Unlocking the potential of pooled employer plans 

In an evolving retirement landscape, employers are increasingly seeking solutions to streamline the delivery of competitive employee benefits while helping manage costs and compliance. Pooled Employer Plans (PEPs) have emerged as a compelling option for retirement plan sponsors of all sizes, helping provide a collaborative approach to retirement savings and the economies of scale that come with it.

We explore the structure, potential benefits, and considerations of PEPs, equipping retirement plan sponsors with the knowledge needed to make informed decisions about their retirement plan strategies.

Pooled employer plans are designed to allow multiple employers to participate in a single retirement plan, pooling resources and delegating administrative responsibilities. The legal framework governing PEPs was established by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, and enhanced with the SECURE Act 2.0 of 2021. See below for the PEP provisions.

PEPs are classified as "multiple employer plans" (MEPs) but differ in that they allow unrelated employers to join a single plan – simplifying compliance with the Employee Retirement Income Security Act (ERISA) and Internal Revenue Service (IRS) regulations. Key compliance requirements for establishing a PEP include:

• Fiduciary responsibilities: Each PEP is established and managed by a Pooled Plan Provider (PPP), who is the named fiduciary under ERISA for the Plan, responsible for performing all related tasks.
• Audit requirement: The PPP is responsible for the annual plan audit and engaging with the independent auditor to meet ERISA and IRS requirements.
• Plan document: A written plan document must be maintained, outlining the plan's provisions and operations.
• Annual reporting: PEPs file a single Form 5500 on behalf of all adopting employers, providing transparency and accountability. This eliminates the need for participating employers to file a separate Form 5500.

While the initial intention of the SECURE Act provision was to help start-up and small employers provide a retirement plan to employees, the potential benefits of the PEP framework for employers and plans of all sizes have become more and more apparent.

One of the potential advantages of PEPs is the reduction of administrative burdens on plan sponsors. By participating in a pooled plan, employers can offload many of the complex responsibilities associated with retirement plan management.

Plan administration. PEPs streamline administrative tasks, including enrollment, recordkeeping, and compliance reporting. The PPP typically handles these functions, allowing employers to focus on their core business operations rather than the intricacies of retirement plan administration.

Regulatory compliance. PEPs can also simplify compliance with regulatory requirements. The pooled plan provider assumes fiduciary responsibility for ensuring the plan adheres to ERISA and DOL/IRS regulations, which can help reduce the risk of penalties and audits for the individual employers in the PEP.

Plan audit. The PPP manages the tasks associated with a plan audit and can also help reduce the likelihood of an audit by implementing a system of selective testing of underlying plans. 

Another advantage of PEPs is their potential for cost efficiency. By pooling resources, employers may benefit from economies of scale that can reduce overall costs associated with retirement plans.

Administrative & recordkeeping fees. PEPs typically offer lower administrative fees compared to standalone plans. By pooling resources, PEPs can potentially negotiate better rates with service providers, including recordkeepers. PEPs may also have more standardized processes and procedures managed by the PPP, streamlining administration and potentially leading to lower administrative costs.

Investment costs. In addition to the potential for administrative cost savings, PEPs may be able to negotiate more favorable pricing on institutional-quality investment options by aggregating assets; this could lead to potential savings for participants and improved financial outcomes for the plan and organization. This impact is magnified by selecting a PEP that utilizes a 3(38) investment manager with the size and industry presence to provide access to highly-rated institutional investments and managers.¹

Fiduciary insurance. Entering a PEP can potentially result in lower premiums and more favorable terms for fiduciary insurance. Because the PPP maintains fiduciary insurance and is not covered by the participating employer’s insurance, the employer’s policy should be amended to provide coverage specific to the employer’s participation in the PEP and the related administrative liabilities.

PEPs benefit from economies of scale that may allow them to offer a broader selection than many stand-alone plans, including target-date funds, index funds, actively managed options, and more. This variety can potentially enhance participant engagement and may drive better outcomes, as employees can tailor their investment strategies to their employees’ specific needs and their overall retirement program objectives.

