The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 included provisions that created a new type of retirement plan for companies to consider – Pooled Employer Plans (PEPs). While the name is new, the concept has been around for decades. The idea is that by joining together the retirement plan assets of multiple entities, those entities can benefit from many areas, including economies of scale in pricing and services that wouldn’t necessarily be available to them on a standalone basis along with reduced fiduciary risk.
So why was a new type of plan necessary? This article looks at the different arrangements that exist in the marketplace and why PEPs were created as an attractive alternative to what was already in existence.
Multiple Employer Plans
Prior to the establishment of PEPs, there already existed a retirement vehicle that allowed employers to benefit from economies of scale by combining various features of their plans, including the pooling of their assets into one plan. These vehicles are known as multiple employer plans (MEPs). There are two types of multiple employer plans – open and closed.
An open MEP is a plan that combines employers that are unrelated into one single plan. In an open MEP, each participating employer still has to file a separate Form 5500 and conduct an annual audit. The various participating employers also have exposure to the potential compliance failures of other employers in the plan. Commonly known as the “one-bad-apple rule”, this requires the various employers in the plan to trust that the other employers will do what is necessary to avoid compliance failures that would jeopardize the qualified status of the entire plan.
By contrast, closed MEPs require that the participating employers have some sort of common link. This could be something like being members of the same professional association, or chamber of commerce. The advantages of a closed MEP over an open MEP include the elimination of the requirement for each participating employer to file a separate Form 5500 and have a plan audit. Closed MEPs also aren’t subject to the “one-bad-apple rule” which alleviates some compliance worry from the participating employer group.
Group of Plans
Group of Plans (GoPs) receive some of the benefits of a multiple employer plan but allow each sponsor to maintain a single employer plan, thus a bit more flexibility. GoPs will allow sponsors to benefit from one combined 5500 and the pooling of investments to gain better purchasing power. They require the same named fiduciaries, investment line up, trustee and administrator. Thus, they allow additional plan design flexibility but that comes with the cost of each sponsor needing to maintain their plan document and communications over time.
Pooled Employer Plans
PEPs take the MEP concept one step further. Effectively, PEPs are like closed MEPs in that there is only one Form 5500 filing, one plan audit, and they are exempt from the “one-bad-apple rule”. But unlike closed MEPs, PEPs allow for unrelated businesses to band together into a PEP. This subtle detail opens up a world of possibilities for employers that didn’t want the exposure of an open MEP but didn’t have the linkage requirement of a closed MEP.
Are You a Good PEP Candidate?
While PEPs have only been in existence since 2021, the concept of participating employer joining together to benefit from the economies of scale of more participants and more assets have been around for a long time. For all the reasons that you’d expect in terms of lower fees, lower fiduciary risk, and access to higher end services, PEPs are an attractive retirement plan vehicle for almost any employer to explore.
As we’ve helped employers evaluate the PEP marketplace, we’ve seen fiduciary committees get comfortable quickly with what this vehicle has to offer. To find out if a PEP might be a good fit for your company, reach out to us via our website at www.agilis.llc to schedule an initial consultation.