The Setting Every Community Up for Retirement Enhancement Act of 2019, also known as the SECURE Act, established three types of retirement plans. The most widely recognized is the single-employer plan (SEP).
If you are currently using a single-employer plan, you should reconsider. There are time and cost-savings to be had with other options.
If you don't have a PEO retirement plan, a pooled employer plan (PEP) is the third option.
What Exactly Is a Pooled Employer Plan?
Pooled employer plans, or PEPs, are a type of multi-employer plan intended to relieve employers of various administrative burdens.
Before the SECURE Act, businesses in multi-employer plans needed to be related either by association or industry.
Now, employers in the same PEP can be unrelated.
The SECURE Act allows employers and company owners to come together and create a single plan that is managed by a selected pooled employer plan provider (P3).
Why were Pooled Employer Plans created?
Pooled employer plans (PEPs) were created to enhance retirement plan coverage for small to medium-sized employers and business owners.
Small business employers may not provide retirement plans for various reasons, including costs and administrative burdens.
However, a pooled employer provider will cover some costs and administer workplace retirement plans. The PEP retirement plans' amount covered by the provider depends on the existing economies of scale.
What Are the Advantages of a Pooled Employer Plan?
A PEP has several key benefits over single-employer plans. These include the following:
Group Buying Power
Employers in smaller plans of 100 participants or fewer can benefit from group buying power to reduce the costs of recordkeeping, custodial expenses, and investment advisory.
While smaller employers don't need to undergo an annual independent audit if they offer a plan, employers in a PEP could share the cost of a yearly audit to keep it affordable.
Employers in large plans can benefit from cost savings if audits are conducted at the PEP level instead of requiring each employer to submit to an individual audit.
Additionally, employers can reduce the costs of professional 3(16) fiduciary services that employers may have covered separately.
Less Fiduciary Exposure
The employers have a named fiduciary that provides advice and is responsible for the plan's administration and operations.
Most often, the named fiduciary is usually the plan's sponsor.
Employers in PEPs have certain fiduciary obligations regarding selecting and monitoring the pooled plan provider. Outside of these parameters, the employer has little to no fiduciary responsibilities in these plans.
Instead, fiduciary obligations become the province of the pooled plan provider.
Reduced Administrative Costs
Ordinarily, employers would need to perform various administrative tasks, including audits, filing Form 5500, and bonding.
In a PEP, the pooled plan provider completes these tasks without needing the employer's involvement.
Access to Tax Credits
Another benefit of pooled employer plans is the tax credits provided by the IRS. Eligible employers can secure up to $5,000 in tax credit to account for the start-up cost.
This is in addition to an annual $500 tax credit for the first three years.
The IRS has also received the directive to provide model plan language for PEPs, ensuring plan documentation meets all PEP qualification requirements.
What Are the Disadvantages of a Pooled Employer Plan?
While plenty of advantages make a PEP worth selecting over other plans, there are some potential disadvantages to keep in mind. These cons of pooled employer plans include:
Limited or No Ability to Choose Recordkeepers
Pooled plan providers of PEPs select recordkeepers under the plan, and you have very little say in the matter.
This makes it essential to check with your provider to determine if the recordkeeper is the best choice for your company's retirement plan.
Limitations on Investment Choices
Pooled plan providers may not offer much flexibility regarding investment menus.
This is a double-edged sword.
The rigidity benefits employers by limiting their fiduciary responsibility, but it comes at the sacrifice of controlling investments.
Inflexibility of Plan Design
Some employers may want to separate benefit structures according to varying job categories, branches, and other factors. However, employers under PEPs will have certain limitations around plan design depending on the options that the pooled plan provider offers.
Why Use a PEO as a Pooled Plan Provider?
Pooled employer plans are ideal if you don't already offer retirement plans or want to alleviate the administrative burdens that come with your existing single-employer plan.
The right plan sponsor can help reduce fiduciary liability, save money via pooled resources, and streamline plan administration for employers.
Employers can also integrate payroll with their plans to optimize accuracy, efficiency, and cost-effectiveness through a PEP.
Whether you opt for a multiple-employer plan or a PEP, you should consider partnering with a professional employer organization (PEO) that will serve as your plan provider. PEOs provide expertise in retirement plans while also handling retirement plan administration.
That means your business benefits from offering a top-notch retirement plan without the administrative hassle that usually accompanies it.