Are Pooled Employer Plans (PEPs) Poised to Change the Retirement Plan Landscape?

February 11, 2021
Hall Benefits Law, LLC

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) established a new structure whereby a group of unrelated employers could participate in a single defined contribution plan as of January 1, 2021. 

Pooled Employer Plans (PEPs) must be administered by a Pooled Plan Provider (PPP), which acts as the plan sponsor, handling all fiduciary, administrative, and investment responsibilities. PPPs must be registered with the Department of Labor (DOL) before beginning operations.

Because of the highly specialized requirements for administering a PEP, the PPP role is more likely to be filled by registered investment advisors (RIAs), third-party administrators (TPAs), record keepers, and other financial services entities. 

PEPs and MEPs

Some small employers may think that a PEP is the same as a MEP (Multiple Employer Plan), which have been available for decades. However, two key MEP limitations that soured these employers on MEPS – the IRS’ “one bad apple” rule that can disqualify a MEP if just one participating employer fails to follow the rules, and the DOL’s “nexus” rule that requires all employers in a MEP to be in the same line of business – were eliminated by the SECURE Act’s creation of the PEP. 

Establishing a PEP

The primary purpose of a PEP is to remove as many of the administrative and fiduciary duties as possible from the employer.  To that end, it is anticipated that most PPPs will outsource the fiduciary duties of a plan administrator to a TPA and investment decision fiduciary duty to an RIA. The PPP will also be responsible for the traditional roles of custodian and record keeper.

RIAs and broker-dealers that wish to establish themselves as PPPs in order to offer these services to their small business clients need to be aware of the potential risks. Chief among these risks is the potential for creating a prohibited transaction under IRC Section 4975(c)(1) when providing investment advice to a plan while serving as a PPP. This potential for a prohibited transaction exists because a plan fiduciary is prohibited from receiving compensation from a plan for transactions that involve the plan’s income or assets or from dealing with a plan’s assets or income for their own interest. 

In addition, PPPs are required to serve as the 3(16) administrative fiduciary for PEPs, and PPPs must fulfill a number of key fiduciary duties that are typically not core competencies for RIAs. While the answer may be for RIAs to outsource these fiduciary duties to a TPA, doing so does not relieve the RIA of liability for those functions.

Hall Benefits Law has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 678-439-6236.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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