Pros and Cons of Pooled Employer Plan (PEP)
Managing a new retirement plan can feel overwhelming, leading some employers to avoid offering them to their employees. Smaller organizations are less likely to provide a retirement option due to additional fees or efforts associated with adding a new benefit. SCORE, a partner in resources for the US Association of Small Businesses, stated in their 2022 report that only "28% of companies with less than ten employees offer retirement benefit options". However, there are now more convenient alternatives available that allow organizations to streamline administrative tasks such as monitoring and reporting, plan setup, filing 5500 forms, and employee enrollment.
The recently passed Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 offers increased tax incentives for small businesses establishing new retirement plans in 2023 or later. A notable option is the Pooled Employer Plan (PEP), a new retirement alternative introduced by the SECURE Act 1.0 in 2019. The Secure Act 2.0 has expanded provisions related to PEPs, making it easier to administer by improving efficiencies, minimizing compliance oversight, and providing cost savings. A regulated Pooled Plan Provider (PPP) oversees these plans to ensure proper governance.
PEP Key Advantages:
Reduced Fiduciary Exposure: PEPs ease the burden of fiduciary responsibilities when selecting and monitoring plan providers, while employers retain obligations in choosing the Pooled Plan Provider (PPP).
Lower Administrative Costs: Shared costs among participating businesses make administrative tasks more affordable. For example, filing forms 5500 and conducting audits are handled at the plan level by the PPP, allowing for streamlining of processes for each employer.
Tax Credit Opportunities: Eligible employers can receive annual tax credits of up to $5,000, with an extra $500 tax credit for implementing automatic enrollment in the plan during the first three years.
Some drawbacks of PEPs are:
Limited Plan Options: Pooled assets from multiple employers may result in a restricted selection of investment options, limiting participants' customization.
Restricted Plan Design Options: The PPP dictates plan design options, including loans, distributions, and eligibility, potentially limiting plan flexibility.
HR professionals considering PEPs should evaluate the current retirement plan's challenges and areas for improvement. Those points can be used during the decision-making process and when evaluating whether a PEP may be a right fit. It's essential to recognize that PEPs are relatively new and may take time to be fully established as a trusted retirement option.
If you need assistance exploring retirement options for your organization, please contact Kiwi Partners’ HR Services.