Mutliple Employer 401(k) Plan Advantages

[Guest STP20004]

There is a big, HUGE, prize (i.e., my everlasting gratitude) for any one on here who can come up with a reason why participation in a multiple employer 401(k) plan is better than a single employer plan, not including economies of scale, vesting credit, and one Form 5500. Thanks, THANKS, T-H-A-N-K-S!!!

[RCK]

I REALLY want to win the prize, but need clarification.

Better for whom?

[QDROphile]

One reason a multiple employer 401(k) plan is better for participants is that the employer guarantees that each elective deferral will have positive investment earnings for one year. The plan will be in violation of securities laws, so the participants will have a right of rescission until the expiration of the one year statute of limitations. If the participant does not like the investment return during the year following the deferral, the participant can rescind, which will also include interest at the applicable statutory rate.

The downside for the plan could be disqualification because the tax laws do not accommodate rescission, and it will be unlikely that a distribution event has occured, unless the particpant just happens to have terminated employment.

Disregard if the plan has properly registered.

[Guest STP20004]

We represent an association that sponsors a mutliple employer 401(k) plan for its member companies. A third party bank is trying to convince certain member companies to switch to them and sponsor a seingle-mployer plan through the bank. We are trying to come up with arguments for our client to use as to why participation in the multiple employer plan is better (i.e., more advantageous) for the participating employers and their employees.

Thanks!!!! I hope this helps!

[Guest BXO]

Has the SEC ever acted on these much-mentioned violations of securities law?

[Guest STP20004]

QDROphile, thank you for your response, but could you please provide more background for me. I am not aware of this issue... are you saying that in order to comply with state (federal?) securities laws, a multiple plan must guarantee positive investment earnings on deferrals (but only for one year). What is the basis for this rule (cite, etc.)? Thanks!!!!!

One reason a multiple employer 401(k) plan is better for participants is that the employer guarantees that each elective deferral will have positive investment earnings for one year. The plan will be in violation of securities laws, so the participants will have a right of rescission until the expiration of the one year statute of limitations. If the participant does not like the investment return during the year following the deferral, the participant can rescind, which will also include interest at the applicable statutory rate.

The downside for the plan could be disqualification because the tax laws do not accommodate rescission, and it will be unlikely that a distribution event has occured, unless the particpant just happens to have terminated employment.

Disregard if the plan has properly registered.

[QDROphile]

STP:

I was having a little fun in how I answered your post. The problem is that 401(k) plan interests relating to elective deferrals are securities, but almost everyone forgets about this because there is a general exemption from registration requirements for 401(k) plans. The exemption does not apply if employer secuitires are offered as an investment option for elective deferrals -- which is pretty well known. The exemption does not apply to multiple employer plans if the exemption is read literally and carefully. To my knowledge, the SEC has not spoken about its interpretation of the exemption. It is possible that the SEC does not think the exemption was meant to treat multiple employer plans diferently, but I can think of arguments about why multiple employer plans are different from a policy perspective.

The solution/requirement is not to guarantee investment returns. The effective guarantee of investment returns comes about because a penalty for violation of the registration requirements is that the investor has a right to rescind (get the invested amount back) and get statutory interest on the amount for the period of investment. Whether or not the SEC thinks the exemption applies to multiple employer plans, the participant can rescind if it can convince a court about the interpretation of the statute. The statute of limitations for rescission is one year, so only the most recent deferrals are subject to the right.

If you want to delve into relevant authority, search the securities law board. The issue is discussed in some detail there and some authority is cited.

[Mike Preston]

While QDROPhile was yanking your chain a bit (although within the bounds of reason for our government, that's for sure), there are other reasons why multiple employer plans are less beneficial than single employer plans. Have you researched what happens when an individual portion of the multi-employer plan is DQ'd? Aren't there at least some circumstances where Employer A's action can have a negative impact on Employer B's qualified status?

I know you came here looking for support of multiple employer plans and not for the opposite, but I'm afraid it might be difficult to come up with any you haven't mentioned.

Economies of scale are certainly one advantage. Most of my clients, however, would much rather be a big fish in a small pond than a guppy in the ocean.

How much time does the multiemployer plan allocate to each participating employer to determine HCE's? Don't forget the 17 and 1/2 hour rule.

In all seriousness, the only time I would ever go on record to a client that a multiple employer plan was a good idea would be when the individual employer wanted a plan that didn't require any testing (a safe-harbor plan without ER contributions other than safe-harbor match such that there is no need for any top-heavy determination). Even then I'd be a bit scared and would caveat my recommendation.

Obviously, the marketplace could prove me to be on the wrong side of this issue.

[Guest STP20004]

Thank you all for your thoughts and comments... a lot of food for thought. I very much appreciate the help!

While QDROPhile was yanking your chain a bit (although within the bounds of reason for our government, that's for sure), there are other reasons why multiple employer plans are less beneficial than single employer plans. Have you researched what happens when an individual portion of the multi-employer plan is DQ'd? Aren't there at least some circumstances where Employer A's action can have a negative impact on Employer B's qualified status?

I know you came here looking for support of multiple employer plans and not for the opposite, but I'm afraid it might be difficult to come up with any you haven't mentioned.

Economies of scale are certainly one advantage. Most of my clients, however, would much rather be a big fish in a small pond than a guppy in the ocean.

How much time does the multiemployer plan allocate to each participating employer to determine HCE's? Don't forget the 17 and 1/2 hour rule.

In all seriousness, the only time I would ever go on record to a client that a multiple employer plan was a good idea would be when the individual employer wanted a plan that didn't require any testing (a safe-harbor plan without ER contributions other than safe-harbor match such that there is no need for any top-heavy determination). Even then I'd be a bit scared and would caveat my recommendation.

Obviously, the marketplace could prove me to be on the wrong side of this issue.