What is a PEP 401(k) Plan?

A PEP (Pooled Employer Plan) 401(k) allows multiple unrelated businesses to participate in a single, shared 401(k) plan. This arrangement reduces administrative burdens and costs for each employer, while providing professional management and potentially better investment options due to the larger pooled assets.
Author: Penelope Team
What is a PEP 401(k) Plan?

One of the most widely known types of retirement plans available is a 401(k), but nearly 70 percent of small businesses do not offer this option. There’s a lot of reasons for that, including concerns that 401(k) plans are too expensive to set-up and manage.

The good news is a few years ago, another retirement plan option, known as Pooled Employer Plans (PEP) became available. This new type of 401(k) retirement plan is offered by a pooled plan provider or PPP.  Established near the end of 2019 by the SECURE ACT (Setting Every Community Up for Retirement Enhancement), PEPs are meant to be an updated version of multiple employer plans (MEPs.)

But what exactly are the benefits of a PEP 401(k) plan? And how is it different from MEPs and the other retirement plans out there?  

Read on for answers to those questions and details about how PEPs can be beneficial for small business owners.  

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What is a Pooled Employer Plan (PEP)?

PEPs are employee 401(k) plans that make it possible for two or more companies in unrelated industries to participate in a single plan managed by a pooled plan provider. 

The provider has discretion over all plan administration needs and investments, which decreases administrative duties for the participating companies, as well as reduces the risks involved. 

By delegating more of the retirement plan administration duties to the 401(k) experts, small business owners and human resources employees can focus on their core business priorities instead.

What are the Benefits of a PEP Retirement Plan?

As PEP 401(k) plans are still a relatively new option, it’s important for company owners to understand all of the factors that make them unique, as well as their benefits compared to single-employer retirement plans.

Pro: Offloading Some of the Administrative Responsibilities

When using a PEP plan, the majority of the related  administrative and fiduciary liability responsibilities can be shifted from your company as the plan sponsor, to the pool provider. This can greatly decrease the administrative burdens for your company, as well as lower fiduciary risk and liability.

A study conducted by The Pew Charitable Trust found that many small businesses do not possess the time, infrastructure, or the technology needed to carry out all the administrative tasks involved with offering their workers a retirement plan. This is believed to be the second largest obstacle standing in the way of employers who want to offer employees a high-quality retirement plan. 

Pooled employer plans directly tackle these challenges. The provider takes on the majority of the daily plan administration tasks, as well as monitoring and reporting. The employer therefore has fewer duties to take care of, yet they still have control over some areas, such as making sure the plan is performing as expected so that it meets the needs of employees. 

Pro: Lower Participant Fees

Because PEPs involve multiple participating businesses, typically there are much lower administrative and record-keeping costs, in comparison to single employer retirement plans.

Pro: Fewer Vendor Relationships

When dealing with traditional plans, companies must engage with record keepers, investment advisors, legal or tax advisors, trustees, custodians, auditors, and in some cases, actuaries. 

The costs incurred for these additional services can add up quickly. An investment advisor alone may cost a company as much as $50,000 to $250,000 per year based on the company’s size. When using a PEP, however, these services are all grouped together with one provider that offers economies of scale.

Why Small Businesses Should Consider PEPs

For millions of Americans employed by small businesses, who do have a way to save for retirement, a pooled employer plan could be a game changer. According to the U.S. Bureau of Labor Statistics, there are approximately 38 million private sector employees who lack access to an employer-sponsored retirement plan. 

The Department of Labor hopes that the growing interest in PEPs will influence small business owners to offer this new and innovative option to their workers. PEPs help level the playing field by ensuring small businesses have the same benefits and advantages available to employees of larger companies. 

How is a PEP Different from an MEP?

PEPs were designed to be an upgrade from MEPs.Here are some of the key differences to be aware of:  

PEPs are not as restrictive as MEPs.

MEPs are sponsored by multiple small businesses or employers that are related via a single industry or region. With a PEP, however, the industries do not have to be related, nor do the companies need to be geographically close to one another.

Less liability risk for each employer.

There is also no “one bad apple” rule for PEPs. This means that if one employer is not compliant, it will not cause the entire plan to become disqualified.

No more individual Form 5500s.

PEPs make it possible for groups of workers to join, and this would be considered as one plan for the general purposes of the Employee Retirement Income Security Act of 1974. 

Regulatory Tailwinds for PEP

The SECURE Act of 2019 laid the groundwork for PEPs, while the subsequent SECURE 2.0 Act of 2022 further cemented their position. The key themes of this rule include the following:

  • Strengthening sensible investment management and efficient use of well-defined benefit pension plan assets.
  • Enhancing the outcomes of 403(b) plans by granting participants access to index funds, PEPs, and possibly collective investment trusts in the years to come.

Questions to ask if you are considering a PEP

There are many different types of PEPs and their benefits will vary based on the party that is acting as the provider. Therefore, you need to compare the features and benefits of the PEP with other retirement plans so you can be sure you are getting exactly what you and your workers need in order to save for the future.

Below are a few questions to ask when considering a PEP.

Does a PEP plan include the flexibility that my employees and I need in a 401(k) plan? 

It’s important to have a clear understanding of how much you will save by switching to a PEP before you commit. It’s also a good idea to ask how much the PEP will cost your company upfront, and if there are any ways to lower plan costs, if needed, to suit your company’s needs.

Has the PEP bundled together record keeping with any third-party administrative services within the offer? 

This is important because if the PEP provider has not bundled these services, you will need to determine if there are any additional costs that the plan sponsor or participants will be required to pay. You can then ascertain whether the fees are a reasonable price for your employees.

How is the investment lineup chosen for the PEP plan platform? 

With PEPs, the design of the retirement plan management and the investment lineup is chosen by the plan provider and not the employer. Therefore, you will not be able to change the key aspects of your plan, such as employee eligibility. 

For that reason, always request a demo before making the final decision. This will ensure you know what your administrators and workers will experience if they switch to the PEP model in-question.

Key Takeaway 

PEPs are designed to help decrease participant costs for small businesses, while simultaneously achieving higher levels of efficiency. They can also help ease the burden and stress of plan administration while ensuring other fiduciary obligations, responsibilities, and liabilities are effectively managed. 

A pooled employer plan may be a good solution if your small business does not currently offer a retirement plan option, or if you have a retirement plan in place, but would like to reduce their involvement with the plan’s administration.

Interested in retirement plans for your employees?  Get started today with a free, no-obligation consultation with a 401(k) retirement specialist.

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