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Retirement savings plans consistently rank among the top employee benefits, but despite their popularity with workers, they have gained a reputation among employers for being costly and complex.
As a result, many small- and midsize-business owners avoid offering a retirement benefit altogether, believing they lack the budget, resources, and expertise to effectively manage a high-quality plan.
This can be a missed opportunity, especially when it comes to attracting and retaining talent. Fortunately, there is a solution that is making retirement plans easier and more affordable for businesses of all sizes: Pooled Employer Plans (PEPs).
The potential of Pooled Employer Plans
PEPs were introduced as part of the SECURE Act of 2019 to expand access to retirement savings options by simplifying the process for participating employers.
While the concept of a pooled plan is not entirely new, the legislation addressed significant obstacles that previously prevented the widespread adoption of the PEP’s predecessor, the multiple-employer plan. As a result, PEPs have become a more viable and attractive option for many businesses.
Every business needs to evaluate whether a PEP is a fit with the unique needs of the organization and its employees, but there are several compelling reasons why PEPs are worthy of consideration regardless of business size:
Reduced cost
As the name suggests, PEPs allow unrelated businesses to pool their buying power by joining the same 401(k), creating economies of scale that drive down the cost of investments and administrative services. Ultimately, PEPs make it possible for smaller companies to access pricing that has historically been reserved for much larger organizations. In essence, PEPs level the playing field, offering businesses of all sizes the opportunity to provide high-quality retirement plans without the hefty price tag.
Reduced workload
Sponsoring a traditional 401(k) plan can be a time-consuming task that involves a lot of administrative effort. PEPs help alleviate this burden by offering affordable access to administrative services, freeing up key personnel from the tedious work associated with plan sponsorship. By joining a PEP, you can shift much of the day-to-day maintenance to a dedicated provider, allowing you to focus more on running your business instead of completing required plan paperwork.
Reduced fiduciary liability
Managing a 401(k) plan is not just a matter of time and money; it also comes with legal responsibilities. In a traditional single-employer plan, the business carries a significant fiduciary risk, meaning it is liable for overseeing the plan’s administration, compliance, and investment decisions. Service providers can be hired to help shoulder some of this responsibility, but depending on the nature of the engagement, employers may still find themselves accountable for the actions (or inaction) of providers that have been hired specifically for their 401(k) expertise. In contrast, PEPs shift much of the fiduciary responsibility from the employer to the plan provider, offering participating employers significant relief from this legal and financial burden.
Not all PEPs are created equal: Selecting the right provider
While PEPs certainly offer some intriguing advantages over traditional 401(k) plans, not every PEP is designed with the employer and employee at the forefront.
As PEPs gain traction, business owners must navigate the various offerings to ensure that they select the right plan. Here are some of the most critical elements that can significantly influence the value and overall effectiveness of a PEP:
Provider independence
In many traditional plan structures and even some PEPs, inherent conflicts of interest exist. For example, it is not uncommon to see plans that subsidize all or part of their operating costs by using investment offerings that are associated with one or more providers, selecting inefficient share classes that charge participants more than other alternatives and use the excess fees to indirectly compensate or offset the expenses associated with various service providers to the plan. Oftentimes, these arrangements are detrimental to at least some segment of a given participant population. For this reason alone, choosing an independent provider is crucial to ensuring that participants’ best interests remain the top priority. By avoiding potential conflicts of interest, such as proprietary funds or revenue-sharing arrangements, you can trust that your employees are investing in high-quality funds selected for their value and performance, not the provider’s financial gain.
Objective oversight
While not necessarily true of all arrangements, at least some of the PEPs in the marketplace are managed by independent third-party fiduciary experts who receive no compensation from the other plan providers, the investment offerings that are made available to the participants, or the PEP itself. Instead, these third-party fiduciary experts receive compensation solely from the employers that elect to join the PEP — similar to the plan committee structure that is typically used in a single employer plan setting. Unlike traditional plan committees, these independent third parties are actual experts in the retirement field and assume full fiduciary responsibility for the PEP’s oversight. In this way, the PEP’s service providers are selected based upon excellence, and both the services provided and the costs charged for those services are actively monitored by an independent party that is fiduciarily responsible.
Plan flexibility
There is a misconception that PEPs restrict plan design options, and despite some providers entering the PEP market with rigid, restrictive solutions, the constraints are not inherent in the PEP structure. For many employers, plan design flexibility is essential and choosing a provider that allows maximum flexibility will give you the best opportunity to build a plan that suits your organization’s goals without unnecessary constraints.
Fee transparency
A clear and upfront fee structure helps both employers and employees make better decisions regarding their retirement plan. Hidden fees can erode retirement savings over time, not to mention trust in the plan and the provider, so understanding exactly what you are paying helps ensure that the plan is providing value without unnecessary costs.
PEPs directly address many of the concerns voiced by employers, from cost and complexity to administrative burden and fiduciary risk.
By expanding access to high-quality, flexible, and transparent 401(k) options, PEPs represent a significant step forward in the retirement plan industry and provide a powerful opportunity to improve retirement income security for workers.
Get information and advice for your business from a MassMutual financial professional near you.
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