Recent press accounts have noted that two nonprofit educational institution associations recently established group retirement plans for their employer members. Such association retirement plans offer potential cost savings and administrative ease to participating employers, and we expect to see more of them in the future.
An Association Retirement Plan – What Is It?
An association retirement plan is a single retirement plan – either a 403(b) plan (for 501(c)(3) organizations) or a 401(k) plan (for other types of organizations) – that is available to employer members of "bona fide associations." It would typically have the following characteristics:
- A single plan document, with each participating employer executing a participation agreement. Within parameters established by the association, the participation agreement would permit a participating employer to choose from among eligibility, contribution, vesting, and distribution alternatives for its employees. (This differs from the standard IRS pre-approved plan approach, under which each plan sponsor is deemed to have separately adopted its own pre-approved plan.)
- A single investment fund menu
- A single recordkeeper/third-party administrator
- A single Form 5500/annual audit
Under ERISA, an association retirement plan is a single "plan," which permits the features set forth above. To attain this status, the association must be "bona fide" under, and the plan must be structured in accordance with, U.S. Department of Labor standards. Under the Internal Revenue Code, an association retirement plan is a "multiple employer plan," which allows participating employers to offer differing contribution structures. This structure is available under current law. While proposed legislation has been introduced to expand the availability of pooled retirement plans even for unrelated employers, to date efforts to move this legislation have been unsuccessful.
An Association Retirement Plan – Why Consider It?
The association retirement plan structure provides the following potential advantages:
- Reduced fees – Because of the economies of scale achieved by combining plan assets from multiple employers, and eliminating duplicative compliance and administrative functions, the plan can reduce administrative and investment expenses borne by each participating employer and its participants. This is particularly important in light of various ongoing pieces of litigation against plan sponsors alleging fiduciary breach due to payment of excessive fees.
- Easier, professional administration – Because of the centralization of many plan administration functions at the association level, participating employers can free themselves of much of the burden of plan administration, including investment fund menu oversight, annual Form 5500 preparation, and participant interaction.
- Potential source of non-dues revenue – Associations may be able to benefit their bottom line by offering these plans to their members. Note that revenue collected by an association under this structure may be subject to unrelated business income tax.
Participating employers need to weigh these advantages against diminished flexibility regarding certain aspects of plan terms, and lack of ability to customize an investment fund menu, when considering whether an association retirement plan is the right solution.
In sum, we expect to see more associations make group retirement plans available for their employer members, given the advantages involved and the pressure on plan sponsors to reduce administrative and investment fees. Please contact us if you have any questions or would like to discuss this topic in more detail.