Pooled employer plans (PEPs) were created by the SECURE Act of 2019 and have been available since 2021. A PEP brings different employers together to create a single shared retirement plan. It provides a scalable solution that frees plan sponsors from operating and maintaining their own 401(k) plan.
PEPs have already begun to transform retirement benefits. What are the main advantages of a PEP over business as usual?
A PEP is one of the few innovations where stakeholders may achieve better outcomes. Being better informed about PEPs can help you make better decisions about your retirement plan. So here are the top five reasons your company should consider a PEP as part of your 401(k) benefits strategy.
1. Help Improve Retirement Outcomes for Employees
Less than one-quarter of employees in a recent survey were saving enough for retirement.1 Part of this retirement readiness gap is caused by poor plan design and investment options.
By its scale and design, a PEP is built to enhance the financial wellbeing of participants. The plan’s scale provides access to lower fees on investment options, which translates to larger projected retirement account balances for participants.
Pooled plan providers, which administer PEPs, create purposeful investment menus with automatic features that can help improve overall retirement outcomes. Why? The better a PEP performs for participants, the more likely other employers will join it, which increases the benefits of scale.
In the past, retirement plan sponsors were hesitant to offer annuities in a defined contribution plan because investments lacked liquidity compared to other options. New rules in the SECURE Act make these investments more portable, allowing employees to transfer their lifetime income option into another qualified retirement plan or an IRA. PEPs are designed to take these rules into account and reduce the risk of bad outcomes, such as not saving enough or running out of money in retirement, by giving employees access to lifetime income options.
2. Less Risk for Employers and Fiduciaries
Retirement plan sponsors have faced increased risks over litigation involving excessive fees. Employers can shift much of the fiduciary responsibility of the retirement plan to the provider that runs the PEP. A pooled plan provider monitors operational compliance across all functions and parties.
Employers who have a single account plan structure cannot mitigate this risk. With a PEP, employers only have to monitor the pooled plan providers.
Better governance with a PEP means more than reducing fiduciary liability. Efficient processes and decision-making developed by the pooled plan provider can help minimize risk and lower administrative costs for employers.
3. Lower Fees, More Innovation and More Tools
Pooled employer plans can provide lower recordkeeping and investment fees than smaller standalone 401(k) plans. In fact, PEPs produced savings relative to current 401(k) costs at an average cost savings of 44 percent.2
PEPs produced savings relative to current 401(k) costs at an average cost savings of 44 percent
However, the advantage of a PEP is more than just lower fees. PEPs can offer modern tools and features that smaller sponsors may not be able to afford on their own, such as services to help participants manage their student loans or coordinate their retirement plans with a health savings account.
Given their scale and specialization, PEPs are compelled to design better experiences for participants to attract more employers to join. Pooled plan providers want to allocate resources to offer a top-notch experience for employers and employees alike. Organizations running their own retirement plans may struggle to maintain an appealing experience for plan participants.
4. Streamline Plan Administration for HR
Employers want to focus on their core business. With a PEP, they can reallocate resources that have been dedicated to providing competitive retirement benefits.
PEPs allow HR departments to adjust their structure and focus within the organizations. With a simplified plan administration through a PEP, HR departments can dedicate more time to strategic initiatives while reducing the uncompensated risk of administering the retirement plan. With a PEP, HR leaders can demonstrate the value their teams provide to the business.
5. Future-Proof Your Retirement Benefits Strategy
PEPs are still new, but organizations that wait will miss out on all the PEP’s advantages. In a competitive job market, a company’s rivals could gain an edge by joining a PEP and offering retirement benefits that better attract and retain employees.
PEPs could reshape the retirement benefits landscape in much the same way 401(k)s changed it in the 1980s. Maintaining and operating a separate retirement plan will continue to pose more fiduciary risk. Administrators of smaller plans may have difficulties keeping up with best practices in retirement benefits compared to PEPs.
Few innovations in the retirement industry offer such clear advantages to all stakeholders. With PEPs, companies can focus on their core businesses while giving their workforce the latest tools to improve their retirement security. As PEPs grow in popularity, so do all their advantages.
2 Aon analysis of PEP costs comparing Aon PEP administrative and investment fees to average 401(k) fees for similar plans. Base fee may not reflect all ancillary services selected by the employer. There is no guarantee that results or savings will be achieved if you should select AIUSA and/or its affiliated entities to provide services to you.