Pooled Employer Plans: How A PEP May Be A Good Fit For Your Business
Retirement plans are one of the most sought-after employee benefits. But for some companies, it can be challenging to administer a plan and stay in compliance with all the fiduciary requirements. One new type of 401(k) plan first available in 2021 that can help alleviate this burden and make it easier to offer retirement benefits to your employees is a 401(k) pooled employer plan (PEP). Is a PEP right for you? Let’s find out.
Complete Payroll Solutions is a 401(k) provider to thousands of companies. We understand how the different retirement plan offerings stack up and what’s important when deciding on an option for your business. To help you evaluate the new PEP, here we’ll discuss:
- What is a 401k pooled employer plan?
- What is a MEP vs PEP?
- How does a pooled employer plan work?
- What does a pooled employer plan cost?
After reading this article, you’ll know if a PEP is the right retirement solution for you and your employees.
What is a 401(k) pooled employer plan?
A PEP is a single umbrella plan under which many employers can house their company’s 401(k) plan instead of sponsoring their own plan.
With a PEP, you are able to outsource fiduciary responsibility under ERISA to reduce your risk and administrative burden so you can focus your time on your business. That’s because many of the tasks associated with managing a plan are taken over by a third party like:
- plan set up and documents
- overseeing investments and operations
- annual compliance testing
- Filing Form 5500, required under ERISA
- Approving transactions and distributions
In addition to eliminating a lot of your responsibilities, a PEP can provide economies of scale to allow you to obtain better pricing and reduce plan expenses. For example, a PEP could be attractive for large employers that have annual audit requirements since the audit cost is spread over multiple companies, which we’ll discuss later.
What is a MEP Vs. PEP?
Pooled employer plans have been around for years, and have primarily been used by industry groups, Chambers of Commerce, and other associated businesses. These plans are known as multiple employer plans (MEPs), and require that there be some commonality between the participating companies such as industry or geography.
To increase participation in pooled plans, the SECURE Act created PEPs for plan years beginning in 2021 that operate much the same way MEPs do. However, the main difference is that any employer can join a PEP; you don’t have to have a common link between you and the other companies.
How does a pooled employer plan work?
A PEP involves several different professionals all working together to operate the plan. These professionals include:
- Pooled Plan Provider (PPP): This entity is the plan sponsor and has to file as the fiduciary for the plan with the Department of Labor (DOL). The PPP is responsible for making sure all the pieces inside the 401(k) product operate as they should. In some cases, the recordkeeper could also be the PPP. Other times, the 3(16) administrator acts as the PPP.
- 3(16) Administrator: This role handles the administrative tasks associated with operating the plan and takes on certain fiduciary responsibilities such as participant notices and year-end compliance testing.
- 3(38) Investment Manager: This professional has fiduciary oversight to make sure the plan offers a diverse range of investment options. They will also monitor performance and the investment manager and determine if any of the funds need to be replaced.
- Recordkeeper: The recordkeeper is like a bookkeeper for the plan that uses a platform to value employees’ 401(k) accounts on a daily basis. Recordkeeping is also integrated with a trading platform for conducting transactions.
- Trustee: A trustee ensures that contributions to the PEP are made on a timely basis. Sometimes, this will also be the recordkeeper.
Depending on the PEP, you may also use a financial advisor whose role is to help educate employees, for example, with selecting investments.
These individuals all have specific knowledge and skills and play an important role in the plan’s operation. A big advantage with a pooled employer plan is that they are all packaged together into a single, robust program so you don’t have to worry about picking the right providers for your plan.
What does a PEP cost?
Like a traditional standalone 401(k), you’ll be responsible for some retirement plan costs. These include start-up costs, initial fees to set up your plan that cover activities like establishing the plan document, supporting the implementation and enrollment process, and educating your employees about the plan.
You’ll also pay fees for plan administration and recordkeeping. Administration fees are generally a flat amount per year based on the number of employees you have and recordkeeping fees are typically an asset based fee that is deducted from plan participants. However, since a PEP is treated as a single plan, economies of scale may reduce these costs for participating employers.
For example, if you have 120 or more participants, your retirement plan will need to be audited each year. While this can cost over $10,000, if you spread that over multiple employers in the PEP, it can greatly lower what you pay.
Is a PEP right for me?
If you’re a small or mid-sized business and you don’t currently offer a 401(k), a pooled employer plan can be a good way to provide your employees this added benefit without requiring a lot from you. Even if you offer a retirement plan now, you can easily and seamlessly switch to a PEP to reduce your plan involvement and administration. But a PEP may not be right for everyone.
A PEP can be an ideal choice over a standalone 401(k) if you:
- Don’t have the time or expertise to manage the complexities of 401(k) compliance and administration
- Are willing to accept potentially more limited investment choices (think index funds) since a PEP has to appeal to multiple companies
- Want to eliminate your fiduciary risk from activities like late contributions or investment fund performance
If you decide to participate in a PEP, there are a growing number of PEPs currently on the market built by financial companies who are either creating their own product or aligning with other products in the marketplace. As you evaluate your choices, you’ll want to consider:
- The investments and what’s being offered
- The technology and services available through the recordkeeper to help your employees such as a mobile app or dashboard that will set them up for success
- Cost of administrative costs for you and recordkeeping and investment fees for employees
For more information about how to choose a 401(k) provider, read our next article on the top considerations for your search.