (at least in part) on the reputation and competence of the independent fiduciary.
This is very much an evolving area of the law. In that regard, it will be interesting to see if it evolves in a manner different from the litigation against single-employer plans.
The imposition of litigation costs, and (perhaps more profoundly) the cost of the participating employers’ management attention to MEP fiduciary issues, may reduce the MEP valuation proposition.
MEPs are, for the moment at least, being targeted at smaller employers – but the lessons from MEP fiduciary litigation may provide interesting insights into 401(k) fiduciary litigation more broadly.
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The foregoing is somewhat abstract. In the end, what will matter is whether and how these themes will play out in actual MEP litigation. In our next article on this topic, we will look at a recently filed MEP fiduciary claim – Khan v. Pentegra.