A Retirement PEP Talk for the Small Employer
There’s good news for small employers looking to provide retirement services to their employees… Pooled Employer Plans (PEPs). PEPs allow unrelated employers that meet certain requirements to unite and participate in a single retirement plan.1 One of the most recently created plans that fall under the multiple employer plan (MEP) heading, PEPs have been in the spotlight since their establishment under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, a set of reforms enacted in 2019 to broaden retirement plan access.2 Under PEPs, smaller companies that may not have had the financial resources and numbers to offer employee-sponsored retirement plans can now do so via collective purchasing power, ensuring that their employees can build wealth and save for long-term retirement. Although some have predicted that PEPs may become the most popular retirement plan over the next 10 years, they still have their own complexities, require specialized management and oversight, while plan sponsors and advisors are still testing PEPs’ waters before diving in completely.
The novelty behind PEPs is that they are a MEP for unassociated employees, who previously would have needed a “common nexus” to band together to form a retirement plan. The SECURE Act paved the way for the 40 percent of Americans working in the private sector that, up until 2019, had no access to an employer-enabled savings plan.3 United under a PEP, smaller companies (10-99 employees)4 can potentially obtain lower fees and more comprehensive services, and by offloading certain nonfiduciary responsibilities to a third party, have a significantly reduced administrative burden.
Not so Fast…
Although plan sponsors and advisors agree that PEPs provide substantial opportunities for workplace savings to employees of smaller companies, concerns about lower service levels, administrative complexity, and employers’ potential liability regarding vendor and investment selection remain serious considerations. In a recent poll conducted by the Secure Retirement Institute of 913 decision-makers in small U.S. businesses, 42% were concerned about potential lower service levels for their company, 38% wanted to retain control of plan design decisions, and 32% wanted to retain control of vendor selection.5 Meeting DOL and ERISA requirements are other significant concerns, along with the administrative burden of filing the complex annual report Form 5500. PEP customization is also limited, but what may be most concerning to plan sponsors is that PEPs are new and relatively untested; it will take time for these plans to reach their full potential and maximum benefits for employers and employees.
PEPs may not be an immediate cure-all for the many smaller company employees that would be eligible, but they nevertheless remain a social good as well as a powerful step toward building equitable access to employer-enabled retirement planning. Although PEPs may potentially reshape a niche within the greater defined contribution plan landscape, their impact will likely play out over many years to come.
2 “The SECURE Act Acronym Plans: PEPs, MEPs, and GoPs,” CAPTRUST, May 2021
3 “Banding Together: DC Advisor Views on MEP and PEP Developments and Opportunities,” SRI Institute, LIMRA, 2021
4 “Small Employers Interested in Learning More About Pooled Employer Plans, Not Yet Ready to Implement,” LIMRA, May 2022
5 “Small Employers and Pooled Employer Plans (PEPs): Employers Are Concerned About PEP Service Levels,” Secure Retirement Institute, LIMRA, 2022