A New Retirement Plan Type: Why PEPs are Growing So Fast

by Prof. Robert Bloink and Prof. William H. Byrnes

Pooled employer plans, or PEPs, are a fast-growing type of retirement plan first introduced by the original SECURE Act as an option effective January 1, 2021. In the most general terms, a PEP is a type of multiple-employer plan (MEP) that meets certain additional requirements to avoid the commonality of interest requirement and one bad apple rule. While the concept seems simple, PEPs can vary significantly in terms of fees, options and flexibility. While PEPs are relatively new in the United States, if global markets are any indication, PEP assets are likely to continue to grow significantly as the idea gains traction with employers looking to reduce administrative burden and limit fiduciary liability. Whether the employer is transferring existing 401(k) assets to a PEP or joining the PEP as their first retirement plan offering, it’s critical to understand the terms of any given PEP before deciding to participate.

PEPs: The Basics

The PEP structure “houses” the 401(k) plans of multiple businesses under a single structure. Typically, the PEP will be treated as a single retirement plan, so that the group will only be required to file a single Form 5500 to further reduce the administrative burdens for each of the individual employer-participants.

To qualify, the PEP must be administered by a pooled plan provider (a “PPP”, which is generally a financial services firm). Use of the PPP to act as both plan administrator and a fiduciary with respect to the plan is intended to ease both the administrative burden and fear of fiduciary liability for small business owners. However, a small business client cannot eliminate all duties and responsibilities by outsourcing retirement plan administration to the PPP.

It’s still up to the employer to exercise prudence when selecting the PEP and the PEP service providers. Not all PEPs are identical, and the employer must evaluate investment options and the potential for conflicts of interest. In other words, employers remain responsible for acting in their employees’ best interests when offering a retirement savings option.

The PPP is responsible for filing the PEP’s Form 5500 and is also responsible for most plan audits and performing all basic administrative duties associated with the plan. The PPP must maintain any required bonding coverage.

The PEP will be exempt from the one bad apple rule if it follows rules about providing notice to participating employers when the need for corrections arises. The PEP must also have procedures in place to remove the assets of any participating employer that remains out of compliance.

Typically, the PEP can offer a broader array of investment options (and potentially lower costs) for savers because many small plans are pooled together.

Evaluating PEP Options

Not all PEPs are created equally. The precise PEP that will be most advantageous for any given client will depend on a variety of factors, including the PEP’s fee structure, the value of the adopting client’s assets that will be invested and the number of employees participating in the plan.

Fee structures can vary significantly from PEP to PEP. PEP fees typically involve a combination of base fees that are charged annually, fees assessed based on the number of PEP participants and asset-based fees. The structure that will benefit any given employer will depend on that employer’s circumstances. For example, employers with relatively few employees with higher account balances will benefit most from lower asset-based fees, but higher participant-based fees.  The reverse would be true for an employer with many employees that have relatively low account balances.

PEPs can also contain restrictions when it comes to allowing asset transfers. Some will have no minimum asset value restrictions while others have minimum requirements (i.e., only accepting new employer-participants with a minimum of $10 million in assets). Additionally, not all PEPs allow employers to make matching contributions, which can be an issue for business owners who offer an employer match as a tool to attract employees.

The employer’s industry can also be an important consideration. Industries that typically experience higher turnover rates may face higher costs—or may be prohibited from working with any given PPP entirely.

The availability of loan options can also be a relevant consideration. 401(k) plan sponsors can allow participants to take loans from their accounts, subject to restrictions. Many PEPs are more restrictive, or could prohibit loans entirely.

Conclusion

PEPs remain a relatively new option in the U.S.—but global adoption of PEPs has been strong in mature markets, indicating that interest among domestic employers is only likely to increase as time goes on. Ensuring that those business clients have the full information necessary to make informed decisions will be critical to choosing the PEP that best serves the business’ needs.