Smaller companies: Explore pooled employer plans for retirement benefits

Most businesses today need to offer a solid benefits package. Failing to do so could mean falling behind in the competition to hire and retain talent in today’s tight job market.

When it comes to retirement benefits, however, smaller companies may struggle with the financial and administrative burdens of sponsoring their own plans. The good news is, thanks to the Setting Every Community Up for Retirement Enhancement Act of 2019, a relatively new solution is available: pooled employer plans (PEPs).

Meet the MEP

PEPs are a variation on an existing retirement plan model: multiple employer plans (MEPs). MEPs are qualified defined contribution plans, typically 401(k)s, maintained by two or more employers. MEP sponsors may be one of the participating employers or a third party, such as a trade association or professional employer organization.

MEPs offer several advantages. Group purchasing power and other economies of scale tend to lower plan sponsorship costs. Also, participating employers avoid time-consuming and often disruptive administrative tasks. Plus, they can shift some — though not all — of their fiduciary duties and liability exposure to the MEP sponsor.

MEP sponsors are responsible for plan design and day-to-day management. This includes:

  • Coordinating with various third-party service providers,
  • Handling compliance issues, and
  • Overseeing annual audit and reporting requirements.

Sponsors can also provide participating employers with access to expertise and advanced technology that the participants might otherwise be unable to afford.

MEP drawbacks

However, traditional MEPs have some drawbacks. 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 drawback of traditional MEPs is the “one-bad-apple” rule. Under this rule, a compliance failure by one participating employer can expose the entire MEP to the risk of disqualification.

PEPs step up

Properly designed PEPs avoid 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,” which include financial services companies, insurers, third-party administrators and other firms that meet certain requirements. 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.

Also, while one of the advantages of PEPs is cost savings, they may increase one type of cost for some participants. That is, though small employers generally aren’t subject to annual audit requirements, PEPs are. So, small businesses that join a PEP will have to bear annual audit costs they otherwise wouldn’t. These costs can, however, be spread out among participants.

Dip your toes in

If you’re intrigued by the prospect of a PEP, dip your toes in slowly. Discuss the idea with your leadership team and professional advisors before you dive in. Contact us with any questions, we’d be happy to help you estimate the costs and potential cost savings involved.

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