One potential advantage a PEP may offer is the opportunity to work with large, established recordkeepers who are experienced in retirement plan administration and who have made substantial investments in rolling out PEP service and administrative enhancements – from demographically-tailored onsite and remote financial education/wellness programs to innovative, in-plan retirement income solutions. A PEP may enable an individual retirement plan to provide their employees with a robust participant experience they would be unable to offer in a standalone plan.

While PEPs provide a standardized approach to retirement plan management to simplify administration, they can also offer a large degree of flexibility. Sponsors can often customize certain features such as contribution rates, automatic features, vesting schedules, and withdrawal options as well as investment options.

This flexibility can allow employers to tailor the plan to meet the unique needs of their workforce while potentially benefiting from the efficiencies of a pooled plan. Sponsors should consider these needs when identifying a PEP provider to meet their retirement program’s objectives.

Understanding the division of fiduciary responsibility in a pooled plan structure is crucial for plan sponsors considering adopting a PEP. In a PEP, the PPP assumes primary fiduciary responsibility for both the plan's operation and investment decisions – serving as the 402(a) named fiduciary and assuming the risks associated with it.

While the PEP provider manages primary fiduciary duties, sponsors still retain some responsibilities, including selecting the PEP provider and monitoring the plan's performance. However, the shared fiduciary model helps mitigate risks associated with plan management for the individual member employers.

Pooled employer plans offer many potential benefits, but as with any strategic decision, it’s important to weigh all factors to help ensure smooth implementation and alignment with long-term goals.

Transitioning to a PEP involves changing control over plan design, investment options, and other plan characteristics, which can simplify management but may also limit direct control and influence. It also requires clear communication to make sure participants understand the changes and feel confident about their retirement savings. Plan sponsors should also evaluate the initial transition process, including any associated costs and administrative steps, to ensure a seamless experience with no surprises.

A good PEP provider will facilitate a smooth transition, foster transparency, and provide participant communication support during the initial onboarding and on an ongoing basis.

While we’ve seen how a PEP allows plan sponsors to outsource a level of fiduciary responsibility, sponsors must still exercise and document their due diligence in selecting and monitoring the provider. In addition, finding a PEP provider whose offering aligns with an organization’s unique needs is vital to the success of the retirement program. Plan sponsors should consider several factors when evaluating potential providers:

Experience and reputation. Look for a provider with a proven track record in managing PEPs and a strong reputation in the industry. Research their experience with similar employers and their ability to deliver quality service.

Investment options and performance. Evaluate the range of investment options offered by the provider and assess their historical performance. Ensure that the provider can offer a diverse lineup that meets the needs of your workforce.

Fees and transparency. Understand the fee structure associated with the PEP, including administrative and investment fees. Seek providers that offer transparency in their pricing and are willing to provide detailed fee disclosures.

Support and resources. Consider the level of support and resources the provider offers to both employers and participants. Access to educational materials, tools, and dedicated support can enhance the overall experience for plan sponsors and employees alike.

Pooled employer plans can present a valuable opportunity for retirement plan sponsors of all sizes to help enhance their employee benefits offerings while simplifying administration, potentially lowering costs, and mitigating fiduciary risk. By understanding the structure, benefits, and considerations associated with PEPs, employers can make informed decisions that align with their organizational goals and support their employees' retirement readiness. As the retirement landscape continues to evolve, PEPs may play a pivotal role in shaping the future of workplace retirement savings.

Mercer is a global consulting and solutions firm in talent, health, retirement, and investments. We launched Mercer Wise PEP in 2021 as a comprehensive total retirement outsourcing solution. Mercer serves as the Pooled Plan Provider (PPP) and 402(a) fiduciary, in collaboration with Empower as recordkeeper.

To discover the potential benefits of Mercer Wise PEP or learn about additional customized or expanded DC OCIO options available to your organization, please contact us.

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_{¹ Please see the Guide to Mercer’s Investment Strategy Ratings.}