The appeal of PEPs for employers is in mitigating personal liability and controlling costs, and has been particularly attractive choice both small business and for audited plans with 100+ participants. Understand the common infrastructure of PEPs, emphasizing their cost-effectiveness compared to single employer plans, with built-in coverage for plan audit expenses and fiduciary responsibility. With this retirement plan option, there will be consideration of PEPs in future RFPs and significant growth in PEP adoption over the next five years.
To PEP or not to PEP, that is the question. In the wake of the SECURE Act in late 2019, Pooled Employer Plans (PEPs) emerged as a transformative addition to the qualified retirement plan space, offering a potential solution to expanding retirement coverage, especially for small businesses. However, the onset of the pandemic quickly overshadowed the SECURE Act, resulting in minimal discussion and early adoption of these innovative plan provisions. By the second quarter of 2021, PEPs started gaining traction, particularly as an attractive alternative for smaller employers navigating state-mandated plans. Fast forward to today, and PEPs have become a prominent topic at industry conferences, captivating the interest not only of smaller employers but surprisingly, audited plans with 100 or more participants.
Understanding the PEP Advantage
The burgeoning popularity of PEPs can be attributed to two pivotal factors: personal liability and cost-effectiveness.
Personal Liability Considerations
In the realm of qualified plans, all fiduciaries, including the plan sponsor, Trustee, plan administrator, and committee members, bear personal liability without the protection of a corporate veil. The prospect of shouldering immense liability should a lawsuit emerge, prompts employers to explore alternatives. PEPs, by outsourcing fiduciary responsibility to external experts, offer a strategic avenue for mitigating this significant risk, often at a lower cost.
Cost Dynamics: PEP vs. Single Employer Plan
The cost analysis between a single employer plan and a PEP reveals compelling advantages. While the construction of each PEP may vary, a common infrastructure is shared among them. The Pooled Plan Provider (PPP) serves as the plan sponsor and administrator, overseeing the selection of service providers. PEPs typically align with established recordkeepers for investment sourcing and engage a 3(38) Fiduciary Advisor for investment oversight. Employers can also involve a local advisor as a 3(21) co-fiduciary for additional support and participant education.
PEPs often incorporate a 3(16) compliance partner, usually the PPP, to handle plan administration and governance. This includes the ability to sign the 5500 form, oversee participant transactions, administer payroll, and represent the employer in court, offering a comprehensive compliance solution that can be expensive for single employer plans.
One of the notable cost advantages of PEPs is the built-in coverage of plan audit expenses. For larger employers subject to annual audits costing $8,000 to $15,000, PEPs distribute these costs across adopting employers, resulting in substantial annual savings. Within a PEP, audit expenses are built into the plan’s pricing, and shared across all adopting employers. This can create an immense, annual savings for employers.
Charting the Future: Is a PEP Right for Your Plan?
As PEPs gain momentum in the retirement industry, the question arises: Is a PEP the right solution for your single employer plan? While the answer may vary based on individual circumstances, the merits of PEPs are evident. As the landscape evolves, it’s prudent to consider PEPs in future Request for Proposals (RFPs).
At RSG, we proudly serve as 3(38) on two nationwide Pooled Employer Plans, each with its unique stories and value offerings. While PEPs represent new territory, our extensive experience positions us to navigate this evolving landscape. We firmly believe that PEPs will experience significant growth over the next five years. If you’re keen on exploring this innovative approach to retirement planning, reach out to RSG to learn more. The PEP revolution is here, and it’s time to consider whether it could be the right fit for your organization’s future financial well-being.