Recent statistics indicate that the retirement crisis in the United States is very real. According to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households, one-quarter of non-retired citizens have no retirement savings or pension whatsoever.
According to the Bureau of Labor Statistics, just 56 percent of U.S. employees participate in a workplace retirement plan. The participation rate is 68 percent at private businesses with at least 100 employees but is just 38 percent at private businesses with fewer than 100 employees. A total of 38 million private-sector employees do not have access to an employer-sponsored retirement plan.
The federal government is actively taking steps to make it easier for employers (especially small businesses) to offer a retirement plan to their employees. One is passage of the SECURE Act, which contains a broad range of retirement-related provisions.
Among these provisions is the introduction of Pooled Employer Plan, or PEP. The goal of PEPs—which only became available in 2021—is to make retirement plans more accessible to employees who work at small businesses by removing some of the administrative and compliance burdens that can make offering a plan difficult and cost-prohibitive for employers.
In addition, PEPs will provide small employers with economies of scale they wouldn’t enjoy otherwise, along with less fiduciary responsibility. PEPs may also offer employers and participants lower plan fees, higher plan quality, market-leading investment options, and potentially better participant outcomes.
While PEPs tend to offer less flexibility with plan design options, it is a tradeoff many small businesses are happy to make for the potential PEP benefits.
An Outgrowth of MEPs
PEPs are an outgrowth of multiple employer plans, or MEPs. With a MEP, employers with some kind of connection—like a common profession, industry, or membership in a trade association—jointly offer a retirement plan to their respective employees. For example, MEPs are common among medical practitioners.
Until passage of the SECURE Act, however, unrelated businesses couldn’t pool their resources together to offer a retirement plan. Now they can, which opens pooled retirement plans to a much wider universe of potential plan sponsors.
As the name implies, pooled employer plans allow plan sponsors to pool their retirement resources with those of other employers and delegate most day-to-day plan management activities to a third party. All participating plan sponsors share the same plan design.
The PEP is established by a pooled plan provider, which is an organization that has been approved to be the plan fiduciary. This provider will set the rules for plan governance and appoint all plan service providers, such as the recordkeeper and investment managers. In addition, the pooled plan provider will file the Form 5500 for the plan.
Right for You?
Given that PEPs only became available this year, some employers are just now analyzing the details to determine if a PEP is right for them.
We can help you look at the pros and cons of PEPs and decide whether this might be a viable retirement plan option for you and your employees. Give us a call to learn more.
Survey: Most Employers Are Interested in PEPs
In a survey of retirement plan sponsors conducted by Mercer last year, 20 percent of midsize to large businesses that were familiar with pooled employer plans (or PEPs) said they are open to joining one. In addition, 40 percent said they are interested in exploring PEPs further.
One reason for this is that about half of the plan sponsors in the survey (48 percent) said they have less or far too little time to spend managing their retirement plan than they would like. The PEP benefits that the plan sponsors view as essential include the following:
- Lower participation fees (69.3%)
- Mitigation of fiduciary risk (66.5%)
- Reduced administrative workload (65.9%)
- A well-diversified investment lineup (57%)
- A great participant experience (45.8%)