The Setting Every Community Up for Retirement Enhancement (SECURE) Act included several measures to increase employer and employee access to retirement plans. 

One of those measures included the creation of Pooled Employer Plans (PEPs), which allow unrelated businesses to “pool” together under one communal retirement plan.

While PEPs might be right for some employers, it’s important to evaluate all the facts and consider if the benefits of a PEP meet the needs of your business.

What is a Pooled Employer Plan (PEP)?

A Pooled Employer Plan (PEP) is a group, or “pool”, of unrelated employers that participate in the same retirement plan. 

Each PEP will have a Pooled Plan Provider (PPP), that will serve as the plan’s named fiduciary, plan administrator, and perform all associated administrative duties.

Who qualifies for a PEP?

Generally speaking, small businesses can come together to join a PEP, regardless of where they are located in the United States or what their trade is.

With that said, PEP providers may have specific requirements that must be met in order to join their plan. 

How much do PEPs cost?

The biggest talking point for PEPs is their supposed reduced costs to the employer. 

These plans state that by pooling together a bunch of employers and having them all be a part of one big retirement plan, employers end up saving money in administrative costs.

While this may ring true, it doesn’t factor in the cost to each employer for a plan audit. Since PEPs will be bigger in size, they will most likely be subject to an annual audit, and any fees associated with being audited will be paid by the employers in the plan, something that may be avoided when employers have their own 401(k). 

Along with audit fees, employers in the plan may still have to pay recordkeeping and administrative fees to their PPP, especially if their PPP decides to outsource those duties and relay those costs to the employers.

PEPs may reduce employer costs, but they do not eliminate them.

Can plan designs be customized within a PEP?

All employers in a PEP adopt the same plan document. 

The most important thing for an employer who is considering a PEP to understand is that they lose control of their plan when they join a PEP. Furthermore, the PPP can restrict an employer’s plan options by limiting the plan design options to ones that are cheaper to administer.

If you would like to maintain any level of control over your plan, such as having an employer match or choosing your investment lineup, then a PEP is most likely not the best option for you.

What is the fiduciary risk?

In a PEP, the PPP assumes most of the fiduciary responsibility, including recordkeeping and administrative duties. The PPP may also make investment decisions, or they can pass that responsibility on to a third party. 

The employer still remains responsible for selecting an advisor who will act in the best interest of the employees in the plan, as well as monitoring the portfolio performance.

Are PEPs compliance-friendly?

Since a PEP is one retirement plan shared by multiple employers, there is just one Form 5500, one audit, and one ERISA Fidelity Bond for the PEP. With that said, each employer will have to undergo and pass individual non-discriminatory testing (NDT). 

It’s also worth noting that PEPs may be at an increased risk for lawsuits. Since PEPs are large in nature, as more participants join the plan the likelihood that the plan will face litigation over poor investment choices or excessive fees increases. 

Deciding on a PEP over a traditional 401(k) all comes down to personal preference, and which one will better suit your business. 

If you’re wanting the best of both worlds, look no further than SaveDay. We offer all the same bundled services as a PEP and you get to retain control over your plan, all at no cost to the employer. Contact us today to learn more!

Photo by Mateus Campos Felipe on Unsplash.

*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. SaveDay makes no warranties with regard to such information or results obtained by its use and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation and before engaging in any transactions. The information may not reflect the most current legal developments and is not guaranteed to be complete, correct, or up-to-date.

Sources:

https://www.employeefiduciary.com/blog/pooled-vs.-single-employer-401k-plans-are-peps-for-you

https://www.newportgroup.com/NewportGroup/media/Documents/MEPS-PEPS-White-Pape-from-Newport.pdf

https://www.napa-net.org/news-info/daily-news/pooled-employer-plans-are-here%E2%80%94will-they-be-next-big-thing

https://www.kitces.com/blog/pooled-multi-employer-plan-pep-mep-401k-secure-act-small-business-employer-sponsored-retimrement-plan-pooled-plan-provider/

https://www.plansponsor.com/in-depth/the-pep-opportunity/

https://www.paychex.com/articles/employee-benefits/pooled-employer-plan

https://www.planadviser.com/exclusives/pooled-employer-plans-338-fiduciary-advisers/

https://www.fisher401k.com/blog/secure-act-open-mep-pooled-employer-plans#:~:text=Nondiscrimination%20Testing%3A%20Testing%20is%20applied,plan%20participants%20and%20plan%20contributions.

https://www.lockton.com/insights/post/pooled-employer-plans-the-benefits-considerations-for-employers

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