For small businesses considering joining a pooled employer plan, the chief issues to review are costs, the level of fiduciary outsourcing oversight provided by the specific model and 401(k) audit requirements.
Pooled employer plans were created by the 2019 Setting Every Community Up for Retirement Act to allow unrelated employers to convene to participate in a single 401(k) defined contribution plan sponsored by a registered pooled plan provider. The goal of provisions in the bill was to encourage employers that didn’t provide retirement plans to participants to offer one.
LIMRA data showed that prior to the SECURE Act, four in 10 employers with fewer than 100 employees offered retirement benefits. PEPs aimed to appeal to small businesses by allowing shared fiduciary responsibility for the plan and allowing unaffiliated plan sponsors to operate under a single Form 5500.
Plan sponsors interested in joining a PEP must examine the exact type of PEP the company would be joining, because there are many different types and arrangements that carry distinct fiduciary responsibilities, explains Catherine Reilly, director of retirement solutions at Smart, a global retirement technology business.
“The employer needs to be quite clear about what responsibilities they are taking on in each specific PEP,” she says. “Employers need to read the fine print and understand what level of fiduciary and outsourcing they really are getting.”
While joining a PEP does allow shared co-fiduciary responsibility, plan sponsors are not absolved of the fiduciary duty to retirement plan participants. “One important thing to consider is how much fiduciary responsibility does the specific PEP that they’re looking at allow them to offload,” Reilly adds.
Some PEPs are modeled for an employer to delegate as much responsibility as possible to a pooled plan provider, and to have the pooled plan provider oversee service providers to the plan. Others have the employer directly appoint many of the service providers, and the plan sponsor maintains a greater ongoing level of fiduciary oversight.
Despite the attention paid to small business retirement benefit coverage gaps, PEPs have not yet proliferated, explains Joshua Forstater, senior vice president at Vestwell. While advisers and traditional recordkeepers have talked tons about PEPs, “by and large, what we’ve seen is that they haven’t taken off the way we expected them to,” he says.
Businesses with 100 or more eligible retirement plan participants at the beginning of the plan year must undergo a 401(k) audit. According to Forstater, for plans with more than 100 eligible employees, using the single Form 5500, “you’ve still got to test individually, and then if you talk about small businesses, they don’t need to be audited because they have less than 100 employees.”
The audit requirement may be keeping employers from joining a PEP.
He adds, “PEPs have been a trickle, and you’ve seen them, most notably, with Aon, Voya and some of those mid-market solutions.”
PEPs haven’t been a great way for small business to provide retirement benefits, “the reason being that small businesses are not [401(k)] audited, so solving for one audit across the PEP doesn’t actually solve their needs,” he says.
Reilly adds: “Small employers who have less than 100 employees are not subject to audits, and audits are expensive; if they joined the PEP, it is subject to an audit, so that raises costs a little bit for very small employers.” She continues, “That’s why we’re finding it actually cheaper to do a collection of smaller plans, because none of these employers are subject to audits compared to doing a PEP where the whole PEP would be subject to an audit and the employers would have to share those audit costs.”
While midsized business with more than 100 employees have benefitted from PEPs, it comes at a cost, according to Forstater. For a plan sponsor, having to transition from a single employer plan to a PEP “is a hard sell when you have a certain legal structure, a compensation structure, et cetera, and now you’ve got to apply to someone else’s — so there are a lot of trade-offs,” he says.
Forstater explains that small business owners are overwhelmingly more concerned about the functionality of workplace retirement plans than the specific PEP they join. “What [plan sponsors] should consider is: does the solution make my life easier? Is it modern? Is it highly automated and [does it] bring together the fiduciary administration and investments in a simple and uncomplicated way?”
“Those are the ultimate factors that a plan sponsor should consider when they’re thinking about a PEP or any of those other alphabet soup solutions,” he says.
« More Companies Dive Into Pooled Employer Plans