Employers have been using defined contribution plans to attract and retain top talent since the launch of 401(k)s in 1978. These plans transferred most of the risk involved with defined-benefit plans from the employers to the employees. The only problem? Managing a 401(k) comes with high administrative costs that most small businesses can’t afford. As a result, only 53% of workers at private companies with fewer than 100 employees have access to employer-sponsored retirement plans.
To remove this barrier to entry, the US government passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019. This act led to the birth of a new, more affordable way of offering retirement benefits: pooled employer plans (or “PEP”).
A PEP is a type of 401(k) retirement plan that is shared by two or more employers. None of the businesses involved have to manage the plan themselves. Instead, it’s overseen by a third-party plan provider that has to be verified by the US Department of Labor (DOL).
PEPs alleviate almost all of the administrative duties of the employer. They present a cost-effective opportunity for small businesses that want to offer their employees retirement benefits.
The Brass Tacks of Pooled Employer Plans
Unlike traditional or Roth 401(k)s, a PEP isn’t limited to the employees of one business — staff members of every business involved can participate in the plan. However, businesses must work with a pooled plan provider (PPP) to get started. A PPP is a third-party plan administrator who acts as the PEP’s named fiduciary. They manage the plan and assume all of its administrative responsibilities, along with some of the fiduciary liability.
One of the major responsibilities of a PPP is selecting and monitoring other third parties to help keep the plan functioning and compliant. Examples of such third parties include accountants for record-keeping, investment managers, and external auditors.
As a business that’s a part of the pooled plan, you don’t need to worry about any of the above. Employers may choose to contribute to employees’ accounts, just like in a 401(k), but it isn’t required. Your employees can participate through a central portal or a benefits professional at your company, although this will vary from provider to provider.
Some providers may also offer plan customization options. For instance, your PEP could be set up to allow pretax or after-tax (Roth) contributions, profit-sharing, or auto-enrollment if the provider offers those features.
What Is the Difference Between a Multiple Employer Plan (MEP) and a PEP?
The concept of a single retirement plan shared by multiple businesses existed long before the SECURE Act was passed. Known as multiple employer plans (MEPs), these plans enable similar businesses to band together to offer retirement benefits to their employees.
In a way, a PEP is a type of an MEP. One key difference between the two: in a PEP, the plan sponsors don’t necessarily need to have any similarities to one another. For example, two businesses from completely different industries (ex. fishery and journalism) can have the same PEP. This distinction makes PEPs more accessible, as unrelated employers can come together to form one.
That said, businesses can currently only pool together 401(k) plans in PEPs, not 403(b)s. There are no plans or acts in the works that would allow PEPs to pool 403(b) plans. But MEPs could allow for 403(b) plans to be pooled in the near future, thanks to the introduction of the Improving Access to Retirement Savings Act.
The Key Benefits of a Pooled Employer Plan for Your Small Business
The emergence of PEPs is a step in the right direction for the US retirement landscape. Here are some huge benefits that they offer to small-business owners:
Lower Administrative Costs and Burden
Companies pay an estimated $100 to $200 per participant every year in administrative costs associated with 401(k) plans. Small businesses don’t have the resources to bear these costs to sustain their plans. However, PEP plans significantly reduce that cost since they allow multiple businesses to pool their 401(k) plans together.
PEPs also result in a substantial reduction in audit costs. Businesses with more than 120 eligible 401(k) participants are legally required to get their plans audited by a third-party CPA firm. The cost of an audit can be as high as $20,000. But with a PEP, employers pay a fraction of that cost since it’s shared by all employers in the plan.
Employers don’t have to allocate resources to manage the day-to-day of their 401(k)s. Most of the administrative burden falls on the PPP.
This allows businesses sponsoring the plan to freely focus on other strategic matters.
Less Fiduciary Risk
There are fewer risks involved with a PEP compared to a single employer plan. Every 401(k) needs a fiduciary to oversee the plan and work for the best interest of the participating employees. The employer typically assumes that role in a company-managed or private 401(k).
According to the IRS and DOL, the fiduciary must fulfill certain responsibilities. Examples of these responsibilities include managing plan documents, monitoring the flow of funds, and overseeing the trust that holds the assets of the 401(k).
With plans that are not pooled, the employer is held liable if there are any discrepancies, frauds, or errors. However, that risk is substantially reduced in a PEP since the fiduciary responsibilities fall on the PPP. Therefore, you should carefully research and select a provider with a good reputation.
A Level Playing Field
Thanks to the launch of PEPs, more businesses can now offer defined contribution plans to their employees.
While MEPs have been available for decades, the same industry and/or relationship eligiblity criteria made the options rather limited. In addition, the “one bad apple” rule — one employer’s compliance negligence disqualifies the whole plan — made MEPs risky. However, this rule was later eliminated by the SECURE Act.
PEPs give small businesses such as yours a chance to compete for talent by offering comprehensive retirement benefits with a fraction of the cost and risk. As a result, employee satisfaction, retention, and even productivity levels are likely to increase, as your staff will have the promise of a comfortable retirement.
Comply with State Laws Mandating Retirement Plans
A total of 6 US states have made offering retirement plans mandatory for businesses of all sizes, while several others are considering adopting them. Employers in those states are required to either enroll their employees in a state-sponsored retirement plan or offer a private one through a provider.
PEPs provide small business owners the option to offer their own plans without going over their budgets. This allows them to easily comply with their state laws and avoid penalties.
PEPs Are a Win-Win!
With the launch of PEPs, small businesses can attract top talent and retain their best employees who want retirement benefits. Plus, more employees in the private sector can get access to employer-sponsored retirement plans; therefore, everybody wins!