The Setting Every Community Up for Retirement Enhancement (SECURE) Act is landmark legislation that largely took effect on Jan. 1, 2020. In a nutshell, the SECURE Act makes it easier for Americans to save for retirement. Among the Act’s many provisions are pooled employer plans, or PEPs, which were legalized Jan. 1, 2021.
What are PEPs?
Pooled employer plans are a new form of multiple employer plan (MEP) that enable unrelated employers to jointly offer a single 401(k) retirement plan without having to satisfy the “common nexus” requirement that typically accompanies MEPs.
Historically, in order to establish a MEP, employers must share a common nexus, such as being in the same industry or geographic area. Under the SECURE Act, employers can jointly create a shared or pooled retirement plan even if they are not related.
How do PEPs benefit employers?
Greater access to 401(k) plans
The SECURE Act is primarily aimed at small employers, as studies show that many small businesses do not offer retirement plans. By permitting PEPs, the SECURE Act makes it easier for unrelated small employers to band together and provide 401(k) access to their workers. In addition, the SECURE Act offers tax credits to eligible small employers that adopt a new 401(k) plan.
401(k) administration savings
In a 2020 survey by J.P. Morgan, some respondents cite the cost of administration as one of the top reasons why they do not offer a 401(k) plan. Pooled plan providers, or PPPs, are designed to alleviate this burden.
Under the SECURE Act, a PEP must be established by a PPP, which assumes most of the PEP’s administrative and fiduciary responsibilities, such as Form 5500 filing, plan audit, plan documentation, annual 401(k) testing, participant notices, distributions and rollovers, and investment selection and monitoring.
The PPP decreases the amount of time that employers in the PEP must spend managing their 401(k) plans and lowers their fiduciary risk and liability. Also, certain administration costs (such as auditing fees) are split among employers in the PEP, which likely reduces each employer’s individual cost relative to the cost of providing a 401(k) plan on their own.
On Nov. 16, 2020, the U.S. Department of Labor issued a final rule detailing the registration requirements for PPPs. The rule explains what 401(k) service providers must do to become a PPP, so that they can start operating and offering PEPs as of Jan. 1, 2021.
Better pricing and plan options
By combining their purchasing power, small employers in the PEP can access the same competitive pricing and quality investment products that are already available to large employer plans.
Although PEPs offer many benefits, they may not be suitable for every business. Interested employers should first determine their 401(k) challenges and needs, then decide whether a PEP is the best solution.