AN INSIDE LOOK AT ‘PEPing’ A MEP

The retirement plan landscape continues to evolve rapidly.

Since the SECURE Act introduced pooled employer plans (PEPs) in 2021, further leveling the playing field for small and mid-sized businesses, we’ve seen a wave of innovation and adoption that’s reshaping how retirement benefits are approached.

According to Planadviser.com, the number of PEPs registered with the DOL increased by 106% between 2021 and 2023. While multiple employer plans (MEPs) have long served as a valuable solution, particularly for PEOs and trade associations, this exponential growth in just over two years, allows a prudent PEO to ask the logical question, “Should we explore a PEP for our PEO?”

A BRIEF HISTORY

MEPs have been around since before the establishment of ERISA in 1974, evolving from defined benefit to defined contribution structures. A MEP is a retirement plan for businesses that typically share a commonality, but are not commonly owned — such as belonging to the same association or PEO — to band together and leverage buying power.

Their growth accelerated in the late 1990s into the early 2000s (rev. proc 2002-21) with the rise of PEOs and gained further traction in 2012 when regulatory guidance clarified how unrelated employers could participate in pooled plans (2012-04A). All of this laid the groundwork for what we now know as PEPs.

A PEP is a defined contribution plan in which a group of unrelated employers participate as part of a single pooled plan. It is sponsored by a pooled plan provider (“PPP”) named in the plan document as the sponsor, 3(16) plan administrator, named fiduciary, and person/entity responsible for performing all administrative duties.

A NEW EFFICIENT FRONTIER FOR PEOS?

While both MEPs and PEPs offer scale, there are unique and distinct features of PEPs that are hard to ignore, prompting PEOs and trade associations, who were early adopters of MEPs, to examine how “PEPing” their plans—transitioning to a PEP structure — can be advantageous from a financial and legal perspective.

Here is the rationale for a PEP:

1. Reduction of fiduciary risk to near zero. PEPs are designed to streamline operations and reduce risk in a more standardized manner. PEPs can assume almost all fiduciary responsibility for PEOs and, on behalf of adopting employers, with their integrated layers of fiduciaries.
2. Enhanced coverage for all employer types. PEPs allow PEOs to “roll up” all client types into one plan (i.e., ASOs, client companies, and payroll clients). This expands the net while reducing the potential for multiple audits through multiple arrangements.
3. Online payroll integration. In a PEO with a PEP, payroll can be completely outsourced with 360° integration, further reducing potential compliance risk and administrative burden.
4. The PPP. A PEP is supported by a DOL-registered PPP who, when enabled by modern technology, can offer cohesion and optimal risk management, as well as the offloading of burdensome administration that can tax even the most well-stocked retirement staff within a PEO. The PPP carries with it tremendous responsibility in managing the PEP, balancing the work and risk involved.
5. Additional and required scrutiny. The PEP comes with additional layers of scrutiny mandated by the SECURE Act that MEPs are exempt from. For example, the SECURE Act outlines that it is the responsibility of the PEP’s trustee to ensure contributions are collected by the plan for the participants’ benefit in a timely manner, along with many requirements and stipulations.
6. A powerful retention tool. Pooled retirement plans, including PEPs, can be a fantastic retention tool for a PEO’s financially cautious clients who may be pondering cost reductions or service downgrades.

Many CEOs (of PEOs) that I have spoken with have responded well to the idea of transitioning the fiduciary work to a registered PPP within a PEP, gaining comfort and additional clarity when adding their payroll or administrative outsourcing (“ASO”) clients into the same pooled plan, and enjoying the administrative scale that has come to the market with online payroll or HRIS integration with third parties.

The PEP structure offers employers a high degree of fiduciary outsourcing, pricing scale achieved through asset aggregation, and administrative simplicity, helping to overcome three of the biggest barriers to plan adoption in the small business market. Risk, cost, and administrative complexity.

A BUSINESS PROPOSITION RARELY IMAGINED

PEOs with a current PEP (or those considering one) have an immense business-building opportunity to partner with trade associations. Trade associations with MEPs often lack the “central nervous system” of common payroll remittance or integration, whereas PEOs naturally have this built into their ecosystem. Would it benefit your PEO to develop a referral fee arrangement on a per-worksite-employee basis for new business that comes from an association into the PEP?

The advantages to the trade association are four-fold; they do not have to set up their own MEP or PEP, can forgo administrative responsibilities, can gain access to a suite of benefits and services, and may demonstrate their value by offering a streamlined retirement plan solution (versus offering none at all). A win for all involved.

WHAT’S AHEAD

Will PEPs replace MEPs entirely? Not likely, but they will continue to gain ground for the reasons outlined in this article. MEPs will remain relevant in specific verticals, particularly where existing structures and relationships are well-established. Ultimately, both models serve a common goal: expanding access to retirement plans and improving outcomes for American workers, which is at the core of Equitable’s mission and values.

The industry has witnessed numerous PEPs surpass $1 billion in assets, underscoring the importance of selecting the right recordkeeping partner to support your retirement plan’s success.

With SECURE 3.0 being worked on in the background, offering new options to save, retirement planning will remain a core tenet in the national conversation. Enterprising PEOs who look to the future for growth can reap the rewards of evolving smartly.

This article is designed to give general and timely information about the subjects covered. It is not intended as legal advice or assistance with individual problems. Readers should consult competent counsel of their own choosing about how the matters relate to their own affairs.