Summer may be over, but your clients might still be thinking about jumping into a pool — a pooled employer plan, that is.

Historically, an individual employer — no matter how small — has had to set up and run their own individual retirement plan. Regulators and legislators have sought for years to ease this administrative burden by putting multiple employers together into one buying pool — thus offering potential cost savings and reduced legal liability.

Pooled employer plans (PEPs), created under the SECURE Act, are the latest attempt to make 401(k) plans more accessible for small businesses. Rolled out on January 1, 2021, PEPs have gained attention among financial professionals and employers alike but are off to a slower than expected start with only about 100 plan providers registering with the Department of Labor as of September 2022.*

Yet, they are still relatively new and can be complex, leaving many plan sponsors with questions. This provides an opportunity for you to educate yourself and your clients about this emerging strategy before testing the waters.

What are PEPs?

PEPs are an updated version of multiple employer plans (MEPs), which permit unaffiliated businesses to participate in the same retirement plan, but with three key differences:

• Removes the requirement that employers share a commonality, such as being part of the same industry or professional organization
• Eliminates the “one bad apple” rule, in which all participating employers could bear responsibility if just one employer violates the rules and regulations of the plan
• Uses a pooled plan provider (PPP) to run the plan, requires an ERISA 3(16) administrator and typically involves a discretionary investment manager under ERISA 3(38).

The premise (or promise?) of PEPs

Much has been said about the retirement emergency in the United States, especially among small businesses. The vast majority (92%) of businesses with at least 500 employees offer a workplace retirement plan, compared with less than half (46%) of those with fewer than 100 employees.^†

Everybody in the pool — what to consider before making the leap

Many smaller employers do not sponsor plans for a variety of reasons, including cost, fiduciary responsibility and administrative burden. But the extent to which PEPs resolve these concerns remains to be seen. Below are some considerations when determining whether PEPs are the right choice for your clients:

PEPs may involve additional costs
Cost is one of the top reasons small-business owners cite for not offering a plan.^† One premise of PEPs is that they may be more cost effective because multiple employers pool their assets and can potentially achieve economies of scale. But are PEPs really more cost effective? Consider:

• The costs of 3(16) administrative services and a 3(38) investment manager are already built into a PEP. Clients joining the PEP will have to absorb these costs whether or not they want these services. As a result, employers may wind up increasing cost by adding services they don’t really want or need.
• PEPs are subject to an annual audit and share the associated costs. If a plan is currently paying for an annual audit, pooling the expense can result in a noticeable cost savings, but it is not typically necessary for single-employer plans with fewer than 100 participants. Given that nearly 90% of all 401(k) plans have fewer than 100 participants, with a PEP, your clients might be potentially sharing the cost of an expense that does not apply to them.
• Given that PEPs are still in their infancy, data on costs are not widely available but the chart below shows that the expenses for a single-employer plan are lower compared to MEPs — the predecessor of PEPs.

Some fiduciary responsibility and administrative burden may remain
According to a 2022 study by the Secure Retirement Institute (SRI), approximately one-third of plan sponsors cited reduced administrative burden (35%) and reduced legal liabilities (32%) as part of the appeal of PEPs. In a PEP, the PPP will oversee or outsource some of these functions. But there are some caveats with these services that plan sponsors should understand.

• Joining a PEP does not completely remove the plan sponsor’s fiduciary liability, as they are still responsible for selecting and monitoring the PPP.
• As previously mentioned, administrative and fiduciary services are packaged together and cannot be separated.

Flexibility may be limited
Many pooled arrangements can be restrictive. One of the biggest concerns is lack of control. Cerulli found that 33% of plan sponsors prefer to have a plan that is customized for their employees without constraints.

• There is often little or no flexibility when it comes to the investment menu, as the PPP or another 3(38) fiduciary makes the investment choices. These choices will ultimately affect participants’ retirement outcomes, so it’s important that plan sponsors are comfortable with the selections.
• Plan design is another area that might have limited flexibility. Plan sponsors will have to think about which plan features they want to offer as there are differences among the offerings across PPPs (e.g., auto features, different vesting schedules, whether to offer loans).

Options outside the pool
While there are aspects of PEPs that make them seem compelling to plan sponsors, there may be another option better suited to them. For example, some of the benefits that appeal to plan sponsors — the potential for lower costs, reduced fiduciary liability and decreased administrative burden — already exist in a traditional single-employer plan structure.

When considering a PEP, ask your clients:

• Do you have fewer than 100 employees?
• Do you want to have input in your plan’s design?
• Do you want to have some say in selecting your plan’s investment options?
• Do you want to choose the features and services you pay for and how those costs are paid?

If your client answers yes to any of these questions, a single-employer plan may be a good option to consider. Our recent white paper discusses some of the potential benefits and drawbacks of PEPs versus single-employer plans.

While PEPs address some plan sponsor concerns, the “one-size-fits-all” approach may not actually fit your particular clients’ needs. That’s why it’s a good idea to compare the pros and cons of PEPs versus other solutions in the marketplace. Only leap into a PEP if it’s the best solution for both the participants and plan sponsor.

Read important disclosures