It is no secret that most Americans today are not saving enough for retirement. 55 million workers do not have access to a retirement plan offered through their workplace, which business owners denote to cost and administrative headaches.
In January the presidency and the Senate transitioned power to a blue state of mind. Now that the Democrats hold control of the White House and Congress, President Biden will have a stronger chance of passing legislative changes that could significantly impact individuals and businesses. There is ambiguity in future legislation surrounding retirement savings, taxes, student loans, and COVID-19 support. The Biden proposals could alter the retirement plan landscape, which some anticipate to be a potential heavier regulatory hand in order to promote better workplaces and employment opportunities for all.
There is anticipation within the first 100 days of the Biden administration to mandate employers to provide auto-enrollment plans so that almost all workers will have access to an 'automatic 401(k),' and we may see additional incentives for adopting these plans. For small- and mid- sized businesses there is an attractive option that is new this year to consider with several key benefits: a PEP. If you have been considering adding a retirement plan to your practice, but have not done so because of cost, administrative responsibility, and/or liability, this new solution under the SECURE Act may be the right fit you have been looking for.
What is a Pooled Employer Plan?
A Pooled Employer Plan (PEP) allows businesses (related or not) to come together to form a plan that is treated as a single retirement plan. This is very beneficial for small- and mid-sized business owners because it allows the employers to share costs and outsource administrative responsibilities and risk. The PEP files a single 5500, undergoes a single audit, and determines ERISA bonding requirements based on aggregate PEP assets.
A pooled plan provider (PPP) registered under the DOL must be hired by the PEP and assumes most fiduciary responsibility for the operation of the PEP, alleviating the business owner from this duty. This can be almost anyone; however, in most cases will be a third-party administrator (TPA), insurance company, mutual fund management firm, or broker. The employer is responsible for selecting and monitoring the provider and presenting the information needed by the PPP to properly operate the plan, such as employee census and payroll files.
Under the PEP, employers have the option to customize the plan to fit their specific needs within certain limits, including the match provided, investment options, and eligibility requirements. To employees, a PEP will look just like a normal 401(k) plan. They will have the opportunity to enroll in the 401(k) based on eligibility criteria you select, determine an amount to contribute, and select and monitor their investments. The PEP’s intent is to make a 401(k) plan less complex with less administration and less fiduciary risk for a participating employer.
Advantages of a Pooled Employer Plan
A PEP can provide numerous benefits to both the employer and employees. Most responsibilities are managed by the PEP, reducing operational costs and allowing the plan sponsor to focus on other top priorities, including growing revenues and profits in its business. Major benefits of a PEP include:
- Cost Efficiencies: Administrative costs are spread across a larger participant and asset base, thereby reducing the costs for each member of the plan. Larger plans are often offered the lowest-priced share classes for investment funds. Overall, aggregated dollars mean lower annual costs to the employer.
- 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. The employer does not have to worry about choosing or auditing the plan’s investments and the liability that comes with that role.
- 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, removing almost all typical duties from the employer.
- Tax Benefits: It is unknown what tax policies will be amended under this new administration. Retirement plans offer a consistent tax benefit because every dollar a company contributes to employees, whether a match or profit-sharing, is tax-deductible up to certain limitations.
- Tax Credits: Another provision under the SECURE Act includes two tax credits:
- Small businesses can receive a tax credit of 50% of ordinary and necessary eligible startup costs up to a maximum of $500 or $250 for each non-highly compensated employee who is eligible to participate in the plan up to $5,000. This credit applies for the first three years that a retirement plan is in existence.
- Small businesses can earn an additional $500 tax credit by adding an automatic enrollment feature to a new or existing 401(k) plan. The credit is available for each of the first three years the feature is effective.
We continue to wait and see what future legislative policies will be passed; however, we can counter uncertainty by focusing on the opportunities that come with change. With new and improved opportunities for small- and mid-sized businesses to provide retirement benefits and savings opportunities to their teams, such as the PEP, we are encouraged these efforts will help bring long-term financial security to many people.
Regarding any retirement plan solution, it is important to evaluate the fees, investments, and services provided under each provider. A trusted financial advisor can assist you in determining the right choice for your practice. To learn more about PEPs, please visit www.dental401k.com.
Charles Cooke, CFP®, is the founder of Cooke Capital, a wealth planning and investment management firm specializing in dental practices. Haley Tolitsky, CFP® is a financial planner with Cooke Capital.
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.