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A New Type of Retirement Plan: The PEP

In the U.S., employees generally rely on 401(k) plans for retirement savings. However, surprisingly, almost half of U.S. employers do not offer this benefit, including 70% of small businesses. This forces employees to seek alternative means and, oftentimes, results in no savings at all. The SECURE Act passed a few years ago introduced a solution: the pooled employer plan or “PEP.” At that time, the PEP discussion centered mainly around 401(k) plans, but PEPs are back in the spotlight again with the passing of SECURE 2.0 as they may become available for 403(b) plans.

PEPs are designed to make defined contribution plans more affordable and accessible for small business and their employees. They allow multiple unrelated employers to participate in one retirement plan under a single “pooled plan provider,” or PPP. This is different from the multiple employer plan (MEP) of the past where businesses were required to be part of the same industry or association.

The new PEP model is a sensible solution if a company does not currently offer a retirement plan but has considered doing so, or if a company has a plan and is looking to significantly reduce its involvement with plan administration. A PEP is a professionally administered retirement plan that includes reduced liability, simplified plan administration for employers, and potential savings due to the pooling of resources.

Several notable benefits of a PEP include:

  • Potential administrative cost savings for employers – By pooling assets into a single, large plan, employers may save on administrative costs and achieve economies of scale.
  • Less fiduciary risk – Because the PPP assumes most fiduciary responsibilities, employers are not subject to the same level of liability.
  • Less administrative burden – The plan is a “do it for you” approach where the PPP takes on most of the day-to-day plan administration from the employer. The PPP is responsible for plan documentation, required governmental filings, and ongoing plan compliance, which reduces the amount of resources an employer needs to allocate to benefits administration.
  • Tax credit opportunities – To offset startup costs, the SECURE Act provides that eligible employers may be able to receive up to $5,000 in tax credits annually, with an additional $500 tax credit available for using automatic enrollment in the plan, for the first three years that the plan is effective. Under SECURE Act 2.0, additional credits, such as the employer contribution credit, are available.
  • Employee stability and satisfaction – Employers can provide their employees with peace of mind by making a high-quality retirement plan, such as the popular 401(k), more accessible and easier to afford.

PEPs are still relatively new and can be complex, so it is important to educate yourself about this emerging strategy before testing the waters. That said, many retirement experts agree that the PEP has the potential to be a game changer for millions of Americans who currently don’t have a way to save for retirement.

Please contact us if you have questions about the information outlined above, our seasoned and experienced employee benefit plan professionals are here to help. You can also learn more about our Employee Benefit Plan Audit services by visiting our website.

About the Author

Steph Kramer

Steph joined McKonly & Asbury in 2016 and is currently a Manager in the firm’s Audit & Assurance Segment. Steph audits a broad spectrum of employee benefit plans, including 401(k), 403(b), retirement, profit sharing, health and… Read more

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