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:
After reading this article, you’ll know if a PEP is the right retirement solution for you and your employees.
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:
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.
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.
A PEP involves several different professionals all working together to operate the plan. These professionals include:
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.
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.
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:
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:
For more information about how to choose a 401(k) provider, read our next article on the top considerations for your search.