This is another article in our series on Pooled Employer Plans (PEPs). In prior articles we’ve looked at PEPs from a high level and we’ve also discussed the various fee arrangements offered by PEPs. In this article we’re going to look at the differences in plan design characteristics that exist between different PEPs.
Differences in PEP providers as it relates to plan design comes down to one major attribute: flexibility. Some PEP providers provide greater flexibility in terms of the employer provided contribution formulas, and plan features, while others provide little-to-no flexibility in plan design. Ultimately a PEP provider is balancing the extra services involved in managing various provisions against keeping a streamlined service. Since PEP providers are providing administration services for each of the participating plans, typically the more flexibility allowed in design means more work for the PEP provider, this is especially true if nondiscrimination testing is required (which is done at the participating plan sponsor level and not at the aggregate PEP level).
The PEP providers that do give greater flexibility to participating sponsors allow for greater customization of the participating plan sponsor’s plan provisions. This extends not only to compensation definitions and employer contributions but also to provisions like loans and hardship withdrawals (amount, number, and frequency). As mentioned above, by allowing participating employers to customize their plan provisions, PEP providers are also anticipating the need to perform nondiscrimination testing each year, which could result in additional costs.
However, some PEP providers limit the participating employers to specific provisions. For example, a PEP provider may specify that all participating employers will have a Safe Harbor plan design – and they may even specify which Safe Harbor designs are allowable under the PEP. A PEP provider would take this approach to streamline their services since nondiscrimination testing should not be needed. Further, the PEP provider may limit or prohibit loan and hardship withdrawal features.
Depending on a plan sponsor’s goals and objectives with their retirement plan, a plan sponsor’s desire to customize plan provisions could eliminate some PEPs from the list of potential providers that would best suit them. It’s important for plan sponsors to understand the constraints that PEP providers impose on participating employers before selecting a provider to ensure that the provider will be able to give them the features they are looking for in their 401(k) plan.