Should a company offer a Pooled Employer Plan (PEP)?

November 02, 2022


Small business leaders and employers sometimes have a harder time recruiting workers due to their inability to offer the robust retirement plan benefits that larger enterprises can. That may no longer be the case since the introduction of rules surrounding Pooled Employer Plans, also known as PEPs.

What are PEPs, and are they a good option for small businesses who might lack the resources or administrative capacity often associated with a traditional 401(k) defined contribution plan? When consulting with business leaders, remember to discuss their potential advantages and disadvantages.

What is a PEP?

First things first: be sure your clients who might lead a small organization understand the concept of PEPs and that they may be an option. As its name suggests, a Pooled Employer Plan allows multiple businesses to participate in a single 401(k) retirement plan that is managed by a pooled plan provider (PPP). The PPP acts as a fiduciary.1

These plans are not necessarily a new concept. In the past, however, businesses that participated in PEPs had to be in a related industry or association. That changed when the Setting Every Community Up for Retirement Enhancement (SECURE) Act removed those requirements, allowing unrelated organizations to work together to offer a Pooled Employer Plan. Though the provisions went into effect in January 2021, some business leaders may not be aware that their options have expanded.1

What business leaders should know about PEPs

Business leaders and small business owners may have dismissed opportunities to offer their employees a retirement plan due to the burden of managing such plans and the associated fiduciary liabilities. With a PEP plan, however, a PPP takes on most of the administrative responsibilities and, as noted, serves as the fiduciary.

Even though the new rules surrounding PEPs have been in place since early 2021, many business leaders have focused on recovery efforts from the pandemic or have had to deal with shifting to remote or hybrid workforces. In other words, their minds may have been elsewhere. Things may have settled now, providing these individuals with an opportune time to take a second look at these investment vehicles for their workforces.

What are some considerations for business leaders?

Employee demand

Employers need to gauge their business model and the interest level of their employees to determine whether they consider a retirement plan option to be of value. If an employer struggles to recruit and retain workers, providing accessibility to a PEP may help play a role in engaging and attracting potential employees.

Administrative trade-off

While a provider takes on many of the administrative duties, there are associated service fees. It’s important for employers to weigh whether there’s a significant enough reduction in costs in comparison to having an internal administrator manage an individual plan, and whether that person has the capacity to take it on. Decision makers should fully understand the services they will receive as part of such a plan, including the PPP’s role in audits, tax filings, managing lost participants and other necessary tasks.

That said, there are still some administrative tasks that the employer will be responsible for, such as ensuring proper withdrawals from employee paychecks and providing accurate data. It’s also important to note that while administrative duties are mostly outsourced to a fiduciary, the employer still has a responsibility for selecting and monitoring the PEP and PPP.1

Potential tax credits

There are start-up costs associated with any employer-sponsored retirement plan. Fortunately, eligible employers of qualified plans may claim an annual tax credit of up to $5,000 for the first three years. Plus, if they offer an auto-enrollment feature, they can claim an extra $500. These credits aren’t just reserved for PEPS, but also apply to most other defined contribution plans.2 Yet, it’s still an important consideration when making a decision.

Plan options

Similar to 401(k) defined contribution plans, there are many available plan options within the PEP framework. A PPP can help identify options that align with a company’s goals. Because the plan is pooled, however, there may be a limit on customization. It’s important to not assume that the PEP will act exactly like a traditional employer-sponsored plan. Prospective organizations should ask questions, such as:

  • What types of investments are available, including insurance products like annuities?
  • What options are there for employer matching contributions?
  • Will the plan qualify for rollovers from a previous employer or be able to move with an employee who switches jobs?
  • Does the plan offer online tools and educational resources?
  • What type of support or financial advice is offered to employees, and is there an additional charge?

There are many important considerations when deciding whether an employer should offer a retirement plan, whether it’s a PEP or any other plan option. When speaking with business leaders, stress the importance of working with a reputable plan provider who can help them navigate the complexities and provide the full scope of services they really need.

1, Registration Requirements for Pooled Plan Providers, November 16, 2020.
2, Retirement Plans Startup Costs Tax Credit, June 16, 2022.