Retirement planning and investment have always been crucial aspects of securing a comfortable and financially stable future. As more individuals and organizations recognize the importance of retirement savings, the landscape of retirement plans has evolved to include innovative options that address both the needs of participants and the regulatory requirements governing these plans. Two fundamental concepts that play a significant role are fiduciary responsibility and governance. These concepts ensure that retirement plans are managed in a responsible and transparent manner that exclusively benefits the participants in these plans. Pooled Employer Plans (PEPs) are an option for employers that can help to spread out the obligation of some of these duties.
A PEP is a relatively new retirement plan structure that emerged from the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019. PEPs are designed to provide a cost-effective and efficient way for businesses, and even self-employed individuals, to offer retirement benefits to their employees. These plans pool together multiple employers into a single retirement plan, allowing for economies of scale that can lead to reduced administrative costs and potentially improved investment options.
Fiduciary responsibility is a core principle that underpins the management of retirement plans. It establishes a legal and ethical obligation for those responsible for managing retirement plan assets to act in the best interests of plan participants and beneficiaries. This includes making informed investment decisions, diversifying investment options, and ensuring that fees and expenses are reasonable. Fiduciaries are expected to exercise prudence, loyalty, and care when managing plan assets, and they can be held accountable for any breaches of these duties.
Governance refers to the processes and structures in place that guide decision-making and ensure accountability within an organization or system. In the context of retirement plans, governance mechanisms are critical to maintaining transparency, minimizing conflicts of interest, and upholding fiduciary responsibilities. Effective governance involves creating a framework for decision-making, setting up oversight mechanisms, and maintaining clear communication with employees that participate in the retirement plan.
PEPs are required by law to have a named fiduciary who assumes responsibility for the management and administration of the plan. This fiduciary is tasked with ensuring that the plan is operated in compliance with the Employee Retirement Income Security Act (ERISA) and other relevant regulations. This includes making prudent investment decisions, managing plan fees, and disclosing information to participants.
The governance of PEPs typically involves the establishment of a governance structure that includes a board of trustees or directors. This board oversees the plan’s operations, investment decisions, and administrative functions. The board’s responsibilities may include selecting and monitoring investment options, evaluating service providers, and ensuring that the plan’s design aligns with the best interests of participants.
Being part of a PEP, as opposed to a single employer 401(k) Plan, can help to alleviate some accountability from employers. Many PEPs offer the advantage of outsourcing fiduciary responsibilities to professionals who are experienced in managing retirement plans, which helps to mitigate fiduciary risks for participating employers. By pooling together multiple employers, PEPs can leverage economies of scale to negotiate better terms with service providers and investment managers, leading to potential cost savings. Participating employers can also benefit from outsourced administrative tasks, allowing them to focus on their core business operations.
Fiduciary responsibility and governance are essential elements in the retirement landscape, ensuring that retirement plans are managed in a responsible and transparent manner. PEPs represent a contemporary approach to retirement planning that incorporates both principles. By pooling resources and responsibilities, PEPs offer a promising solution for employers seeking to provide retirement benefits while adhering to their fiduciary obligations. As the retirement landscape continues to evolve, PEPs stand out as a valuable tool that addresses the needs of both employers and employees, helping individuals build a more secure financial future.