Why Non-Profits Should Embrace the 403(b) MEP
A blog by Pete D’Angio, CFP, CRPS, National Director, Not-for-Profit Markets, Pentegra Retirement Services – November 21, 2016
Small to mid-size plan sponsors have for years been simplifying their 401(k) plan oversight by merging their plan into a Multiple Employer Plan (MEP), a retirement plan that covers unrelated employers while transferring many of the responsibilities and liabilities associated with being a named fiduciary to the MEP.
Non-profits looking to reap the benefits of a 401(k) MEP can do so via a 403(b) MEP. Available to non-profit employers, a 403(b) can only be sponsored by a 501(c)(3)-designated organization, in either a lead sponsor or co-sponsorship arrangement with another 501(c)(3) group. (Plan sponsors in the 403(b) space are primarily hospitals, nonprofit organizations, colleges and school districts.) The sponsor’s only responsibility is to appoint fiduciaries to run the plan. To fulfill that responsibility, the association, with its advisor’s help, can create a board of directors made up of association members who would be early adopters of the MEP.
This arrangement may appeal to non-profits for a number of reasons. Altruistic by nature, such associations can offer its employees a solid retirement plan, much like the better-known 401(k) … in effect, taking care of people within their organization while simultaneously continuing on their philanthropic mission.
Associations of 403(b) sponsors come together with a sense of community. Non-profit employers are comfortable working within associations to pool resources, accustomed to working with a board to provide oversight, and often do not have the means, expertise or desire to effectively administer their ERISA (Employee Retirement Income Security Act of 1974) plans. Simply put, they are cut from a different cloth than are traditional 401(k) sponsors.
And that has been a key point since the one-two punch of the Pension Protection Act of 2006 and a set of final rules from the Internal Revenue Service on 403(b)s that became effective in 2009; the latter required plan sponsors to come up with written plan documentation covering the features of all 403(b) plans, including those that are non-ERISA arrangements. All of this requires plan sponsors to take a more active role in their retirement plans — something, frankly, that those sponsors weren’t exactly keen to add to their other duties.
The reasons for that are many and varied: A 501(c)(3) is typically a small organization without a huge budget; is often made up of people without formal business backgrounds and/or degrees; and have no internal division dedicated to handling employee benefits. As a result, they have historically looked to record-keepers and third-party administrators for help … but those people did not necessarily have adequate systems in place, leaving the sponsors essentially on their own.
That was a big bucket of cold water over the non-profits’ heads … but we at Pentegra are of a view that could revolutionize the 403(b) space. Section 413(c) of the Internal Revenue Code, which established MEP arrangements as a viable option for qualified retirement plans, does not mention 403(b) plans at all … for the simple reason that they did not exist at the time that Section 413(c) was enacted. This has been interpreted by some as meaning that a 403(b) plan cannot participate in a MEP.
However, on the advice of our attorneys and some third-party advisors, we maintain that Section 413(c) does not specify that a 403(b) plan cannot participate in a MEP — meaning, logically, that it can.
The good news for non-profits is that its board of directors can appoint plan fiduciaries, including an ERISA Section 3(16) plan administrator and either a Section 3(21) investment advisor or 3(38) investment manager for the MEP. The burden of overseeing the program is shared by the participating non-profit organizations that are represented on the board, with all fiduciary duties other than oversight and monitoring being delegated to professional fiduciaries. Because the appointment and oversight of the MEP’s fiduciaries are handled by a board of directors, the oversight burden of each participating nonprofit employer is dramatically reduced.
The board also hires an investment advisor to assist with the fiduciary requirement of maintaining a diversified investment menu. By consolidating the investment advisor’s work within the MEP (one investment policy statement, one quarterly review process, one report that can be shared with all of the MEP members), the cost of the advisor can be spread across the MEP members. Members gain the advantage of working with a professional investment advisor, a service they may not have been able to afford on their own.
The quick takeaway here is that you needn’t be afraid of MEPs or their administration. Help is available if you look for it.
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