To PEP or not to PEP… that is the Question?

Enterprise Iron Financial Industry Solutions, Inc.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act amended the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code to establish a new type of Multiple Employer Plan (MEP). Now, Pooled Employer Plans (PEPs) have the potential to transform the retirement plan landscape and provide millions more Americans with a way to save for retirement.

According to a 2018 study by the Bureaus of Labor Statistics, approximately 38 million private-sector employees in the United States do not have access to a retirement savings plan through their employer. About 85% of workers at private-sector establishments with 100 or more employees were offered a retirement plan. In contrast, only 53% of workers with fewer than 100 employees had access to such plans.¹

Anyone following industry news has seen an uptick in information sharing around PEPs. This article shares insights around PEPs, including key features, the importance consultants and advisors will play in the successful adoption of these programs, and compliance and operational readiness providers will need to consider.

Highlighted below are the key features of PEPs, which must be administered by Pooled Plan Providers (PPPs) and took effect January 1, 2021:

Peter Lohri
  • Single Plan: Plans that satisfy PEP requirements are characterized as open MEPs and are treated as a single plan to satisfy ERISA requirements.
  • Non-Industry Related Groups: While MEPs require participating employers to be related by industry or association (such as trade group), PEPs, on the other hand, do not, thus eliminating the nexus rule.
  • Economies of Scale: Potential to reduce fiduciary liability, simplify administration for employers, and increase savings due to resource pooling.
  • 401(k) Plans Only: Plan types are currently limited to 401(k) plan structures, so 403(b) and 457 plans are excluded from participating in a PEP at present.
  • Removal of “One Bad Apple” Rule: The SECURE Act replaces the “one bad apple” rule with a procedure allowing PEPs to separate the asset of a non-compliant employer, allowing the plan to retain its tax-qualified status.
  • Fiduciary Protection: A professional third party known as the PPP, required to register with the Secretary of Labor before beginning operations, will serve as the designated plan administrator, and the named 3(16) fiduciary.
  • Tax Credit: To offset startup costs, the SECURE ACT provides up to $5,000 in tax credits annually, with an additional three-year $500 tax credit with automatic enrollment.
  • Company Match & Contributions: Participating employers still have control over these limits.
  • Plan Assets: Plan assets are held in a commingled trust, meaning there is no segregation of assets by the employer.

The Role of the PPP

Compared to a single employer plan, PEPs outsourcing benefits are rather significant. The legal obligations of the plan sponsor can now be shifted to a professional Pooled Plan Provider — adding a substantial layer of fiduciary protection not previously available, as the PPP essentially becomes the new plan sponsor. Initially, we anticipate seeing the more common models where the PPP is filled by a third-party administrator (TPA) or recordkeeper, with investment selection and monitoring supported by a 3(38) fiduciary.

It is important to note that Registered Investment Advisor (RIA) and broker-dealers may also serve as the PPP. However, there are several issues that advisory firms should understand before deciding to commit to this role. Most significant is the fact that by providing investment services to the plan and managing assets for an AUM fee while serving as the PPP, there is potential for creating a prohibited transaction, as the Internal Revenue Code Section 4975(c) (1) disallows a plan fiduciary from dealing with the income or assets of a plan for their own interest or from receiving compensation from the plan in connection with transactions involving income or assets of the plan.³

Enterprise Iron anticipates that RIAs and broker-dealers take a more “wait and see” approach before fully jumping in as PPPs.

Not uncommon to single-employer plans, the TPA or Recordkeeper will take on these administrative duties:

  • Form 5500: Participating employers do not have to file separate 5500’s — meaning only one 5500 filing for the entire plan, not each employer.
  • Non-Discrimination Testing: While the PPP or registered party will perform non-discrimination testing, it is important to note that testing is applied separately to each adopting employer for their employees and plan contributions (not across the PEP in aggregate).
  • Annual Audit Requirements: Unless the PEP fits within the new audit exemption rule (no more than 1,000 participants and no employer with more than 100), the PEP is subject to an audit².
  • Plan Document/Restatement & Participant Notices: The PPP will take on this role for the PEP.
  • Hardship Distributions, Loans & Rollovers: Anticipated to potentially be more streamlined under a PEP, technically allowing employers to remove themselves from the actual approval process.

