Pooled Employer Plans
When discussing financial goals with our clients, saving for retirement is often one of their highest priorities, with the most significant contributor normally being their workplace plan. Business owners are aware of this, and to help attract and retain talent, they offer their employees access to an employer-sponsored retirement place, such as a 401(k).
Knowing that job-seekers often screen for employment opportunities using access to retirement savings as one of their top criteria, almost all employers have an incentive to offer a retirement plan. So why don’t they? It boils down to two factors: cost and complexity.
- Setting up and maintaining an employer-sponsored plan can be expensive.
- Navigating regulations to make sure plans are compliant can be challenging for non-financially savvy business owners.
Inevitably this leads to many small businesses not offering retirement savings plans to their employees. It’s a lose-lose scenario for both the company and the employee.
To curb the disadvantage, Congress created Pooled Employer Plans (PEPs) as part of the Secure Act that passed in 2019. PEPs allow multiple small businesses to house their 401(k) plans under one umbrella.
Multiple Employer Plans (MEPs)
This idea is not original, and the ability to accomplish this has been around for decades, under a different name, Multiple Employer Plan (MEP). MEPs generally allow for the same thing with two caveats that are the main reason they never really took off.
- Unified Plan Rule – The IRS rule, often referred to as the “One Bad Apple” rule, states that if one company is out of compliance, all the companies are considered out of compliance and can face the penalty of disqualification.
- Nexus Rule – MEP participants must all be in the same line of business or geographical area, which limits options for businesses.
Pooled Employer Plans (PEPs)
The creation of the PEP was in direct response to the shortcomings of its predecessor, the MEP. The two main barriers, “One Apple Rule” and the “Nexus” Rule, have been eliminated.
- PEP participants can now kick out any non-compliant employers without dissolving the whole plan.
- There is no longer a requirement for employers to be in the same line of business or geographical area.
As mentioned earlier, PEPs are an umbrella in which companies can house their firm’s 401(k) plan. Firms partner with a Pooled Plan Provider (PPP) that maintains the PEP. Benefits can include:
- Reducing Liability–The PPP takes responsibility for all administrative duties and acts as the plan’s fiduciary. Employers do not have to worry about falling out of compliance, reducing possible future liability for the participating companies.
- Operational Efficiency–A PEP plan can even benefit a firm with the resources to sponsor an individual 401(k). Managing can be demanding to a business owner that would instead focus on growing their business.
- Lower Cost–Pooling assets into one overarching plan allows smaller companies to take advantage of the benefits of economies of scale provided to larger firms.
- Tax Credit–To encourage employers to offer 401(k) plans, the SECURE Act provides eligible employers with a $5,000 tax credit to help counteract startup costs. There is an additional $500 benefit for auto-enrollment plans for up to the first three years of having the auto-enrollment feature. These tax benefits are afforded to any new 401(k) plan but have a more significant impact on the less costly PEP plan.
Is a PEP plan right for you?
Employers that have considered offering a retirement plan but don’t currently can be great candidates for a Pooled Employer Plan. While it can be beneficial for recruitment and retainment purposes, a retirement plan can also benefit owners. Business owners tend to have a large percentage of their wealth tied to the business itself. Contributions to a retirement plan can diversify their overall net worth. Also, it includes an added benefit if you currently sponsor a stand-alone 401(k) plan and are looking to reduce cost or outsource administrative and fiduciary duties.
How Can We Help?
We here are River Capital Advisors don’t believe that there are any “one size fits all” answers, and although a Pooled Employer Plan can have significant benefits, they are not for everyone. We work with a Pooled Plan Provider to help our clients determine if a PEP makes sense for them and go over what feature aligns with the goals of the business. If a PEP doesn’t make sense for your business, we are experienced in providing business owners advice about what employer plans will benefit them the most. Please contact us to have a conversation with one of our advisors to learn how we can help.
River Capital Advisors is a fee-only, SEC registered investment advisory firm that provides a range of financial services for its clients. RCA is a member of The National Association of Personal Financial Advisors and the Garrett Planning Network. We provide individuals options in how they want to work with RCA to help them in all areas of their financial life, as discussed in this blog posting. RCA is also affiliated with the Jacksonville CPA firm of Smoak, Davis & Nixon, LLP (SDN). The combination of RCA and SDN, along with being a fee-only investment advisor and a financial fiduciary to our clients makes RCA the exception and not the norm in the financial services industry.
Please contact us to have a conversation with one of our advisors to learn how we can help you and your family in all areas of your financial life.