State of PEPs: Q&A with Theresa Conti

August 16, 2024 | By Theresa Conti

Nearly half of American workers do not have access to a retirement plan at their workplace¹. This equates to 57 million people in the U.S. who do not have access to a retirement plan. In addition, over 61 million people work for a small business² but only 34³% of small businesses offer a retirement plan.

The coverage gap for retirement plans mostly lies in the small businesses that make up the majority of employers in our nation. The barriers for these small businesses to set up a retirement plan are things like uncertain revenues that make it hard to commit to a plan, employees preferring other benefits, and the costs that employers will incur to start up a plan. With that being said, let’s get into some questions and answers!

• Question: How do employers start if they want to set up a plan?

Answer:

Many different options are available today that will help them set up a plan and ultimately help their employees so that they are prepared to retire someday! One of the newest things is state-run plans. Currently, there are about 10 states with plans in place but many more (most states in fact) have introduced legislation to start a state-run plan.

Another new alternative resulting from the SECURE legislation is the Pooled Employer Plan or PEP. A PEP is similar to a MEP (Multiple Employer Plan) which has been around for many years. There are many reasons why an employer may want to consider a PEP as opposed to a standalone plan.

• Question: Why would an employer want to consider a PEP?

Answer:

An employer may join a PEP to achieve better pricing. As I mentioned earlier, cost is often a barrier for an employer to start a plan. But by joining a PEP, employers can get some of the pricing leverage of a bigger plan since they join with other employers when they become part of a PEP. Having a larger participant and asset base will result in better (lower) pricing for the employer than they could get with a standalone plan.

• Question: What about the fiduciary risk of offering a retirement plan?

Answer:

When an employer starts their own plan, they bear all the fiduciary risk. However, by joining a PEP, they can mitigate some of that risk. A PEP has a Pooled Plan Provider (PPP) that assumes most of the fiduciary risk and responsibilities of the plan. The main fiduciary responsibility that an employer has when they join a PEP is to oversee that the PPP is doing their job.

• Question: Any other benefits to a PEP that advisors and plan sponsors should know about?

Answer:

A PEP also allows an employer to outsource many of the operational tasks that are an administrative burden when running a retirement plan. Tasks that are typically outsourced are: tracking participant eligibility, tracking beneficiaries, calculations of employer contributions, integration and monitoring of payroll contributions, managing and approving loans and distributions, and distribution of required notices to plan participants. In addition, a PEP files one Form 5500 and completes one audit so the individual employer is not responsible for that. Employer can provide a retirement plan and limit their liability but also give participants more flexibility than a state-run plan allows.

Employers utilizing PEPs are comprised of two main groups. One group is comprised of employers who have never had a plan before, using it as their first offering to employees. The other group includes stand-alone 401k’s that are already established and are merging into a PEP to accomplish the things we have discussed like lowering fees and reducing both administrative burden and fiduciary liability.

If your client is considering moving to a PEP, be sure to research it like you would any retirement plan as there is not a one-size-fits-all PEP. There are varying PPP models, varying investments, and many variations of PEPs, so making sure you understand what is being offered and how the PEP is run will be important to you and your plan sponsor client.

As always, JULY is here to help. Please feel free to reach out with any PEP questions you have.

1. https://press.aarp.org/2022-7-13-New-AARP-Research-Nearly-Half-Americans-Do-Not-Have-Access-to-Retirement-Plans-at-Work
2. https://www.forbes.com/advisor/business/small-business-statistics/#:~:text=Nearly%20half%20of%20all%20U.S.,total%20of%2061.6%20million%20people.
3. https://www.asppa-net.org/news/two-thirds-small-businesses-do-not-offer-retirement-benefits-fidelity