The Mechanics of Moving to a PEP

With a lack of regulatory guidance, plan sponsors can rely on certain existing rules to know the steps to take if they decide to move from a single-employer plan to a pooled employer plan.

The goal of the provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act that created pooled employer plans (PEPs) was to encourage employers that didn’t have retirement plans for employees to offer one. But employers that already sponsor a plan may also decide a PEP is a better choice for them and their participants.

“My sense from talking to PPPs [pooled plan providers], and reading about them, is they are marketing to employers that don’t have retirement plans,” says Malcolm C. Slee, principal at Groom Law Group, Chartered.

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However, Michael Majors, senior director of national retirement sales at Paychex, says although its PEP was marketed for new plan sponsors in December, it has already started accepting mergers. “We will promote [the PEP] for existing plan sponsors in the next 45 days or so,” he says. “From a demand perspective, in two full weeks of December, we exceeded expectations. We’re already selling to hundreds of employers.”

Majors says Paychex has found in the conversations it is having with plan sponsors that many have said the main reason they are interested in joining a PEP is to reduce their responsibilities. “For plan sponsors joining our PEP, there’s one-fourth the paperwork that requires signatures than there is when we sign on a new single-employer plan. So we’re seeing that it is already easier in that sense,” he says.

Paychex also does recordkeeping for single-employer plans, but it hasn’t marketed its PEP to existing clients. “We will probably wait for more regulatory clarity before doing that,” Majors says.

Slee notes there’s not much regulatory guidance about PEPs at this point. There was a rule issued last year regarding how PPPs can register with the secretary of labor and the secretary of the Treasury, but there’s no guidance about the mechanics of moving from a single-employer plan into a PEP.

“There is language in the SECURE Act that says in the absence of guidance, plan sponsors can rely on a good faith interpretation of existing law and guidance,” Slee says. “So, a big part of that would be going by how MEPs [multiple employer plans] have worked.”

Slee suggests that the decision of which PEP to join should be treated as a fiduciary decision. “Plan sponsors should look at what services the PEP offers and the fees. It’s a challenge because everything is new,” he says.

Slee reminds plan sponsors to keep in mind the Employee Retirement Income Security Act (ERISA) anti-cutback rule. “Participants’ benefits can’t be reduced by the merger into the PEP,” he says. “Plan sponsors should do a benefits rights and features comparison. I’m assuming PPPs will have procedures for that kind of comparison.”

Once the plan sponsor has picked a PEP provider, the existing plan would be merged into the PEP, Slee says. “I don’t think a plan sponsor would have to terminate its existing plan. There are rules about offering a follow-up plan immediately after terminating a plan,” he says. “But different providers might have different approaches or attitudes about this.” Slee adds that there are conceptual similarities to merging plans when companies merge.

Zachary Keep, manager of compliance risk at Paychex, says the move from a single-employer plan to a PEP is like a plan merger. However, his view of whether the single-employer plan should be terminated is a little different than Slee’s interpretation.

“A plan sponsor doesn’t have to terminate its [single-employer] plan; it can sponsor multiple plans. But, a typical plan sponsor would want to consider termination and the timing,” Keep says. “If a plan sponsor terminates the [single-employer] plan before moving to a PEP, it’s a distributable event, so it would probably want to terminate the plan after the merger into a PEP.”

Slee says plan sponsors will have to change their plan documents, amending the single-employer plan to provide for a merger into a PEP.

Plan sponsors will also have to adopt a new plan document. Keep says plan sponsors that join Paychex’s PEP will have to use the plan document it provides.

There will be a transfer of employee census data and most likely a transfer of assets, requiring a blackout period, Keep says, noting that a plan sponsor of a single-employer plan that decides to join a PEP doesn’t have to transfer assets. “My understanding is PEPs will have the same or substantially similar investment types [as single-employer plans] available to participants,” he says. “We’re doing all we can to ensure participants are where they want to be [as far as investments] in our PEP.”

“If a plan sponsor moves to a PEP recordkept by the sponsor’s current recordkeeper, it may make things a little easier. The mechanics of transferring money may be different,” Slee says.

He suggests plan sponsors fix any compliance and data issues before the move to a PEP. “Not just data, but nondiscrimination issues as well,” he says. “The PPP doesn’t want to import problems into the PEP.”

“Obviously, things are still evolving,” Keep says. “As a result of the insanity of last year, we are still waiting on some regulatory clarity. There’s a lot of good faith understanding being used in the market, but we are prepared to pivot if anything changes.”

“We will welcome guidance from agencies about how these things work,” Slee says.