Pooled Employer Plans (PEPs)
In December 2019, Congress passed "The SECURE Act" (Setting Every Community Up for Retirement). In an effort to broaden retirement savings, refine plan administration, and simplify the industry rules, the SECURE Act enabled the “Open” MEP (Multiple Employer Plans) concept to expand into what we know as PEPs (Pooled Employer Plans) which are more accessible.
Pooled Employer Plans have generated increasing interest from small business owners. Likewise, many of the big retirement industry leaders are starting to offer PEPs as their popularity grows.
What is a Pooled Employer Plan?
A Pooled Employer Plan (PEP) is a retirement savings vehicle that allows multiple employers from completely unrelated industries to join together as a group in order to create a single, larger plan which then, because of its size, has access to better prices.
A summary of the rules in the current version of ERISA says a PEP is:
- An individual account plan created to provide retirement benefits to the employees of multiple employers.
- A Section 401(a) qualified plan or Section 408 IRA trust. (403(b)s and 457(b)s are not currently included.)
- One in which the employers do not have anything in common other than participation in the plan.
PEPs and Open MEPs
Open MEPs aren't going anywhere (the name itself is a registered trademark, after all). But the SECURE Act clarifies several "gray area" issues in the original law, making PEPs a very attractive alternative, especially to small business owners. For example:
- The "commonality" rule is officially no longer necessary. The original "closed" MEP required that all participants be from the same industry or business sector. Now, participants need only to have the plan itself in common.
- The "bad apple" rule is no longer an issue. Under MEPs, if one of the participants failed to comply with regulations, it meant that the entire plan could be disqualified. This section of the old law is gone. Now, the plan simply has to provide a way to remove any "bad apples" from the group, and the rest of the members will not be affected.
- A "Pooled Plan Provider" (PPP) must be hired. A third-party plan administrator, registered with the Secretary of the Treasury, must be named as a fiduciary responsible for performing all administrative duties. They must also ensure ERISA compliance by everyone who handles plan assets. Employers are no longer responsible for all of this.
Peps' Impact on Your Retirement
PEPs are a simplified "plug and play" solution that makes retirement savings plans more accessible to small businesses and nonprofits that have traditionally been hesitant to get into 401(k) plans. The hassle of day-to-day oversight shifts from the employer to the third-party PPP. PEPs also allow employers to associate with a larger pool of businesses which leads to reduced costs, lower fees, and greater buying power for the group as a whole.
Employers who currently participate in retirement plans may also shift assets out of traditional 401(k) arrangements into PEPs as they discover their advantages.