Put Some PEP in Your Step: A New Retirement Plan Option To Consider
For construction companies struggling to find skilled labor, a generous benefits package that includes a robust retirement plan can be a powerful recruiting tool. But providing cost-effective, high-quality retirement benefits for employees can be a challenge — especially for small businesses.
One new option to consider is a pooled employer plan (PEP). This variation on a multiple employer plan (MEP) was created by the SECURE Act of 2019 and became available just this year. PEPs allow participating employers to take advantage of group purchasing power and other benefits without the drawbacks that made traditional MEPs unworkable for many companies.
Pros to MEPs
A MEP is a defined contribution retirement plan, typically a 401(k) plan, maintained by two or more employers. The plan sponsor may be one of the participating employers or a third party, such as a trade association or professional employer organization. MEPs offer several significant advantages, including:
Cost Savings. Group purchasing power and other economies of scale tend to lower the overall cost of providing a retirement plan.
Time Savings. Participating employers avoid time-consuming and often disruptive administrative tasks. This allows them to focus on running their businesses.
Professional Oversight. The MEP sponsor is responsible for plan design and day-to-day management. It coordinates with various third-party service providers, handles compliance issues, and oversees annual audit and reporting requirements. The sponsor may also provide participating employers with access to expertise and advanced technology that the participants might not otherwise be able to afford.
Reduced Liability. Participating employers can shift some — though not all — of their fiduciary duties and liability exposure to the MEP sponsor.
And Some Drawbacks
However, traditional MEPs have drawbacks as well. For one thing, to be treated as a single employer plan for reporting, audit and administrative purposes, a MEP must be “closed.” That is, its members must share some “commonality of interest,” such as being in the same industry or geographical location.
Employers that join “open” MEPs, which don’t require a commonality of interest, are treated as if they maintained separate plans with their own reporting, audit and other compliance responsibilities. (Note: Certain smaller plans — generally, those with fewer than 100 participants — aren’t subject to audit requirements.)
Another big drawback of traditional MEPs is the “one bad apple” rule. Under that rule, a compliance failure by one participating employer can expose the entire MEP to the risk of disqualification.
The PEP Solution
Under the SECURE Act, a properly designed PEP avoids both the commonality-of-interest requirement and the one bad apple rule. PEPs are treated like single-employer plans for reporting, audit and other compliance purposes — even if they allow unrelated employers to join. One participating employer’s compliance failure won’t jeopardize a PEP’s qualified status so long as the plan contains certain procedures for dealing with a participant’s noncompliance.
PEPs are available from “pooled plan providers” (PPPs), which include financial services companies, insurers, third-party administrators and other firms that meet certain requirements. For example, PPPs must register with the U.S. Departments of Labor and the Treasury. They must also sign a written acknowledgement that they’re the PEP’s named fiduciary and plan administrator, and they need to ensure proper bonding of those who serve as fiduciaries or handle plan assets.
Although PEPs eliminate some of the obstacles that make traditional MEPs impractical for many companies, they’re not without disadvantages. For instance, PEPs have limited flexibility to customize plan designs or investment options to meet the needs of specific employers and their employees.
Also, while one of the advantages of PEPs is cost savings, they may increase costs for participating employers in one area. That’s because small employers aren’t subject to annual audit requirements, but PEPs are. So, small employers that join a PEP will have to bear annual audit costs they otherwise wouldn’t, though these costs are spread out among the PEP’s participants.
It’s also important to keep in mind that, while employers can shift certain fiduciary obligations to the PPP, employers aren’t completely shielded from liability. (See the sidebar below)
Do Your Homework
A PEP can be an attractive option for providing employees with valuable retirement benefits. If your construction company decides to pursue one, work with your professional advisors to weigh the pros and cons and to select the right provider. Among other things, you should:
- Evaluate the PPP’s level of experience and management team’s expertise with PEPs, MEPs or other group plans, and
- Review the PEP’s policies and written agreements to be sure you understand the level of fiduciary responsibility the PPP is assuming, and which responsibilities will be delegated to other providers.
Also, get a feel for the PPP’s level of transparency about its operations and types of reports you can expect from it. Without good communication from the PPP, you’ll face difficulties monitoring and evaluating its performance.
SIDEBAR: Some Employer Fiduciary Duties Remain
A primary advantage of pooled employer plans (PEPs) is they allow employers to hand off many of their fiduciary responsibilities — as well as the associated liability risks — to the pooled plan provider (PPP). However, that doesn’t mean that employers are off the hook completely. Although the PPP assumes responsibility for most reporting and day-to-day administrative functions, employers retain fiduciary duties for selecting and monitoring the PPP. Employers may also remain responsible for investment selection, unless the PPP engages a discretionary investment manager. Perhaps most important, employers cannot avoid responsibility for providing the PPP with accurate information regarding employee hire dates, compensation, hours worked, elective deferrals, matching contributions and other such data points.