Advisors & Consultants to Drive Interest & Adoption

We anticipate plan consultants and advisors will play a key role in adoption, being on the front line with clients. While many view smaller plans to be the natural “initial” target, some experts contend mid-size plans may also consider this structure due to potential economies of scale, increased purchasing power, and the ability to offload some fiduciary responsibilities in comparison to single-employer plans.

That said, advisor and consultants will want to understand the different options available in the marketplace as they inform and educate their clients around viable options that best serve each client’s unique goals and objectives, including:

  • Group Consensus: Will employers be comfortable delegating administration and abide by others’ direction?
  • Investment Selection & Monitoring: What level of comfort will employers have related to investment control — one plan translates to one investment lineup across the PEP.
  • Standardization: To keep costs down, most PPPs will likely offer a standard product offering at the onset. This begs the question, will there be a premium for non-standard services (i.e., reporting, participant communications, etc.), or will the model be modularized, allowing for a degree of flexibility and customization for each employer at a price to “buy up” for a degree of customization?
  • Not a Free Ride: While an attractive way to establish or offer a 401(k) plan at a reasonable cost, employers will still be responsible for monitoring plan operations and determining if fees charged to employee’s accounts are fair.
  • Price Points: Multiple layers of involvement, including 3(16) fiduciary, 3(38) fiduciaries in charge of investments, recordkeeper, and independent trustee, could potentially drive up total costs, initially, as preferred models evolve and standardize. First-to-market providers with aggressive pricing may be in a “winner-take-all” position.
  • Exit Strategy: It will be necessary for clients to quickly understand the cost to promptly leave the plan and have their portion of the plan spun off as either an individual plan or transferred to an alternative MEP or PEP.
  • ERISA Class Action Lawsuits: While most ERISA lawsuits have been focused on larger plans, with the rollout of PEPs, we could see litigation moving down-market to smaller plans, leaving PEPs as a potential area of exposure.

Challenges for Those Considering Becoming a PPP

While some might assume, providers active in the MEPs space have a natural advantage, this might very well be the case. Regardless, unlike a single employer plan, PEPs create challenges for those who have not otherwise been active in the MEP space and are looking to build a product offering:

  • Accuracy & Timing of the Data: Accuracy and timing of the data will be key as employers will be responsible for timely funding of employee and employer contributions. Employers must also promptly provide the correct participant data to the PPP and other service providers, as removing the “one bad apple” rule allows the PPP to separate non-compliant employers.
  • Data Feeds & Information Sharing: Pooled employer plans likely translate to multiple channels and methods of exchanging information between employers, PEP providers, and participants (e.g., coordinating payroll, census, and remittance data directly from employers and across multiple third-party providers or distributing required statements, notices and disclosures while allowing participants to “opt-in” to e-delivery vs. paper).
  • Plan Reporting: While one plan, the data will need to be bifurcated between employers for reporting purposes. Plus, each employer may very well have different reporting requirements, including standard, ad hoc, and potential custom reporting requirements based on the employer’s size.
  • Plan Rules: One plan, but each employer determines employee contributions and employer match components, which exist in the recordkeeping system for each employer (meaning they’re not consistent across all employers).
  • Compliance Testing: Discrimination testing must be applied to each adopting employer for their employees and plan contributions separately. In this sense, discrimination testing is more complex compared to single-employer plans.
  • Conversion & De-conversion: With the potential of adding existing plans to or spinning off non-compliant plans, a well-defined conversion and de-conversion process will be essential to any provider’s operations strategy.


In conclusion, to PEPs or not to PEPs… still remains the question as we enter Q2, 2021. While PEPs have the potential to transform the retirement industry and provide millions more Americans with a savings vehicle for retirement, we anticipate 2021 will be a year of discovery with the potential for broader adoption in these plan structures in 2022 and beyond.

Whether you are a Plan Sponsor, Asset Manager, Recordkeeper, Custodian, Trustee, TPA, Registered Investment Advisor, or a Retirement Plan Consultant, Enterprise Iron can help. We have extensive retirement experience and fully understand the entire ecosystem and key constituents involved in servicing retirement plans.

Our business, technology, and workforce solutions teams are ready to help clients evolve their PEPs strategies!

¹Fact Sheet: Final Rule on Association Retirement Plans (ARPs), U.S. Bureau of Labor Statistics, July 29, 2019 ²SECURE Act Pooled Employer Plan Q&As, NAPA ³The New Pooled Employer 401(k) Plan and the Hazards of Advisor-Led PEPs, Jeffery Levine,, December 30, 2020