Unlocking the Potential: The 403(b) PEP Plan Industry

In recent years, the landscape of retirement savings has been evolving rapidly. With the passage of SECURE 2.0, the world of 403(b) plans is set to undergo a significant transformation. Starting in 2023, this legislation now allows 403(b) plans, excluding church plans, to participate in Pooled Employer Plans (PEPs).

The inclusion of 403(b) plans within the PEP framework is a significant advancement for the retirement industry. By participating in a PEP, multiple employers, such as educational institutions, healthcare organizations, and other non-profit entities, can join together to pool their resources and leverage the benefits of scale just as 401(k) plan sponsors have been doing. This enables smaller employers in the 403(b) space to access similar benefits and services that were traditionally only available to larger organizations.

This development presents a unique opportunity for 403(b) plans to streamline plan management services, potentially leading to simpler and more cost-effective plan administration. Moreover, it offers a potential solution to the fiduciary liability concerns faced by 403(b) sponsors, especially within the context of excessive-fee lawsuits filed against colleges and universities in recent years.

Streamlined Plan Administration: Many 403(b) plans face unique challenges in terms of plan administration. These plans often have complex structures with multiple vendors and individual agreements, making coordination and oversight cumbersome and time-consuming. The consolidation of plan management services under a single PEP structure simplifies administrative processes, reduces operational complexities, and potentially lowers costs. The appeal of streamlined plan administration will drive more 403(b) sponsors to explore PEP options, seeking greater efficiency and improved participant experiences.

Cost-Effective Solutions: By leveraging the collective bargaining power of multiple employers, 403(b) PEPs can negotiate favorable fee structures with service providers. This cost-effectiveness will attract plan sponsors who are looking to maximize the value of their retirement benefits while maintaining competitive pricing for their employees.

Fiduciary Liability Mitigation: One of the most compelling advantages of 403(b) PEPs is the ability to delegate fiduciary liability. The wave of excessive-fee lawsuits targeting colleges and universities over the past few years has highlighted the need for robust fiduciary governance. By participating in a PEP, 403(b) sponsors can distribute fiduciary responsibility and reduce fiduciary risk. This collaborative approach also allows employers to tap into the expertise of professional fiduciaries, reducing the risks associated with plan management and enhancing the overall fiduciary governance structure. This should attract plan sponsors seeking to minimize risk and protect the interests of their participants.

The SECURE 2.0 Act also addressed an important concern related to the tax-qualification of participating 403(b) plans within a PEP also known as the “one-bad-apple rule”. Similar to the provisions of the SECURE Act of 2019 (SECURE 1.0) for 401(k) PEPs, the statute creates an exception to the unified plan rule for 403(b) plans. This exception ensures that the loss of tax-qualified status of one participating employer within a PEP does not affect the tax-qualification of other participating employers within the PEP. This provision provides reassurance to employers that their plan’s tax-qualified status is not jeopardized due to the actions or circumstances of other participating employers.

While the prospect of joining a 403(b) PEP is undoubtedly exciting and advantageous, there are obstacles that certain plan sponsors must address. One challenge is the existence of individual contracts and group annuity contracts within the existing 403(b) plan. Individual contracts mean participants maintain separate agreements with service providers, which can introduce administrative complexities and hinder operational efficiency. Similarly, for plans utilizing group annuity contracts, a thorough review of terms and conditions is necessary to determine the feasibility of transitioning to a PEP structure. Overcoming these hurdles requires careful consideration and evaluation of the potential benefits and implications for plan participants and sponsors alike.

In summary, the introduction of 403(b) plans into the PEP space under the SECURE 2.0 Act marks an exciting milestone for the retirement industry. By participating in a PEP, current 403(b) plan sponsors can tap into the benefits of scale, benefiting from improved investment options, streamlined operations, and increased bargaining power. As the industry evolves, 403(b) PEP plans have the potential to revolutionize retirement savings for educational institutions, healthcare organizations, and non-profit entities, empowering them to provide more efficient and effective retirement benefits to their employees.

Article by Justyna Mietelska for Agilis, LLC

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