Today’s defined contribution multiple employer plans are not all the same. In fact, just a few years ago, a new sort of plan came about: the pooled employer plan. With this type, it’s no longer necessary for organizations to have mutual interests or even be in the same region. What’s more, the plan in its entirety cannot be disqualified should a participating employer fail to comply, that is, if the plan offers a means for kicking out the errant company and holding the employer accountable. That has rendered such plans a good choice for some organizations.
There are some demerits, though, including unsuitability in some situations. In any case, let us look at the pros and cons of pooled employer plans.
What is a Pooled Employer Plan?
It is a type of multiple-employer plan that’s crafted to relieve organizations of many administrative burdens. Before the Setting Every Community Up for Retirement Enhancement Act of 2019, organizations in multiple employer plans were required to be related by association or industry.
The Pros of Pooled Employer Plans
- All in one place. The pooled plan provider assumes responsibility for all administrative functions, including overseeing efforts that must be performed by participating organizations. What’s more, the provider is not just plan administrator, it’s the named fiduciary. As such, it provides a plan document with some flexibility in terms.
- Lower fiduciary exposure. It’s true that the organization continues to have fiduciary duties in terms of selecting and monitoring the pooled plan provider. After that, though, fiduciary obligations are negligible or non-existent.
- Lower administrative costs. Rather than have each employer perform functions such as conducting the audit, bonding, and filing certain forms, the pooled plan provider handles all. Further, expect the Internal Revenue Service to issue model plan lingo for such plans. Doing so may, at length, streamline the process of making sure the plan documents regarding qualification requirements are met.
- The advantage of numbers. Just as with Affinity insurance, in which members share in risks and control costs, pooled employer plans are generally able to offer lower-cost record-keeping and management than would be possible with a smaller, single-organization plan.
The Cons of Pooled Employer Plans
- May not be able to pick recordkeepers. It’s a fact that a pooled plan provider may offer, if at all, limited ability within the plan to select recordkeepers.
- Capped investment selections. Regarding the investment menu, the pooled plan provider will probably offer limited to no flexibility. While this can be beneficial in that it limits participating employers’ fiduciary responsibility, some organizations may not want to hand over control of the investment menu.
- Rigid plan design. Based on plan document selections served up by the pooled plan provider, an employer that seeks a variety of benefit structures for disparate job categories, branches, etc. may be out of luck.
- Not suited for all. Some plans, such as those for a government or church, likely won’t go with a pooled employer plan because those plans are subject to different rules. Likewise, a collectively bargained plan will likely not be a good match for a pooled employer plan due to a disallowance of joint employer-union control.
Now that you have the pros and cons of pooled employer plans in front of you, you can make an informed decision regarding provisions for your organization. Overall, such plans are likely better suited for smaller or medium-size outfits that want lower costs and reduced functions and are willing to have less control over their plans.
If you decide you need help managing health and benefits costs and want to improve the quality and cost of care, we suggest going through the consultant Mercer.
Pooled employer plans, also known as PEPs, are a relatively new retirement savings option that has gained popularity in recent months. These plans were created as part of the SECURE Act of 2019, which was aimed at making it easier for small businesses to offer retirement benefits. While PEPs have many benefits, they also come with their own set of drawbacks. Here, we take a closer look at the pros and cons of PEPs.
Pros:
1. Lower Costs: PEPs come with lower administrative costs, as small businesses pool their resources and share the costs of setting up and maintaining the plan. This allows small businesses to offer retirement benefits to employees without incurring the hefty costs associated with traditional plans.
2. Fiduciary Responsibility: PEPs allow for a single fiduciary to oversee the plan, thereby reducing the burden on small business owners who may not have the expertise or resources to manage a complex retirement plan.
3. Access to Professional Management: With PEPs, small businesses gain access to the expertise of professional investment managers who are responsible for managing the investment portfolios of the plan.
4. Greater Flexibility: PEPs allow for more flexibility in terms of investment options and the ability to customize the plan to meet the needs of the small business and its employees.
Cons:
1. Loss of Control: Small businesses that join a PEP may lose control over their retirement plan as decisions are made by the PEP provider. This can be a concern for small business owners who prefer to have a say in how their plan is managed.
2. Compliance Risks: Joining a PEP also means that small businesses must comply with the plan’s rules and regulations, which may be more complicated than managing their own plan. This can result in potential compliance risks and penalties for non-compliance.
3. Administrative Burden: While PEPs do offer lower costs, small businesses may still have to bear some administrative burden related to the plan, such as payroll deductions, record-keeping, and reporting.
4. Lack of Transparency: PEPs may also lack transparency, as small businesses may not have access to certain details about their plan and the investment decisions made by the plan’s fiduciary.
In conclusion, PEPs have pros and cons that must be carefully weighed by small businesses before joining. While PEPs can offer cost savings and access to professional management, small businesses must also be mindful of potential compliance risks and loss of control over their retirement plan. Ultimately, small businesses must carefully evaluate their options and choose the plan that best meets their needs.
