Pooled Employer Plan Benefits for Business Owners
Pooled Employer Plans (PEPs) are a type of 401(k) plan that's designed to reduce employers'administrative and fiduciary responsibilities relating to the plan, which—as a retirement plan sponsor—means fewer hours spent reviewing your plan's investments and more time spent running your business. Saving time and energy, while offering employees a way to save for retirement, sounds like the best of both worlds. However, there are some distinct differences between a PEP and a traditional 401(k) that you'll want to be aware of when deciding which option is the best fit for your business. Let's start with the basics.
Why offer a 401(k) plan for your business?
As a business owner, your schedule is jam-packed and your time is incredibly valuable. You care about your future and those of your employees—and you've likely heard that successful companies attract and keep talented workers when they offer a retirement plan. Maybe it has you thinking that it's time to start a 401(k). There are a variety of benefits to sponsoring a 401(k), and most of these apply whether you decide to join a PEP or sponsor a traditional 401(k) plan:
- Easier employee recruiting and higher retention rates
- Potential annual tax savings and start-up credits available for the business*
- Tax-advantaged savings opportunity for you and your employees
You might also be interested in: Year-End Tax Benefits of Sponsoring a 401(k) Plan
What is a pooled employer 401(k) plan?
The SECURE Act created new opportunities for employers of all sizes to join group or pooled retirement plans. Regardless of the number of participating employers, the Internal Revenue Service (IRS) considers a PEP a single 401(k) plan and relies on the plan's pooled plan provider (PPP) to provide a single annual report, perform the administrative duties to ensure the plan remains in compliance with ERISA guidelines, and act on behalf of the employer to oversee or outsource running the plan and selecting investments.
A PEP allows business owners and employers to come together under one third party (the plan's PPP) to offer a tax-advantaged retirement savings vehicle, all while delegating most of the day-to-day plan maintenance and fiduciary liabilities to the PPP.
A PEP's pooled plan provider may act as the plan's:
- Plan administrator and recordkeeper
- Named trustee
- Investment fiduciary
- 3(38) investment manage
While a participating employer may still choose to integrate with a payroll provider or hire a local financial advisor for support, the PPP handles the major plan decisions and management duties.
Benefits of a PEP for participating employers
A PEP can save business owners a significant amount of time and enables them to offer a retirement plan without taking on much of the fiduciary responsibility—minimizing risk associated with operational failure because the PPP is experienced in the retirement industry. By passing the plan's administration and management to the PPP, employers don't need to worry about many of the challenges that can come with a single-employer retirement plan. Just keep in mind, participating employers still have a fiduciary responsibility to monitor the PPP, which may be harder to do in a PEP than a traditional 401(k) plan.
By joining a PEP, employers automatically check the following items off their to-do list:
- Filing the annual Form 5500 and hiring the auditor
- Approving distributions and rollovers
- Reviewing quarterly investment performance
Of course, you'll want to be prudent in choosing your plan's PPP. Once you've chosen a provider and gone through plan setup, you will be responsible for keeping up with plan costs and service fees, maintaining records of your plan's participants, submitting payroll information, and participating in an annual long-form audit (when applicable). You'll also need to continue reviewing the performance of the PEP and PPP on a regular basis.
A PEP may be a better fit than a traditional 401(k) for employers who:
- Already require an annual audit and would be interested in sharing the cost with other employers.
- Would be content to choose from a slightly limited list of investments and plan design options.
- Want to minimize their fiduciary responsibilities and would be willing to pay administration fees to have those taken care of by the PPP.
- Would submit required information on time and fulfill the responsibilities of a participating employer in a PEP.
On the flipside, a traditional 401(k) plan may be a better fit than a PEP for employers who are:
- Uncomfortable with the PEP's deadlines for submitting information and the consequences for missing them.
- Potentially interested in very specific investments and customized plan design options.
- Familiar with the fiduciary responsibilities of being a plan sponsor, and/or are willing to take them on.
- Focused on keeping plan administration costs as low as possible.
- Self-employed individuals with no employees.
Three things to consider when joining a PEP
While a PEP does offer participating employers some serious benefits, keep these factors in mind to ensure you choose the plan option that will most closely align with your business goals and needs:
- A PEP provides extra fiduciary protection and requires less administrative effort but can lack some of the flexibility in investment choices and plan design that you may desire. Joining a PEP may also end up being more expensive, as there are some extra fees to have a third-party administrator take care of the everyday plan responsibilities. Even if having more investment options isn't high on your priority list, your budget may be tight, and understanding the potential costs of the annual audit is important.
- The annual audit process for larger PEPs may be a factor in determining whether a single employer plan is the better fit for your business. Most smaller plans won't need to go through an audit, but if they are in a PEP alongside larger employers (more than 100 covered participants), they may be subject to an independent annual audit. The audit, if necessary, would be performed after the end of each plan year, and the cost is shared by the participating employers.
- A PEP may not be the best fit for employers who want to feel like they are in the drivers'seat. Business owners who like to make frequent changes or amendments to their retirement plan, or who want to pick and choose from a wider range of investment options may find a PEP to be restrictive. Since the PPP is in charge, tailoring a plan specific to the employer is not an option. For many business owners who see the lack of flexibility as a con to the PEP, a traditional 401(k) might be the better solution.
At Ascensus, we believe everyone deserves to feel financially secure. That's why we offer a wide range of flexible retirement solutions, including PEPs, traditional 401(k) plans, and many more—all of which are backed by industry-leading expertise. To learn more about our retirement plan options, contact our team of retirement specialists at 800-345-6363.
*Ascensus recommends consulting with your accountant to discuss eligible tax credits available to your business. Credits outlined not applicable to Individual(k) plans