A New Option to Enhance Retirement Plan Opportunities: Pooled Employer Plan (PEP)
As an employer of a small- or mid-sized business you may be searching for ways to simplify your business model and create efficiencies. A successful business model must constantly create value for its patients and for itself. As we shift into a “new normal” due to the Coronavirus global pandemic, we have seen the markets fluctuate, between crashes and rallies, making it easy for investors to react. This new era can incite emotions which can disrupt your long-term investment plan.
Fortunately, the SECURE Act that was passed at the end of 2019, a new law which changes the retirement savings rules and taxes for workers and retirees, is ushering in a new frontier. It is the first significant retirement-related legislation in more than a decade. A key provision of the SECURE Act allows employers to offer retirement plans to their employees by participating in a new type of plan, a Pooled Employer Plan (PEP), which is a Multiple Employer Plan (MEP). This is a potential new way to deliver effective retirement plan solutions to your employees.
As stated in previous articles, there is a retirement coverage gap. Only 50 percent of those employed by firms with fewer than 100 employees have access to a workplace retirement plan. There are tens of millions of Americans that do not have access to a retirement plan from their employers, mainly because there is such a high cost associated across the small employer market. Administration and fiduciary responsibilities are also deterrents for small business owners.
Multiple Employer Plans – A New Beginning for Retirement Planning
As a potential retirement plan solution, the Multiple Employer Plan (MEP) arose around the early 21st century and has a host of benefits that can be considered when determining what type of retirement plan to offer employees. A MEP consists of a common type of business, which join together to offer retirement plans to their employees. By sharing resources, each participating employer experiences savings. The basic premise behind the idea of MEPs has remained the same—multiple small businesses join together to reduce the administrative burden and potential fiduciary responsibilities of offering a 401(k)-type retirement plan.
The Wisconsin Education Association has had success by participating in a MEP, with participants including teachers, counselors, educational support professionals, active retired members of the association and more, which has blossomed into over billions of dollars of savings in their retirement plan solution.
However, current MEP regulations have proven to impede business plan owners. MEPs have been viewed as difficult to set up and administer. They are limited in the fact that you must participate in a plan that has the same type of business affiliation. Separate form 5500 annual reports must be filed for each employer, as well as audits conducted separately. More importantly, the entire plan can be disqualified if there is a participating employer that is out of compliance, known as the “one bad apple rule”. This can also increase costs which is much of the reason why these rules have discouraged many employers from joining a MEP.
Advantages of a Pooled Employer Plan
Alas, an improved type of retirement plan solution has been announced. Keeping the momentum going, the Pooled Employer Plan is a single plan that bundles together unrelated employers from unrelated industries, such as dentist and educators. As a member of a PEP, the employer does not take on additional risk associated with other employers in the plan; thus, a PEP offers the upside of a larger plan without any additional downside risk of a prior pooled plan via Pooled Plan Provider (PPP). By facilitating access to high-quality retirement plans at a reasonable cost, PEPs are expected to give other small businesses an additional incentive to provide retirement benefits to their employees which can lead to narrowing the retirement coverage gap.
In addition, a PEP can offer:
- Cost efficiencies: Costs are spread across a larger participant and asset base, thereby reducing the costs for each member of the plan.
- Fiduciary Risk Mitigation: Fiduciary investment duties may be outsourced to the plan advisor, an ERISA 3(38) investment fiduciary. The 3(38) advisor is responsible for the investment selection, monitoring and replacement of plan options, and the plan sponsor is informed before any changes are made. A 3(38) advisor is for plan sponsors that don’t have the time or want to be responsible for the plan’s investments.
- Operational Outsourcing: Using an operational fiduciary will assume many of the administrative burdens on behalf of the employer, including eligibility, beneficiary tracking and plan disbursements.
- Increased Focus: The employer uses fewer resources, allowing more focus on growing revenues and profits in its business.
In short, a PEP is treated as a single retirement plan. It files a single 5500 (all retirement plans, such as profit-sharing and 401(k) plans, must file a Form 5500 for every year the plan holds assets), undergoes a single audit, and determines ERISA bonding requirements based on aggregate PEP assets. A pooled plan provider, instead of the business owner, assumes most fiduciary responsibility for the operation of the PEP. It is expected that many MEP participants will transition to a PEP retirement plan once launched. The PEP option will first be available in 2021.
When it comes to long-term goals like retirement, keeping the money invested is likely safer than panicking and selling everything, such as some investors have done during the most recent market ebbs and flows. With a long-term goal like retirement, your portfolio should have time to recover. And with the newer cost saving solutions available, there are better opportunities for small- and mid-sized businesses to help with diminishing the retirement coverage gap and help bring long-term security to millions of people.
This article was originally published in the North Carolina Dental Society’s Gazette.
Charles Cooke, CFP®, is the founder of Cooke Capital, a wealth planning and investment management firm specializing in dental practices.
Financial advisory services offered through Acorn Financial Services, Inc. (AFAS), a Registered Investment Adviser. Securities offered through The Strategic Financial Alliance, Inc. (SFA), a registered Broker/Dealer. Charles Cooke is a Registered Representative of SFA and an Investment Advisor Representative with AFAS. Cooke Capital is otherwise unaffiliated with AFAS and SFA. Supervising office (703) 293-3100.