14 Jun What Is A PEP — And Is It Right For You?
A pooled employer plan is a defined contribution plan, like a 401(k), that multiple employers can participate in. A PEP outsources many fiduciary responsibilities along with plan management and administrative functions to a third-party pooled plan provider.
PEPs were introduced via the SECURE Act of 2019. Changes to PEP participation were added in the Secure 2.0 Act of 2022. These changes allowed smaller firms to compete for talent with larger companies and their comprehensive benefits packages.
When you participate in a PEP, you have three main responsibilities:
- To determine a plan design that’s appropriate for your workforce and company.
- To work with a payroll system or provider to transfer retirement plan contributions and data.
- To monitor the PPP to make sure it’s meeting its own responsibilities.
The previous incarnation of the pooled plan provider was multiple employer plans. MEPs allowed participation if your company shared an industry or geography with other plan participants. PPPs are different. It sets its own eligibility requirements. Your business doesn’t have to operate in the same industry or geographical area.
Choosing a PPP with proficient plan administration and investment management that acts in the best interests of your employees is the trick. Look for a PPP that:
- Manages plan documentation, government filings and ongoing compliance.
- Bundles communication and coordination with the recordkeeper, custodian, investment adviser, trustee and auditor.
- Works with your payroll service provider to streamline and monitor employee payroll deductions.
How do you choose among PPPs?
The first step is to issue a request for proposals seeking information about the capabilities of each PPP, along with detailed information on cost and fee structures. Be sure to ask for information about plan design flexibility.
You might also consider looking for independent third-party evaluation firms to help navigate the selection process. These third-party evaluators can compare different PPPs and the specifics of each PEP across a range of criteria.
Next, be sure to understand the following:
- Cost and cost assessment with an apples-to-apples comparison.
- Different approaches to fees — asset-based fees, fixed fees or per-participant fees.
- Total annual plan costs — compare service provider and fund manager fees side by side.
- Investment management capabilities of the PPP — is it managed internally or outsourced?
Further, the PEP plans offered by the PPP should provide plan participants with an investment menu that allows them to build well-diversified portfolios at any stage of their career, from early-career employees just starting their savings journey to near retirees drawing down savings for income and everyone in between.
What are the negatives?
With a single-employer retirement plan, you have more flexibility to customize the plan design to meet the needs and retirement goals of your employees. You won’t be dependent on the actions or decisions of others and can access information and resolve problems directly. You have the freedom to choose a different service provider, move your plan or negotiate pricing if you’re unsatisfied with the cost or quality of service.
While a PEP provides several advantages over a single-employer plan — one-stop shopping, ease of implementation, reduced fiduciary exposure and administrative costs, access to expertise that you probably don’t have in-house — the drawbacks include limited or no ability to choose recordkeepers within the plan, limitations on investment choices and inflexibility in plan design.
Tax credits
To offset PEP start-up costs, for the first three years of participation you may be eligible for a tax credit of $5,000 annually with an additional $500 available if you set up automatic enrollment. Another credit of up to $1,000 per employee for your contributions may apply if you had up to 50 employees in the preceding taxable year. The credit phases out from 51 to 100 employees.
In the end, the suitability of a PEP needs to be your call.
Original content by the Mineral Platform. This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.