A new retirement plan offering may help your business pool resources with other companies to provide retirement benefits for your employees — but are the trade-offs worth it for your organization?
- Smaller businesses may be able to use PEPs to provide more robust retirement plans than they could individually.
- Some businesses could greatly benefit from providers assuming oversight and some liability.
- These plans lack flexibility and have not undergone the test of time, but they may still be right for your company.
- If you think a PEP might be right for you, we have the questions you’ll want to ask a future provider.
The passage of the SECURE Act created a new type of retirement plan called a Pooled Employer Plan (PEP). PEPs allow unrelated employers to participate in the same plan and reduce the fiduciary responsibilities and burdens of operating a single-employer plan.
An overview of options
These pooled arrangements are not actually “new,” as they are very similar to an older plan arrangement called a Multiple Employer Plan (MEP).
In an MEP arrangement, the MEP sponsor is responsible for the overall plan design through contracting with various service providers and determining what investments to offer within the plan. The MEP sponsor could be an organization or one of the participating employers. MEPs generally require a degree of commonality amongst the participating employers, and have encountered some fiduciary and operational challenges along the way — particularly when a participating employer fails to discharge its duties under the terms of the plan.
The benefits of PEPs
The Pooled Plan Provider is typically unrelated to any of the adopting employers, and will professionally operate and administer the plan on behalf of the employers and their participants. Pooled Plan Providers take on additional oversight responsibilities for adopting employers. You can expect providers to:
- Handle plan design, plan management, and compliance issues
- Manage employer and employee questions, monitor distributions, and facilitate participant loans
- Stay up to date on all legal and regulatory changes
- Deliver all required notices to participants in a timely fashion
The Pooled Plan Provider also coordinates the annual audit with the independent qualified plan auditor and reviews, signs, and files the annual Form 5500. This greatly reduces compliance and regulatory risks for each adopting employer.
Group buying power
For small plans (generally under 100 participants), there are economies of scale in terms of buying power to drive down custodial, recordkeeping and investment advisory costs that wouldn’t normally be available to a single employer plan. Smaller employers who offer their own separate plan would not be subject to the annual independent audit requirement; however, within a PEP structure, the annual audit would be an additional cost, but shared amongst participating employers.
For large plans, there is potential to realize savings from the audit being done at the PEP level instead of requiring each adopting employer to undergo a separate audit. Savings could also be realized from any professional 3(16) fiduciary services that the employer may have been paying for on a separate basis.
Potential pitfalls of PEPs
No total escape from fiduciary liability
Although the Pooled Plan Provider does take on a significant portion of the fiduciary and compliance liability for the PEP, the employer is not totally off the hook from a fiduciary perspective. Adopting employers continue to be responsible for the monitoring of the Pooled Plan Provider, and, in some cases, the investments — unless a 3(38) investment manager is retained.
The adopting employer also continues to be responsible for correctly calculating and withholding the employee elective deferrals from payroll, timely remittance of employee contributions, and calculation of employer matching contributions.
Lack of customization for employers
PEPs are designed to accommodate a wide variety of employers and are based on economies of scale. To accomplish these goals, the plan designs are generally less flexible than that of single-employer plans. While adopting employers may have the ability to select matching provisions — whether to be a safe harbor plan, or to adopt automatic enrollment and escalation provisions — there is no customization beyond a standard menu of plan features.
What questions should I ask the Pooled Plan Provider?
If you determine that a PEP might be right for your retirement program, an important next step is to figure out which Pooled Plan Provider is best for your plan. Consider several questions as you evaluate your decision:
- How much prior experience does the Pooled Plan Provider have with PEP or similar plans? MEPs have been around for quite some time, so experience with MEPs would demonstrate that a Pooled Plan Provider has a solid understanding of the work involved in running a successful arrangement.
- How many PEPs does the Pooled Plan Provider anticipate operating? Due to reporting and compliance rules beyond the scope of this article, some providers are intentionally keeping the size of each PEP to under 1,000 participants. Providers may therefore operate multiple PEPs of varying sizes, which may result in differing levels of service for individual employers, depending on which PEP they are assigned to.
- Who runs the PEP and what experience in administration, compliance, etc. does the team have? Given that PEPs are in the early stages, it is vital to have the right people — from a quality and compliance perspective — on the Pooled Plan Provider team, and that they have systems in place to handle ongoing attrition to maintain service levels to the employees/participants per the contractual agreements.
- What level of fiduciary oversight is the Pooled Plan Provider taking on? In some instances, the Pooled Plan Provider will be a 3(16) fiduciary and will take on responsibility for review and approval of plan distributions and loans, reviewing and signing the Form 5500, and answering questions from plan participants. The Pooled Plan Provider may also hire 3(38) investment managers to oversee the selection of available plan investments, monitor investment performance, and make appropriate changes to the plan’s investment options. It is critical that employers review PEP agreements carefully to understand the Pooled Plan Provider’s responsibilities and which are formally delegated to other service providers.
- What frequency of reporting should you anticipate about the plan from the Pooled Plan Provider? Although much of the responsibility for the operation and compliance resides with the Pooled Plan Provider, the adopting employer is still responsible for monitoring the provider and any other designated fiduciaries (e.g., investment managers and 3(16) administrators). Receiving regular and timely communication from the Pooled Plan Provider can help employers stay informed about the plan and provide the right information so that the employer can monitor effectively.
How we can help
The SECURE Act addresses a variety of the growing concerns regarding retirement savings for Americans, and provides several incentives for employers to make it easier for their employees to save, one of which is the establishment of this new type of 401(k) plan arrangement.
CLA’s seasoned professionals have experience with employee benefit plans and Multiple Employer Plans in particular, and are well-positioned to help you decide whether a Pooled Employer Plan is right for your company.
Compliments of CliftonLarsonAllen – a member of the EACCNY.