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Pooled employer plans (PEPs) are a compelling option for small and mid-size employers and advisors seeking efficient, cost-effective recordkeeping solutions – and by entering a PEP, the employer reduces its fiduciary responsibilities. However, only about 300 firms have registered with the Labor Department to sponsor the plans since Congress approved PEPs in late 2019, as part of SECURE 2.0.
“SECURE 2.0 has significantly expanded access to pooled employer plans …," said Darren Zino, head of retirement distribution at Transamerica, which offers pooled plan solutions. "Perhaps most notably, it's opened the door for 403(b) plans to participate, which is a significant change for non-profits and educational institutions. We're also seeing clearer guidelines on fiduciary responsibilities, particularly regarding contribution collection.”
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SECURE 2.0 has streamlined audit requirements for PEPs, "which is proving to be a substantial benefit for smaller employers …," said Zino. "Our goal is to increase retirement plan coverage, especially among smaller employers who've historically found offering these benefits challenging. While there's still work to be done, SECURE 2.0 represents a significant step forward in expanding retirement savings opportunities for American workers."
However, a study issued by the Center for Retirement Research found that while PEPs should be more attractive to small businesses, employers may be slow to adopt them.
We talked with Jim Kais, Head of Group Retirement at Equitable, which launched its first 401(k) PEP, Equitable Retirement Access, earlier this month about the potential of these new retirement plans.
Q: What are the remaining barriers to PEP adoption for small and medium size businesses?
A: Pooled employer plans have certainly reduced the primary barriers (e.g. cost, administrative complexities, fiduciary concerns) that have deterred small employers from offering a retirement plan to their employees. Generally, more education is needed to show employers how retirement benefits support employee recruitment, retention, and satisfaction, as well as how retirement fits into a participant’s holistic financial plan … I think some small business owners still aren’t familiar with them or understand how they differ from traditional 401(k) plans.
Q: What are the cost savings of PEPs for small and mid-size employers?
Further, many small employers who are interested in creating a retirement plan don’t understand the tax credits now available to them as a result of SECURE 2.0 and how they work in practice. With cost being such a barrier, taking advantage of tax credits can help small businesses offset retirement plan start-up costs.
More targeted education from retirement plan providers, advisors, and industry stakeholders can help more clearly outline the benefits of PEP plans as well as the recent legislative developments that have created greater incentives for small businesses to offer a retirement plan.
Q. What are some considerations for employers to help them decide whether they should join a PEP or sponsor their own plan?
A: In a typical small employer plan (start up or takeover) the employer is the plan administrator, named fiduciary, and has annual plan governance requirements. Given these responsibilities, it’s important for an employer to understand if they would prefer to sponsor a single employer plan or pool their resources with other employers via a PEP.
Related: Pooled employer plans: Transforming retirement savings for small, midsize employers
Some of the main considerations employers should consider include the size of their workforce, the growth of state mandates where their company is based, and whether or not they want to minimize the time they spend on retirement plan administration. Another consideration is their business goals. Are growth and retention of employees important? When it comes to traditional plan governance – is their preference to be the plan fiduciary or is having a named fiduciary and plan sponsor important to them.
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Lynn Cavanaugh
Lynn Varacalli Cavanaugh is Senior Editor, Retirement at BenefitsPRO. Prior, she was editor-in-chief of the What's New in Benefits & Compensation newsletter. She has worked for major firms in the employee benefits space, Vanguard and Willis Towers Watson, as well as top media companies, including Condé Nast and American Media.
