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Over the past year or so, the concept of pooled employer plans (PEPs) has garnered increased attention from the defined contribution (DC) plan community. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law in December 2019, removed the obstacles that had previously limited adoption of certain open “multiple employer” plans, now referred to as PEPs.
Plan sponsors and consultants have responded with great interest, leading to a number of PEPs having recently been established on behalf of employers of varying sizes and industries. We believe PEPs will continue to gain traction going forward and, indeed, have the potential to reshape the DC plan landscape. However, this is a long-term trend that will likely play out over many years, if not decades.
A PEP may be suitable for companies that do not currently offer a workplace retirement plan to their employees, as well as for some employers that already have such a plan in place. Let’s take a look at the pros and cons — but first, what exactly is a PEP anyway?
What is a pooled employer plan?
A pooled employer plan (PEP) is a type of multiple employer retirement plan created by provisions of the SECURE Act of 2019 and available for plan years beginning on January 1, 2021. As the name suggests, a PEP enables private employers that are existing or prospective DC plan sponsors to “pool” their retirement resources with those of other (unrelated) employers into a single plan and to delegate most of the tasks and duties associated with maintaining the plan to a third party, known as a “pooled plan provider (PPP).”
Some “pros” of PEP retirement plans
- PEPs lower the barriers to entry for smaller employers that might otherwise be unable to offer their employees a workplace retirement plan, whether due to the prohibitive costs or difficulty of implementation and administration.
- As a result, PEPs could have a major positive impact on the DC plan industry in the years ahead by expanding retirement benefits to the millions of US employees who do not currently have access to a workplace retirement plan.
- The plan sponsor and named fiduciary roles are outsourced to the pooled plan provider (PPP), a professional organization that likely has greater expertise in managing retirement plans than would a typical employer running its own plan.
- The employer’s fiduciary liability is thus narrowly limited to the single (albeit important) decision as to which PPP/PEP to use, rather than the many decisions typically required to manage their own plan (e.g., selecting plan investments).
- Participation in a PEP should allow employers to focus primarily on their core business because it offloads and streamlines the additional responsibilities that generally come with administering a DC retirement plan for company employees.
- Assuming the PEP is able to achieve significant scale via multiple participating companies, the total financial cost to the employer may be substantially less than if the employer had set up and managed a retirement plan on its own.
Some “cons” of PEP retirement plans
- By opting for a PEP, a company may give up some ability to “customize” the features of its workplace DC plan to the specific demographics, retirement needs, and objectives of its employee population.
- The employer may lose the “halo” impact – that is, the salutary effects of favorable employee impressions and perceptions — from delivering a valuable retirement benefit to its employees.
- For some larger employers, the explicit costs associated with membership in a PEP may end up being greater than those involved with establishing and running its own retirement plan.
- PEPs are new and relatively untested in the marketplace, so it may take time for these pooled plans to reach their full potential and maximum benefits for both employers and employees.
Getting started with pooled employer plans
In order to join or form a PEP, a private employer must partner with (or itself become) a PPP that is registered with the US Department of Labor to serve in a fiduciary capacity as a plan administrator, performing all of the plan’s administrative functions as spelled out in the Internal Revenue Code. A professional retirement plan consultant may be able to assist in this effort if you determine that a PEP is the right retirement solution for your business.
PEPs may confer compelling advantages to both employers and employees. Notably, this innovative new plan design has real potential to improve the retirement planning experience for countless American workers; time will tell.
On the investment management side, forward-thinking firms that recognize the scale of the opportunity and the potential to provide institutional-quality asset management at an attractive price may be the biggest beneficiaries over the long term.