Into the Pool? PEPping Up 401(k) Plans

When Mark Goldberg, president and CEO of Rochester, N.Y.-based Operation Brain Freeze, which owns and operates a chain of DQ Grill & Chill restaurants, learned about pooled employer plans (PEPs), he began investigating whether they might be a good fit for his company's 401(k) plan.

Established by a provision of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), PEPs, available as of January 2021, are retirement plans that allow unrelated businesses to join a single plan that is set up and administered by a professional plan provider (PPP).

Moving to a PEP

Goldberg soon began viewing a PEP as a way to relieve some of the administrative responsibilities and fiduciary risks involved in sponsoring a 401(k) plan for the company's more than 300 employees. The key concern for Goldberg was that his company's plan had become more complex—and after 10 years of sponsoring the plan, Goldberg was ready for a change.

"When managing a 401(k) plan, you might not fully understand what your fiduciary responsibilities are," Goldberg said. "You can't be an expert at everything, and it's difficult to manage things if you are not comfortable with your ability to do so."

One reason Operation Brain Freeze moved its 401(k) plan to a PEP was an administrative oversight that led to a late filing of the plan's required annual Form 5500. The resulting penalty and time required to remedy the issue highlighted for Goldberg the need to hand over plan administration to someone else. "I was immediately intrigued [by the idea of moving to a PEP], and the timing was perfect," he said.

When an employer moves a 401(k) plan to a PEP, the PPP acts as the plan fiduciary and handles all of the required compliance, administration and record keeping for that plan and all the retirement plans in the PEP. As such, a PEP is designed to help leaders of smaller organizations who want to sponsor a 401(k) plan but, like Goldberg, are uncomfortable with the administrative and fiduciary responsibilities involved.

Currently, PEPs are only available to employers sponsoring a 401(k) plan. Those sponsoring other plans, including 403(b) or 457(b) plans, cannot join a PEP.

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An Evolving Market

With an increasing number of retirement plan vendors now setting up PEPs, many are betting that more employers, especially small ones, will want to adopt this alternative 401(k) model.

Among smaller employers that don't offer a 401(k) plan and consider it unlikely that they will begin doing so within two years, nearly one-third would be very or somewhat likely to use a PEP to start up a plan if they decide to provide a 401(k) benefit, according to a 2021 survey of 1,903 employers of all sizes conducted by the Transamerica Institute.

However, it is less clear if many larger-employer 401(k)s, which tend to enjoy a wider array of investment options and lower fees than smaller plans, will seriously consider moving to a PEP. The Callan Institute's 2021 defined contribution survey of 93 big retirement plan sponsors found that 76 percent are very unlikely to join a PEP.

The most common reasons for this reluctance include worries about having less control over plan administration and concerns that the resulting PEP retirement plan will be less competitive than their existing plans.

The Right Answer?

Before making the move to a PEP, employers should carefully consider whether it makes sense to do so by taking into account the following.

PEPs can reduce administrative costs … 

Because PEPs can spread administrative expenses among all participating plans, they are likely to be able to provide the same or better administrative support for a more competitive price than a small plan can get on its own. One of the largest costs involved in sponsoring a 401(k) plan is the required plan audit, which generally applies to plans with 100 or more participants. PEPs still must conduct plan audits under certain circumstances, but the cost of doing so will be spread among all of the plans involved, which is likely to be much lower than the cost of auditing each individual plan separately.

… but employers still have some plan-related responsibilities.

A move to a PEP can reduce an employer's plan-related responsibilities but does not eliminate them entirely. Employers "still have a responsibility to monitor their providers," said Craig Silverstein, head of retirement services product strategy for Rochester, N.Y.-based Paychex, an HR and payroll services firm. For example, they must monitor the PEP to ensure that the PPP is executing on the agreement.

In most cases, this oversight requires an annual review to make sure it is offering the required services as promised and as expected. In addition, employers are still responsible for front-end plan administration, including providing and updating participant data, calculating and withholding correct contribution amounts, and sending those contributions to the plan in a timely way.

PEPs can provide better and less expensive investment options for participants … 

Now that his company has moved its 401(k) plan to a PEP, Goldberg expects the plan to provide a broader array of investment options with lower fees for plan participants.

PEPs "provide small businesses with a way to access the same investment options as a larger company, but at a reduced cost and with a reduction in the employer's fiduciary responsibilities," said Joseph Sellitto, senior vice president at Bradley & Parker, an insurance, risk management and financial services firm based in Melville, N.Y.

… but it's not guaranteed.

Not everyone is convinced PEPs will be better on the investment fee front. A recent paper released by the American Academy of Actuaries expresses skepticism that the overall potential savings on investment fees will be significant when using a PEP.

"Institutionally priced investment options are currently available at low minimum balances for many index funds, so investment-related fees for those funds would be unlikely to be reduced significantly," according to the paper.

PEPs Still Require Due Diligence

Even though PEPs promise to reduce an employer's responsibilities as a retirement plan sponsor, choosing a PEP still requires appropriate due diligence. In addition to understanding the services and fees of each PEP, employers should "learn all the facets of what goes into a PEP," advised Jeff Coons, chief risk officer at High Probability Advisors, a financial services and risk management firm in Pittsford, N.Y. 

This way, employers will know what to expect from a PEP and, more importantly, whether the PEP is delivering on its promises.

Joanne Sammer is a New Jersey-based business and financial writer.

[Small businesses can find offering a retirement plan to be daunting. SHRM is offering a program through Raymond James that may help. Visit www.shrm.org/401k to learn more.]