When the SECURE Act passed in 2019, it opened a new world of possibilities for companies offering their employees retirement benefits – including the introduction of Pooled Employer Plans – or PEPs. Unlike a Traditional 401(k) or Individual Retirement Plan (IRA), PEPs allow multiple companies to join a retirement plan across a variety of industries and geographical areas, combining investment efforts in the interest of the employee.
These plans are often managed by third-party providers, known as pooled plan providers – or PPP – who oversee the fiduciary responsibilities of the plan, making it an attractive option for employers looking for a more hands-off approach administratively.
Like every retirement plan, PEPs have their advantages and disadvantages. Read below to learn about the ins and outs of a PEP and the roles within the plan.
Advantages of a Pooled Employer Plan
When it comes to PEPs, small businesses benefit the most because it allows them to offer comprehensive benefits packages to their small pool of employees that they may not be able to afford otherwise. The pooled structure of funds from a variety of companies allows each to come together for a greater cause: the employee’s financial future. Many large corporations offer 401(k) plans and profit-sharing opportunities, making them naturally competitive in the job market, but plans like a PEP allow small businesses to offer a wider range of benefits while also competing with big and small businesses, attracting a wider talent pool.
Another benefit is the role that PPPs offer. These providers have fiduciary oversight of the plan and will work with companies and organizations to ensure all compliance standards are met and that the plan is managed appropriately. This frees up time for small businesses, which would have otherwise been spent on plan documentation, governmental filings, reviewing new and upcoming compliance standards, and payroll deductions for those participating in the PEP. For a small business owner/operator already wearing multiple hats, this benefit can make a big difference.
Finally, according to the IRS, small businesses may benefit from tax credits of up to $5,000 in the first three years of participating in a PEP to help offset start-up costs, in addition to $500 for those who select automatic enrollment. The tax credit benefit has expanded since the passing of the SECURE Act in 2019, and now offers additional credits of up to $1,000 per employee for companies with up to 50 employees thanks to the SECURE Act 2.0.
While these advantages are noteworthy, especially for small businesses with limited funds and hands-on service available, there are also disadvantages to consider before committing to a pooled plan.
Disadvantages of a Pooled Employer Plan
PEP disadvantages are almost exactly the opposite of its advantages, especially on the administrative side. A PEP offers limited ability to select its recordkeepers and plan administrators. Instead, these are often assigned to third-parties with little room for flexibility.
In addition, there are limitations to the investment choices and how the plan is structured. While companies do have some flexibility for customizations, they may only have choices between what is allowed within the plan.
Roles within a Pooled Employer Plan
When it comes to running a pooled plan, there are a few different roles within the plan that you should be familiar with, noted by Ropes and Gray, including:
- Plan Provider or Administrator: Admins assume the fiduciary responsibility that would otherwise be the employer’s responsibility, and manage plan documents, distribution of notices, audits, and other administrative duties.
- 3(38) Fiduciary: This role has control over the PEPs fund lineup and has the authority to make changes without approval from the employer.
- Recordkeeper: This role is responsible for the administration of the plan from the third party to the employee.
- Trustee: Trustees are responsible for overseeing the plan’s assets in the investment portfolio.
While PEPs are generally a great option for small businesses looking to offer their employees a comprehensive benefits package, there are rules and regulations to consider, just like with any retirement plan. Learn more about Slavic401k’s PEP offerings.
