Like most things, there’s no hard and fast rule to determine whether or not a PEP is right for any sponsor, especially as these plans inherently share responsibility and there isn’t a list of PPP options currently available. However, that doesn’t mean that it’s too early to start planning.
The Pooled Employer Plan and Multiple Employer Plan provisions are arguably the most publicized elements of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. But what is a PEP and how does it work? Moreover, how do plan sponsors determine what the right option is for them?
What’s a PEP?
A Pooled Employer Plan (PEP) is a type of multiple employer plan (MEP) that will begin to be available in 2021, in which two or more businesses can create a shared retirement plan for their employees. MEPs require that participating plan sponsors share a common trait (such as industry, e.g. “electricians” or “doggie daycares”), and the restrictive nature and minimal benefits of MEPS mean that while in theory they could make administration easier, especially for small businesses, plan sponsors have often found that the benefits weren’t significant enough for MEPs to be particularly alluring. However, PEPs (formerly “open MEPs”) are different in that they do not require the participating businesses to share a commonality. PEPs are also sponsored by a pooled plan provider (PPP) while MEPs are not, and the PPP will be responsible for administrative and fiduciary responsibilities related to the PEP, meaning that the businesses opting into the PEP will be a step removed from such responsibilities and associated legal liabilities. While employers may have avoided PEPs because in the past, many of the duties required for doing so were held by every employer, and the “one bad apple” rule (in which the compliance failures of one sponsor could disqualify the plan for everyone, a rule which was eliminated by the SECURE Act) meant that many employers found that there was very little benefit to such responsibility sharing. One significant benefit brought forth by the SECURE Act is in reporting requirements-- only one Form 5500 will need to be filled out for the entire PEP, rather than one per employer. The SECURE Act made both PEPs and MEPs easier to establish as well, and plans with under 1,000 participants are exempt from audit requirements as long as no individual plan sponsor has more than 100 employees.
PEPs allow small and medium businesses to lower the cost of providing retirement plans to their employees through cost-sharing, and through PPPs, legal responsibility as well. However, as shared plans, individual sponsors also give up some control, and depending on the plan, may still be required to take on some record-keeping duties. Importantly, PEPs are limited only to 401(k) plans, not 403(b)s, 457(b)s, multi-employer plans for collectively bargained workers, or DB (defined benefit) plans, and must also have a 3(16) administrator in addition to the PPP.
Additionally, cost savings can vary greatly depending on plan features and the number of plans being offered to employees. As there may be a wide variety of PEPs offered with varying models for recordkeeping, service providers, and proprietary investments, it’s not yet clear what duties plan sponsors will have to take on themselves aside from choosing a PPP and any other fiduciary they may deem necessary. “Probably, in most PEPs, the only retained responsibility will be to select and monitor the PPP…But, this means finding a PEP based on the services offered, how much responsibility is assumed by the PPP and service providers and what it costs, and whether the service providers appear to be competent,” said Bruce Ashton, a partner at Faegre Drinker Biddle & Reath in an interview with Plansponsor.
The PPP can be one of the businesses participating in the PEP, or a separate, unrelated entity that meets certain requirements outlined in the SECURE Act but must also be registered with the IRS and DOL before offering PEPs. Industry attorneys and analysts believe that “banks, insurance companies, broker/dealers (B/Ds) and similar financial services firms, including pension recordkeepers and third-party administrators (TPAs)” will apply to become PPPs, but, notably, registration is not currently open so there is not yet a list of available PPPs for employers to evaluate.
Like most things, there’s no hard and fast rule to determine whether or not a PEP is right for any sponsor, especially as these plans inherently share responsibility and there isn’t a list of PPP options currently available, so picking the right choice isn’t yet an option. However, that doesn’t mean that it’s too early to start planning; if this is an attractive option, sponsors can start to come up with a short list of others with whom they are interested in banding together, and begin talking of the types of responsibilities, features, and budgetary restrictions that will help them determine whether or not this is a viable solution for their businesses, and to lay the necessary groundwork for when PPPs and the PEPs they offer become available.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
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