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 employees.
Pooled employer plans are often managed by third-party providers, known as pooled plan providers – or PPPs – 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 Pooled Employer Plan and the roles within the plan.
Advantages of Pooled Employer Plans
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 employer to come together for a greater cause: the employees’ 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 larger employers, attracting a wider talent pool.
Another benefit is the role that PPPs offer. These providers have fiduciary oversight of the employer 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, as well as payroll deductions for those participating in the PEP. For small employers 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 small 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 limited hands-on service available, there are also disadvantages to consider before committing to a pooled employer plan as a plan sponsor.
Disadvantages of Pooled Employer Plans
PEP disadvantages are almost exactly the opposite of their 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, participating employers may only have choices between what is allowed within the plan.
Roles within a Pooled Employer Plan
When it comes to running pooled employer plans, 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 and administrative burden 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 Pooled Employer Plans 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 other retirement plan. Learn more about Slavic401k’s PEP offerings for retirement planning .
Related PEP Articles
Quarterly Market Commentary, October 2024
As we near the end of 2024, explore the latest market reactions on U.S. economy, Fed rate cuts, and managing retirement portfolio volatility.
4 Power Moves to Maximize Your Retirement Savings
In this blog post, we explore helpful tips to maximize your retirement savings no matter where you are on your financial journey.
Vesting Isn’t Scary: Dispelling the Myths Behind Vesting Schedules
Slavic401k shines a light on the myths surrounding vesting schedules, dispelling the rumors, and shows you why vesting isn’t something to be afraid of today.
