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The Pooled Employer Plan (PEP): 5 Big Benefits for Your Small Business

business owner reviewing retirement plan

Note: For more information on this topic, please read our whitepaper, "The Pooled Employer Plan (PEP): The Future of Small Business Retirement"

Many retirement experts are calling the Pooled Employer Plan (PEP) the most revolutionary change to retirement since the 401(k) was launched in the ‘70s. The PEP has the potential to be a game-changer for millions of Americans who currently don’t have a way to save for retirement.

According to the U.S. Bureau of Labor Statistics, approximately 38 million private sector employees don’t have an employer-sponsored retirement plan. Businesses with under 100 employees are less likely to offer retirement plans than larger companies. The Department of Labor hopes to reverse this trend with the PEP. It levels the playing field by giving smaller businesses advantages that are typically reserved for large companies.

Traditionally, businesses in multiple employer plans had to be related by industry or association (such as a trade group). This made it easier for them to share a single plan and not have to file separate Forms 5500 or do individual audits. Now, under the SECURE Act, a PEP does not require participating employers to be related, and a professional Pooled Plan Provider (P3) takes on most administrative responsibilities. This alleviates the burden of plan management and decreases fiduciary liability, making it more attractive to smaller businesses.

Reasons to Consider a PEP

Potential savings for employers

In a study done by the Pew Charitable Trust, smaller businesses said the biggest obstacle to offering an employee retirement plan was cost. By pooling assets into a single, large plan, employers can save on administrative costs and achieve economies of scale.

Less fiduciary risk

Because the P3 assumes most fiduciary responsibilities, employers are not subject to the same level of liability. However, to be sure the plan is problem-free, it’s important to choose a P3 that will maintain professional standards such as acting in the best interests of the participants, meeting plan deadlines, and carrying out general duties.

The Pooled Plan Provider does it all for you

The Pew Charitable Trust study also found that lack of administrative resources was the second biggest obstacle to offering employees a quality retirement plan. Many businesses don’t have the time, technology or infrastructure to carry out the duties of retirement administration.

The PEP is a “do it for you” plan where the P3 manages administration, monitoring, and reporting. Employers don’t have to worry about plan set-up, coordinating with vendors, filing Form 5500, employee enrollment, or any of the many complexities of 401(k) plan management.  Although the plan is managed by the P3, employers still have control over things like defining matching levels and contribution limits, and ensuring the plan is performing to match employees’ needs.  Some employers may prefer more hands-on involvement, but for those who want a plan that practically runs itself, a PEP is ideal.

Tax credits

In order to offset startup costs, the SECURE Act provides that eligible employers may be able to receive up to $5,000 in tax credits annually, with an additional $500 tax credit available for using automatic enrollment in the plan, for the first three years that the plan is effective. While this can apply to any new 401(k), it is particularly powerful when applied to the already economical PEP.

Your employees will like the plan too.

Last but not least, the reason you’re doing this in the first place—your employees. In the age of COVID-19, employees may need stability in uncertain times and to feel that their future is secure.  As their employer, you can help provide them with peace of mind by making a high-quality retirement plan like the popular 401(k) more accessible and easy to afford.

Look for a P3 that doesn’t forget your employees, but provides them with tools to help them manage their plan. This may include online auto-enrollment, or an employee portal where they can check their retirement readiness and make adjustments.

Financial advisors and CPAs will also enjoy the benefits of being able to recommend a simpler plan to clients of all sizes. The PEP is a win-win for employers, employees and their families, and professional advisors who want to help their clients set up a high-quality retirement plan.

*Setting Every Community Up for Retirement Enhancement Act

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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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