The DOLs Request for Information on PEPs and MEPs

The DOL released its RFI on PEP and MEP prohibited transactions on 6/17/20. This article provides a brief analysis of the RFI and what it means for PEP builders.

On June 17, 2020, the Department of Labor (DOL) released a request for information (RFI) on potential prohibited transactions in pooled employer plans (PEPs) and other multiple employer plans (MEPs). The point of the RFI is to solicit information on possible service providers, business models, and conflicts of interest. The industry knew the RFI was coming: the passage of SECURE at the end of 2019 required both the DOL and the Treasury to publish guidance in connection with PEPs and the DOL has stated for months that it will be issuing an RFI as part of the process.

The topic of the day is prohibited transactions. Here is a sample of why guidance is widely considered to be necessary:

  • ERISA plan sponsors cannot ordinarily get paid. Providing services for compensation as a fiduciary requires there to be an independent, disinterested party to approve the services and compensation . In a typical plan, the sponsor is an employer who offers the plan for employees and does not seek compensation for the work involved. But if the employer were to seek to be paid, who is the independent party who could approve the services and compensation? SECURE fills the gap, to an extent, by making clear that a PEP’s participating employers are responsible for approving and monitoring the pooled plan provider (PPP) . But is this enough, or will the DOL levy additional conditions on the PPP’s receipt of compensation?
  • SECURE allows vendors to be sponsors, but does not say they can be paid. The law creates PEPs and allows financial institutions and other service providers to be PPPs (sponsors), but says nothing about their ability to get paid. This means ordinary notions of ERISA jurisprudence, which make it difficult for sponsors to receive compensation, must be fitted to the new structure.
  • Proprietary products. If a mutual fund family or other investment provider offers a PEP that includes its own funds, this is a prohibited conflict of interest. Models do exist for offering one’s own funds without a PT , but the industry is looking for guidance allowing a broader palette of product options and business models. The DOL has a historical starting point for PTEs with respect to proprietary product—the BICE (best interest contract exemption) from its 2016 final regulations on conflicts of interest. Those regulations were overturned in court in 2018, but the precedent exists and many of the DOL personnel who wrote those regulations are still there. Might the DOL resurrect portions of that thinking for PTEs with respect to proprietary products in PEPs? Perhaps. There are also existing class exemptions that could be adapted to PEPs .
  • Managed accounts. Ordinary ERISA jurisprudence creates questions about if and how service providers can offer managed account services for an added fee. For example, if an investment adviser to a plan also offers a managed account service to that plan for added fees, there are variations of such arrangements that involve prohibited conflicts. As managed accounts grow in popularity and importance, service providers are looking for clarity on how such services can be offered generally, not just in PEPs and MEPs.
  • Product “partnerships.” Can two service providers work together to offer a PEP? Of course they can. The question, however, is whether they can both do so without one having to be subordinate to the other. For example, an investment adviser can be a PPP and sponsor a PEP, in which it hires a recordkeeper, and the adviser could legally fire the recordkeeper at any time. But can the recordkeeper and adviser enter an arrangement in which they offer a bundle chosen by adopters, in which neither can “fire” the other? Probably so, but there are variations of this arrangement that might involve prohibited conflicts, and for which exemptions might therefore be desirable.

Prohibited transactions are not the only area in which there are questions. Other areas in which added clarity might be helpful or necessary include:

  • Do “groups of plans” filing a single Form 5500 have a single audit? If so, how will that work?
  • Do “groups of plans” filing a single Form 5500 have a single audit? If so, how will that work?
  • What is the process by which an entity files with the DOL and Treasury in order to become a PPP? What additional regulatory requirements (there are none in the statute) might there be in order to become a PPP?
  • The Treasury is required by SECURE to publish model plan document language. Such language will doubtless be helpful, though using it will probably not be mandatory.
  • Both the DOL and the Treasury must publish additional guidance on the handling of “bad apple” employers who are noncompliant.

What Does It Mean?

The “Grand Opening” date for PEPs, when the law says PEPs may first be offered, is January 1, 2021—less than seven months away. Numerous service providers are hard at work crafting their offerings in the expectation that they will be ready for launch on that date. Some prospective PEP sponsors will launch on January 1; others will wait for the full set of guidance and time to digest it. We can expect a wave of PEP launches starting in January and likely continuing for two years or longer, with heavy activity in 2021. The DOL’s issuance of the RFI is the next step on the path to the public review and comment period that will lead to final DOL regulations and/or prohibited transaction exemptions that will probably lay to rest most questions before the end of 2020.

One final imponderable: might the presidential election in November affect the timing or content of long-term PEP regulatory guidance? It might.

For the full text of the RFI, click here.


1Setting Every Community Up for Retirement Enhancement Act, signed into law as part of the Further Consolidated Appropriations Act, 2020 on December 20, 2019
229 CFR 2550.408b-2(e) and ERISA Sec. 408(c)(2)
3SECURE Sec. 101(c)(1)
4For example, see DOL Advisory Opinion 2005-10A, the Country Trust letter
5E.g., PTEs 1977-03 and -04

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