The main reason why employers may be interested in a pooled employer plan (PEP) or a multiple employer plan (MEP) is not necessarily the appeal of lower costs, but the advantage of offloading the fiduciary and administrative responsibility and liability to another entity, says Ilene Ferenczy, managing partner of Ferenczy Benefits Law Center.
“MEPs and PEPs are also appealing for small companies just starting out with their 401(k) plan that don’t have a lot of assets and negotiating abilities,” Ferenczy says. “They give them access to service providers they normally wouldn’t have access to.”
Retirement plan executives say they believe the pooled employer plans that were outlined in the Setting Every Community Up for Retirement Enhancement (SECURE) Act and that can start operating in January will be broadly adopted by smaller companies and go a long way to helping Americans who previously had no access to a workplace retirement savings plan get on the right track.
As Daniel Milan, financial adviser and managing partner of Cornerstone Financial, notes, according to the Department of Labor (DOL), as of March 2018, approximately 85% of businesses with 100 or more employees offer a retirement plan—whereas only 53% of businesses with fewer than 100 employees do. “Some of the reasons smaller businesses choose not to offer a retirement plan include regulatory complexity, cost and exposure to potential fiduciary liabilities,” Milan says.
However, MEPs have largely failed to gain much traction because they require companies that join to have a commonality, or a nexus, Ferenczy says. MEPs have also been subject to the “one bad apple” rule, whereby the entire group can be disqualified if just one of the companies fails to comply with the rules, she continues.
Finally, the Department of Labor (DOL) and IRS have been “concerned about their accountability, especially when they are run by a service provider,” Ferenczy says. For all these reasons, she says, the “DOL has made it difficult to run MEPs.”
With PEPs, service providers can be in charge of them, Ferenczy says. “The SECURE Act has also provided for certain safekeeping issues for PEPs that the IRS and DOL had been concerned about, by requiring PEPs to register with both entities and to take on specific fiduciary responsibilities. Because the government got the safeguards they wanted, the expectation is that PEPs will be more popular than MEPs.”
The SECURE Act also removed the one bad apple rule for PEPs, which Milan calls “a game changer.”
Milan says he believes PEPs are “so powerful that they completely change the quality and access to retirement plans for small businesses going forward.”
Likewise, Rick Jones, senior partner with Aon, says, “We believe PEPs will be transformational in the 401(k) space and lead to better outcomes for virtually all stakeholders—rendering single employer plans and MEPs much less valuable to employers and their people. More American workers will ultimately be able to participate in, and receive better benefits from PEPs.”
Pentegra has been very involved in the MEP market and is now looking to become active with PEPs, says Rich Rausser, senior vice president of client services at Pentegra. “Companies like being able to focus on running their businesses day in and day out and outsourcing the heavy lifting of running a qualified retirement plan,” he says. “We have been waiting a long time for PEPs to step into the shoes where we thought ‘open MEPs’ would be. They will enable unrelated employers to participate in an arrangement where they are utilizing the services of an ERISA [Employee Retirement Income Security Act]-named fiduciary and a pooled plan administrator that sits at the head of the table to take on the fiduciary responsibility for managing the plan.”
To get around the common nexus requirement, some companies created “open MEPs,” Rausser explains, but the problem with open MEPs, he adds, “is that the DOL does not recognize them on Form 5500 and does not allow them to conduct a single plan audit. These two issues are specifically addressed in the SECURE Act” and are why he says he believes PEPs will succeed where MEPs and open MEPs have not.
In addition, Rausser adds, “like a MEP, two of the advantages of a PEP are a single Form 5500 filing and a single plan document, much of which will use standardized language.”
Furthermore, the audit structure of a PEP will be similar to a MEP, he says. However, whereas an audit is required in a MEP once it has 100 employees in the plan, much like a single employer plan, with a PEP, the audit is not required until it reaches 1,000 participants or if any one single employer in the plan has more than 100 workers, Rausser says.
Yet another advantage of a PEP versus a MEP, from the participant’s standpoint, is something called the “shared service rule,” Rausser says. Any vesting or eligibility that a participant has achieved with one employer in the PEP can be transferred if they leave that company and join another one in the PEP, he says. “Employer B will have to recognize their past service with employer A,” he says.
However, Rausser notes, “PEP adoption agreements permit some level of customization, such as different eligibility requirements, vesting schedules or loan or distribution features.”
Rausser says he also sees great opportunities for retirement plan advisers getting involved in PEPs as the fiduciary and/or manager of the investment lineup.
However, one hurdle that PEPs will need to get over, Rausser says, is “reaching scale. It is critically important for the service providers in the industry to think about how they will create efficient scale with PEPs.”
While many are singing the praises of MEPs and PEPs, Jeff Cimini, senior vice president of retirement product management at Voya, points out that, for some companies, particularly larger ones, single employer plans may be the better choice because they allow for complete customization. “For companies whose retirement plan’s primary goal is to attract and retain employees, they may want to go the [single employer plan] route,” Cimini says.
That said, Voya is in support of MEPs and PEPs because the company strongly believes that any effort to broaden Americans’ access to retirement plans is a step in the right direction, Cimini adds.
Eric Levy, executive vice president at AIG Retirement Services, agrees that MEPs and PEPs will help close the “coverage problem we have in this country” and says AIG is fully in support of any effort to ameliorate that problem.
“What Congress saw in including PEPs in the SECURE Act was a significant opportunity to change the way the system works to give more opportunities to smaller companies to offer a retirement plan. A structure like a PEP with appropriate guardrails on it will enable more companies to offer a plan with the infrastructure built in.”