Pooled Employer Plans: Considerations for Employers

Nearly a year ago, the SECURE Act was passed and introduced a new type of retirement plan called a Pooled Employer Plan (PEP), allowing unrelated employers from all industries and sizes to form a single pooled retirement plan. With these plans going live on January 1, 2021, below, we explore what they are and some of the potential advantages and disadvantages plan sponsors may want to consider.

A new defined contribution plan intended to simplify offering a retirement plan, offload some of the administrative responsibilities and offer competitive pricing to two or more unrelated employers. PEPs allow small and mid-size employers the opportunity to pool together and reduce the red tape and compliance issues that may hinder these employers from sponsoring stand-alone retirement plans. PEPs are treated as a single plan to satisfy the requirements of the Employee Retirement Income Security Act (ERISA).

The Pooled Plan Provider (PPP) is a primary component of a PEP’s operation. The PPP will take on the named fiduciary role and assume all plan administrative duties. The PPP may decide to partner with other firms and/or outsource some of these functions. Each adopting employer will retain the fiduciary responsibility to monitor the PEP, including the following: 

• Assessing that the PEP is the appropriate vehicle for its employee’s retirement savings 
• Monitoring the PEP for proper ongoing operations 
• Approving the fees and costs 
• Regularly determining that the PEP remains the appropriate plan for its employees 
• In some instances, PEPs will allow the plan sponsor to select (and therefore have a continuing duty to monitor) the investment manager 

Simplified Filing

• A single Form 5500 filing will be allowed for the entire PEP (instead of one for each participating employer). An audit exemption will apply if all participating employers in the plan have 100 or fewer covered participants and there are fewer than 1,000 participants in the plan.

Possible Reduction in Fiduciary Responsibilities

• In hiring a PPP, the plan sponsor can outsource the named fiduciary and administrative roles. Contracting with the PPP removes the plan sponsor from much of the retirement plan management and administration and shifts this legal obligation to a professional. However, the duty to monitor plan operations will remain with the adopting employer.

Potential Cost Savings

• By pooling funds together, PEPs may translate into cost savings for plan sponsors. In general, service providers offer retirement plans more favorable pricing with higher assets. The same typically applies to investments with larger plans gaining access to institutional priced mutual funds at a lower cost.

Apparent Conflicts of Interest

• Fiduciary self-dealing issues are likely to arise as service providers operating as the plan’s PPP and primary fiduciary hire themselves to take on additional plan roles for a fee. This situation appears highly likely in programs where a recordkeeper serving as the PPP hires themselves as the plan’s 3(16) Plan Administrator (a fiduciary that manages the daily operations and administration of the plan) for additional compensation.
• Another conflict of interest may occur if the PPP offloads investment management to an affiliated 3(38) Investment Manager who recommends proprietary investment products. (A 3(38) Investment Manager is a fiduciary responsible for selecting and monitoring plan investments.) With recordkeepers and broker-dealers potentially assuming the role of PPP and likely to hire related money managers, it’s unclear how they will navigate this potential prohibited transaction.

Department of Labor (DOL) Target

• Some ERISA attorneys believe this new fiduciary structure and potential conflicts of interest will make them a target of the DOL. Even during consideration of the SECURE Act, some Committee members rejected the idea of a financial institution overseeing itself.

Monitoring

• A large part of a plan sponsor’s fiduciary duty is the continual monitoring of the various plan service providers’ fees and services. Under a PEP, adopting employers may not have as much of a pulse on this plan management as it is offloaded to the PPP. Adopting employers will need to pay close attention to how and who will assume this duty to monitor within the company.

Limited Plan Options

• We expect that many PEP providers will offer off-the-shelf plans with limited plan design and investment options to keep costs low and simplify administration. Plan sponsors looking to transition into a PEP may find that they will need to forego specific investment options and plan design features available in their current arrangement. In some configurations, adopting employers will give up control in selecting recordkeepers and the services being provided.  

On the surface, the main attraction of a PEP lies in fiduciary outsourcing and overall cost reduction. However, it is yet to be seen whether the new PEP structure will indeed prove to be less expensive. As a comparison, the Multiple Employer Plan (MEP) market hasn’t demonstrated that a similar pooled arrangement can significantly lower costs.  

For plans that would like to outsource as much fiduciary responsibility and plan administration as possible, similar objectives may be achieved in a single-employer plan by hiring a 3(16) Plan Administrator and a 3(38) Investment Manager (Aldrich Wealth). Combining these two outsourced fiduciary functions will provide the highest level of fiduciary protection and offloading of daily plan administration.

While the SECURE Act provides much of the groundwork for service providers to build out their respective PEP offerings, many questions remain. Will their creation allow adopting employers to obtain the economies of scale relating to plan administration and investments at the level proponents of the SECURE Act intended? Only time will tell as we expect this new retirement plan will not be an appropriate fit for all employers. We expect plan sponsors with established single-employer plans, a large participant base, and/or unique plan requirements will not find them to be beneficial due to their lack of flexibility and other disadvantages as outlined above.