Every time you turn around there seems to be additional risk and exposure surrounding pension plans … employees suing plan sponsors, worries about asset allocations and administrative fees, definitions of compensation, changing and confusing regulations, and more. While we all want to do the right thing and help our employees put aside resources for retirement, are the risks of maintaining a pension plan really worth it? In the long run, yes. Pension plans are essential to attract and retaining qualified employees and they also help to set you and your employees up for long-term success, and now, thanks to the SECURE Act there is a new type of multiple employer 401(k) plan, the pooled employer plan (“PEP”), that can be a viable alternative to small and mid-sized organizations.
If you’ve looked into multi-employer plans in the past, this one is different in that it doesn’t require the employers to have common ownership or interest, or for them to be located in the same geographic area, or any similar restrictions that plagued multi-employer plans in the past. What’s more the PEP can establish a provision within the plan that allows it to terminate the participation of chronically noncompliant employers in the pool. This provides protection from disqualification because of the noncompliance of a participating employer.
So why look at a PEP? A pooled employer plan can provide several advantages to an employer, including the following:
The PEP designates itself as both a named fiduciary and plan administrator. The PEP provides participating employers with a plan document (usually with some level of term flexibility) and assumes responsibility for all administrative duties (including oversight of functions that must be performed by participating employers). Furthermore, the IRS has been directed to issue model plan language for PEPs, which should ultimately simplify the process of ensuring that the plan document meets qualification requirements. This reduces the burden on you and your staff.
Reduced Fiduciary Exposure:
While you, as the employer, still retain fiduciary obligations with respect to choosing and monitoring the pooled plan provider, the provider assumes pretty much all other fiduciary responsibilities, dramatically reducing your risk as the plan sponsor and trustee.
Reduced Administrative Costs:
Administrative functions like filing the Form 5500, conducting the plan audit (which is required if you have over 120 eligible participants), bonding, etc., are done at the plan level by the PEP provider instead of having each individual employer participating in the plan doing them separately.
Economies of Scale:
PEPs may be able to offer administrative, recordkeeping, and investment management on a lower-cost basis than would be available to a smaller single employer plan as plan assets should be significantly greater and fees can be spread over a much larger asset base.
While there are many positive aspects of a PEP, it’s not all roses when it comes to these plans … there are some thorns to, which means employers really need to review the pros and cons of a PEP plan to their current single employer plan. Some of the more prominent negatives of a PEP are as follows:
It is What it is When it Comes to Plan Design:
If you are looking for flexibility in your benefit structure for different departments/programs, job categories, etc. (as are available in new comparability plans), you are going to be limited in your ability to do so based on the plan document options offered by the PEP provider. This will remove some of the potential for creative plan design to benefit you and your employees where it will be the most favorable or impactful.
Limitations on Investment Alternatives:
Since PEP providers are taking on fiduciary responsibility for the plan, they will most likely offer limited or no flexibility with respect to your investment choices within the plan. While this is advantageous because it limits your fiduciary responsibility, it also removes your say in how plan assets will be invested.
Less Administrative Say:
As outlined above, you have less administrative responsibility with respect to a PEP, but you also have less administrative input. Once you select the PEP you are working with, they choose the recordkeeper, the investment advisors, and make all other decisions on how the plan will be run.
Unsuitability in Certain Circumstances:
A governmental or church plan is unlikely to be able to use a PEP as such plans are subject to rules other than ERISA. The market for plans for such employers is already limited, so it is unlikely that PEP sponsors will be willing to provide separate PEPs for non-ERISA employers. Similarly, a PEP is unlikely to be acceptable for a collectively bargained plan, as it does not allow for joint employer-union control.
In general, a PEP is likely to be more attractive to you if you are a small or medium-sized employer that wants economies of scale and you are willing to give-up a large degree of control over your plan, and less attractive to you if you are a larger employer that can obtain low costs on your own and want to maintain more control over your plan.
Courtney is a member of Cerini & Associates’ audit staff where she focuses on serving nonprofit and employee benefit plan clients. She has experience performing assurance work in a vast number of industries, including nonprofit, healthcare, broker dealer, employee benefit plan, and manufacturing and distribution. Courtney brings her expertise, diversified background, and helpful approach to all of her engagements.