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At HR Ledger, we’re committed to keeping you informed about significant legislation that can affect your retirement savings. A perfect example of this is the Setting Every Community Up for Retirement Enhancement (SECURE) Act that largely became effective from Jan. 1, 2020. This pivotal law simplifies the process for Americans to save for retirement and introduces Pooled Employer Plans (PEPs) which took effect on Jan. 1, 2021.
So, what are PEPs?
PEPs are a novel type of Multiple Employer Plan (MEP) that allow unrelated employers to collaboratively offer a single 401(k) retirement plan, eliminating the “common nexus” requirement usually needed for MEPs. Traditionally, to establish a MEP, employers needed to share a common connection like being part of the same industry or geographical location. However, with the SECURE Act, unrelated employers can create a shared retirement plan.
How do PEPs benefit you as an employer?
Enhanced access to 401(k) plans
The SECURE Act is primarily designed to assist small employers, as many small businesses often don’t have retirement plans. The introduction of PEPs enables unrelated small employers to unite and provide 401(k) access to their employees. Furthermore, the SECURE Act provides tax credits to eligible small employers who adopt a new 401(k) plan.
Reduced 401(k) administration costs
A 2020 J.P. Morgan survey indicated that administrative costs were one of the primary reasons small businesses did not offer a 401(k) plan. Pooled Plan Providers (PPPs) are designed to alleviate this issue.
Under the SECURE Act, a PPP must establish a PEP and will assume most of the administrative and fiduciary responsibilities including Form 5500 filing, plan audits, annual 401(k) testing, participant notices, distributions and rollovers, and investment selection and monitoring.
This significantly reduces the time that employers spend managing their 401(k) plans and lowers their fiduciary risk and liability. Additionally, some administrative costs are divided among employers in the PEP, likely reducing each employer’s individual cost compared to running a standalone 401(k) plan.
Improved pricing and plan choices
By pooling their resources, small employers in a PEP can access competitive pricing and high-quality investment products typically only available to larger employer plans.
While PEPs offer numerous benefits, they may not be the right fit for every business. Employers should assess their 401(k) challenges and requirements before deciding if a PEP is the best solution for them.