Starting and managing a new 401(k) plan is a daunting task for any small business owner, which may be why many still don’t offer one to their employees. According to SCORE, a resource partner of the U.S. Small Business Administration:
28% of businesses with less than 10 employees offer retirement plans
51% of businesses with 10-24 employees offer retirement plans
63% of businesses with 25-49 employees offer retirement plans
There are many details to consider if you want to start up a plan, not the least of which are the time, cost, and fiduciary risk involved. Fortunately, a number of more affordable options are available, with much less administrative burden. Many states have launched (or are in the process of launching) a government-run Roth IRA plan for small businesses that don’t have a current plan in place. These plans can be implemented with minimal time, effort and oversight involved (most of the state-run programs are mandatory for employers to join, while a few are not). In addition, the recently passed SECURE Act 2.0 offers increased tax incentives to small businesses that start up a new 401(k) plan in 2023 or beyond (subject to some restrictions).
Besides these solutions, there is also an option called a Pooled Employer Plan (PEP).
What is a PEP?
A Pooled Employer Plan (PEP) is a fairly recent development in the 401(k) marketplace. It was made possible through the original (1.0) Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. A PEP allows employers to join together and “pool” their retirement plan to create efficiencies and economies of scale. In addition, they must be governed by a regulated Pooled Plan Provider (PPP). In general, a PEP allows for more fiduciary support and protection, significantly reduces key administrative duties, combines the “buying power” of multiple small businesses and allows more American workers to have the opportunity to save for a successful retirement.
PROS of PEPS
Pooled Plan Provider (PPP) does all the heavy lifting. The PPP designates itself as a named fiduciary and plan administrator. In addition to providing a plan document, it assumes responsibility for all administrative duties.
Reduced fiduciary exposure. The employer retains fiduciary obligations with respect to choosing and monitoring the pooled plan provider. Beyond that, there are generally no material fiduciary responsibilities.
Reduced administrative costs. Functions like filing the Form 5500, conducting the audit, distributing participant notices and bonding are handled by the PPP.
Economies of scale. Pooled employers generally pay lower administrative, recordkeeping and investment management fees than what a smaller single employer would pay.
CONS of PEPs
Inflexible plan design options. The PPP dictates plan design options, such as employee eligibility, loans and distributions and plan participation features, such as automatic enrollment and escalation.
Limited investment menu options. The PPP dictates the investment menu options, since it is acting as the plan’s investment management fiduciary.
Employers still retain some administrative responsibilities. Employers must still provide participant data, determine plan contributions, and withhold funds accurately. However, PPPs can mitigate many of these tasks by using technology to provide greater customization options and streamline the administrative requirements for employers.
PEP vs. 401(k)
The following table illustrates the key differences between a Pooled Employer Plan and a stand-alone 401(k) plan:
Pooled Plan Provider
Responsible for day-to-day plan administration
Pooled Plan Provider
Responsible for filing annual government forms
Pooled Plan Provider
Ability to customize investments
No or very limited
Ability to customize eligibility and vesting schedules
Pensionmark Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Pensionmark is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC).