By Peter Mastrantuono
In an effort to encourage retirement savings, the SECURE Act, which was signed into law in December 2019, created pooled employer plans to help small businesses establish a retirement plan for its employees at a significantly reduced administrative and expense burden.
What is a Pooled Employer Plan?
A pooled employer plan (PEP) provides a way for small, unrelated employers to participate in a single pooled 401(k) plan in order to realize the advantages of lower costs and better services that typically come with greater purchasing power. PEPs are limited to 401(k) plans.
It is true that multiple employer plans have existed for some time, but they failed to gain much traction due to the burdensome and complicated oversight rules imposed by both the IRS and the Department of Labor. One significant drawback to a multiple employer plan, for instance, was that if any one employer failed to follow the administrative requirements of sponsoring a retirement plan it disqualified the entire plan for all participating employers—it was a risk too great.
The SECURE Act removed the hurdles that, until now, have limited the participation in multiple employer plans.
A PEP is managed by a Pooled Plan Provider, which may be either one of the employers participating in the PEP arrangement or an unrelated entity, such as an insurance company or other financial institution.
The Pooled Plan Provider (PPP), which must register with the Department of Labor, acts as the fiduciary and is responsible for monitoring the operational compliance across all functions and service providers for the plan.
PEP’s Advantages for Small Businesses
The newly available PEP holds out several key benefits. Thanks to the economies of scale PEPs provide, it may offer lower costs to the employer and plan participants, which all things being equal, may result in improved outcomes for employees.
The adoption of a fiduciary with the skill and experience to carry out that role in a competent and responsible fashion should translate into better plan governance. It also mitigates the fiduciary risk to which plan sponsors are often exposed.
Finally, PEPs should reduce the administrative burdens faced by the employer, allowing it to focus more on growing its business.
Not So Fast…
While PEPs are an exciting retirement plan development for small and mid-size businesses, their adoption may be slowed by a couple of significant factors.
The first of these is related to the coronavirus pandemic. PEPs were specifically tailored for smaller businesses, which happen to be the employers that have been most hurt by the economic fallout of the pandemic. It may take some time for businesses to get past survival mode and think seriously about its employee retirement plan benefit.
The other obstacle is that many financial providers are holding off becoming a PPP, awaiting any action from the Department of Labor on its prohibited transaction exemptions. The challenge for prospective PPPs is that current rules prevent a provider from acting both as a fiduciary and as an investment manager since it represents a conflict of interest. Because the PEP rules require a PPP to be a plan fiduciary, it excludes them from the investment management role—an important revenue source for many financial providers.
Nevertheless, some financial institutions have begun offering PEPs and interested employers should discuss the potential choices with their financial advisor.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.