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What is a PEP? Understanding Pooled Employer Plans

Chris Magno

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Small business owners no longer have to choose between offering great retirement benefits and managing administrative burdens. Learn how PEPs are leveling the playing field.

Pooled employer plans (PEPs) are rewriting the rules of retirement benefits for small businesses — and it's about time.

Employers of any size can offer a PEP, but they're especially attractive for small businesses and start-ups. For years, offering a competitive 401(k) plan meant shouldering hefty administrative burdens, fiduciary responsibilities and costs that often put smaller businesses at a disadvantage. The SECURE Act of 2019 changed the game by introducing PEPs, making it easier, less risky and more affordable for small businesses to give their employees a comprehensive retirement plan.

What exactly is a pooled retirement plan, and how does it work?

The ABCs of a PEP retirement plan

A PEP retirement plan is a defined contribution plan, such as a 401(k), which allows multiple businesses to participate under a single plan umbrella. Before the SECURE Act, employers could only join together in multiple-employer plans (MEPs) if they shared common characteristics, such as industry or geography. The SECURE Act eliminated this requirement, creating PEPs and opening the door for any employer to participate regardless of industry or location.

Pooled retirement plan rules differ from those of a traditional 401(k). Employers in a PEP don't manage their own plan independently. Instead, they delegate a third-party pooled plan provider (PPP) to oversee critical plan functions, including plan administration and investment selection. That means small business owners can have peace of mind knowing those responsibilities are off their plate.

The benefits of pooled employer plans for small businesses

A pooled employer plan can transform the way small employers and start-ups sponsor a retirement plan for their employees. Here's what small business owners can gain:

Economies of scale

By pooling assets across multiple employers, participants gain access to lower fees, more robust investment lineups and enhanced plan features to help improve retirement outcomes for employees. Additionally, it provides smaller companies with a competitive edge, enabling them to compete with larger employers through attractive retirement benefits.

Lower fiduciary risk

In a PEP retirement plan, the PPP assumes primary fiduciary responsibility for the plan, reducing the fiduciary liability exposure for participating employers.

Reduced administrative burden

Thanks to the PPP, employers can reclaim the hours spent on compliance, reporting and vendor coordination to focus on core business objectives and priorities. While the employers are still responsible for payroll deductions, the PPP shoulders most of the plan's administrative duties, like plan document design and ongoing compliance.

Simplified vendor management

The PPP handles all vendor selection, oversight and coordination. This further alleviates administrative headaches associated with vendor monitoring and due diligence.

Tax credit opportunities

Tax credits can reduce the out-of-pocket costs of starting a PEP retirement plan. Employers may be eligible for a tax credit of $5,000 a year, for the first three years of the plan, plus an additional $500 for setting up automatic enrollment. Additionally, under SECURE 2.0, employers with up to 50 employees may be eligible for a credit of up to $1,000 per employee.

PEPs can be the ideal retirement plan solution for small employers, but they're not for everyone. Employers don't have the flexibility to customize all aspects of their plans and by relinquishing that control to a third-party, they're also dependent on the PPP's decisions and plan management. That's why it is so important to choose the right partner as the pooled employer plan provider, so employers and their employees can reap the benefits.

Finding the right fit

For small businesses ready to offer competitive retirement benefits without the traditional complexity and risk, PEPs can offer a better path forward. To learn more, reach out to an ADP retirement services specialist or call (800) 432-401K.

_{ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor.}

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