PEP Up Your Retirement Business

PEP Up Your Retirement Business

Financial advisors now have a new arrow in their quiver for their small employer retirement plan business—the pooled employer plan (PEP). PEPs are the creation of the SECURE Act and are designed to help small businesses offer retirement plans at a significantly lower administrative and expense burden.

The Basics of a Pooled Employer Plan

A PEP represents a way for small, unrelated employers to participate in a single pooled 401(k) plan in order to realize the advantages of lower costs and better services that come with greater economies of scale.

Though multiple employer plans have existed for some time, they failed to find favor with businesses due to the burdensome and complicated oversight rules imposed by the Internal Revenue Service (IRS) and Department of Labor (DOL).

One significant drawback was that should any one employer fail to follow the administrative requirements of sponsoring a retirement plan it disqualified the entire plan for all participating employers—the “one bad apple” rule.

Moreover, the DOL held the position that employers in a multiple employer plan needed to operate in the same line of business.

The SECURE Act removed these hurdles, opening up new opportunities for employers to offer their employees a better 401(k) at less cost to them.

A PEP is managed by a Pooled Plan Provider (PPP), which may be either one of the employers participating in the PEP arrangement or an unrelated entity, such as a financial institution.

The PPP, which must register with the DOL, acts as fiduciary and is responsible for monitoring the plan’s operational compliance.

Advantages for Small Businesses

There are several distinct advantages for small employers in participating in a PEP, including;

  • Lower costs to the employer and plan participants, all things being equal, may result in better retirement outcomes for employees.
  • A skilled and experienced PPP should result into better plan governance, mitigating the fiduciary risk for plan sponsors.
  • PEPs can reduce administrative responsibilities, allowing employers to focus more on growing their businesses.

Hurdles Still to Clear

While some providers are now offering PEPs, there is reluctance by many financial providers to become a PPP, owing to the current rules that prevent a provider from acting both as a fiduciary and as an investment manager since that represents a conflict of interest. Because the PEP rules require a PPP to be a plan fiduciary, it excludes them from the investment management role. This may change if the DOL updates its prohibited transaction exemptions to allow for it.

Advisors looking to offer PEPs to their small business clients should speak with their current provider relationships to learn if they are currently or will soon be offering this exciting new solution.

Please reference disclosures:

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