The 3-Letter Plan Type You Haven’t Heard of

For sponsors and sponsors-to-be, there are three main types of composite defined contribution plans to choose from as a way to reduce costs: pooled employer plans, multiple employer plans and defined contribution groups.

While MEPs and PEPs have gotten more attention in recent years, defined contribution groups—sometimes known as Defined Contribution Group of Plans—are groups of single-employer plans. The plan type was created by the Setting Every Community Up for Retirement Enhancement Act of 2019.

DCGs

Plan sponsors that are members of a DCG are still sponsors of a single-employer plan, but the DCG sponsor, known as a direct-filing entity, files a consolidated Form 5500, called Form 5500-DCG, on behalf of all members of the group. This can reduce the plan sponsors’ recordkeeping and compliance costs. Form 5500-DCG was created by the Department of Labor earlier this year for plan year 2023 filings.

To form a DCG, all plans in a group must be individual account plans with the same trustee; have the same named fiduciaries; have the same plan administrator under the Employee Retirement Income Security Act; the same plan year; and have the same investments or investment options available.

Michael Kreps, a principal in the Groom Law Group, explains it is easier to leave a DCG than a PEP or MEP, but DCGs are “not a huge thing.” The consolidated Form 5500 is “probably helpful, with some cost reduction, but not huge.”

Steve Scott, a partner in Retirement Solutions Group, agrees and says he has not seen much growth for this type of plan organization, though they are a newer option than PEPs and MEPs.

Kreps says that when deciding between the three, sponsors need to consider how much they want to outsource and how much power they want to keep for themselves so they can customize features for their participants and work with what makes sense for them.

MEPs

MEPs are a qualified plan created by two or more employers that are in the same industry or geographic area. A MEP may be set up as a defined contribution or defined benefit plan.

Though they can include many employers, MEPs are legally considered one plan. They therefore file a joint Form 5500, are audited as one plan and offer one investment menu to all members. This framework allows employers to save money on recordkeeping, compliance and other fees by pooling costs with the other participating employers.

PEPs

PEPs were created after MEPs, by the SECURE Act of 2019, to permit unrelated employers to create composite plans and control costs.

Unlike MEPs, PEPs do not require participating employers to have a shared nexus and “can have completely unrelated employers,” Kreps says. A PEP must be set up as a DC plan.

Kreps says for MEPs that already exist, “if you have an association already, you don’t need to be a PEP; you can be a MEP. Unless you want to open up to unrelated employers.”

Though PEPs are more open in terms of who can join, they can be more restrictive than MEPs in terms of options for the employers: “You are completely playing by their rules,” Scott says. A PEP requires the plan to be operated by a pooled plan provider, which can make the plan “a little bit more restrictive.” A PPP is responsible for sponsoring and operating the PEP, must be a financial services company and must be registered with the Treasury and Labor departments.

The PPP for a PEP will offer one investment menu, and “that lineup is going to be vanilla,” Scott says. A PEP will come with its own recordkeeper, asset managers and advisers that employers will not be able to opt out of. Scott strongly recommends that employers make sure they understand what they are buying when joining a PEP.

Despite this, most new composite plans are PEPs, rather than MEPs: “Few and far between would be starting a MEP today,” according to Scott.

Scott says many start-ups and small business are interested in joining PEPs, but the industry is “getting more and more interest now in that 100-250ish-[employee] range,” and “it’s 100% because of the audit.” Scott explains that when plans hit 100 participants, they are subject to more onerous audit requirements, but if they join a PEP, they can outsource that to the PPP and control their costs.