(This article originally appeared in the Philadelphia Inquirer)
We’re all aware that there’s a retirement crisis in this country. Not enough people are saving for the future, and there are concerns about whether our Social Security system will run out of money.
That’s one of the big reasons why, in 2019, Congress passed the Setting Every Community Up for Retirement Enhancement or SECURE Act. It offers tax credits and other incentives to small businesses to set up 401(k) plans, which allow employees to save for retirement.
The legislation also has a lesser-known provision that expands the availability of pooled employer plans (PEP). Whether your business already has a 401(k), or you need to start one, you should be considering a PEP.
Why? Because a PEP can save you and your employees a lot of money — and potential headaches — by allowing you to pool retirement plan assets with other companies and share an administrator to oversee the funds.
“We’ve seen a big jump in the number of clients moving to our retirement plan administrative services over the past year, thanks to PEPs,” said Michael Majors, a vice president of human resources services at the payroll processing firm Paychex. The firm recently announced that it had passed the 100,000 milestone for the number of 401(k) clients it serves, and Majors credits PEPs as a big factor.
Before the SECURE Act, a pooled employer plan could be established only among businesses sharing a “nexus” of interest, such as being in a similar industry, or those located in the same geographical area. But no more. Now, small businesses from anywhere and doing anything can band together in a PEP. And more small businesses are taking notice.
“We tell our clients that there’s a single employer, 401(k) option, and then there’s this other option called a pooled employer plan,” Majors said. “And in most of the cases we’re finding that up to 70% of the businesses choose a pooled employer plan. It’s really shifted the dynamic of the number of plans we do in those categories.”
Any business that offers a 401(k) plan must shoulder not only the costs to administer the plan but also any expenses related to filing tax forms and other documents with state and federal authorities. As a plan grows, these costs tend to increase.
That was the reason Melinda Myers converted her company’s existing 401(k) to a pooled employer plan. Myers is the human resources coordinator for H&H Castings, a manufacturer of aluminum moldings in York. Her company has had a 401(k) plan for years. But as the company added more employees, she found herself required by regulation to engage an outside accounting firm to perform an annual audit.
“The cost for us to do the audit was over $8,000,” she said. “And when it’s a small company like us and COVID hits you and you’re struggling to find workers, this is a significant expense.”
But a pooled employer plan solves this issue: Only one audit is needed for the entire group. Costs are then shared by all the participants, at significant savings. Plan participants also share in the day-to-day administrative costs, which lowers their fees, too.
PEPs offer a fix for another big issue: liability. When your small business has its own 401(k), you carry all the fiduciary responsibility for that plan. You’re setting up the plan. You’re choosing the investment options. You’re determining the rules. If anything happens, it’s on you.
But with a PEP, you’re delegating those responsibilities to the shared administrator. So if anything goes wrong, it’s generally the administrator’s responsibility — and liability.
Majors agrees that the benefit of reducing these administrative responsibilities and liabilities “is a big one.” It’s “one of the key reasons,” he said, why his firm is hired as a PEP administrator.
“Our small-business clients are not experts in making investment options or running the plan,” Majors says. “They want us to assume these responsibilities.”
Migrating your existing 401(k) plan to a pooled employer plan requires time and effort. Myers said it took her company about four months to complete the process because of all the paperwork involved and the need to educate her employees about the change.
“Our employees were at first concerned,” she said. “They’re like, ‘What do you mean? You’re taking our monies and you’re putting them somewhere else?’ Along with our administrator, we had to have many conversations with them to explain how secure it was and how in the end this will lower their costs and provide a better return on their investments.”
Pooled employer plans have other limitations. If you choose to go this route, you will be delegating decisions. Your plan may have fewer investing options than before. You will have less choice over the staff administering your plan, or how the plan is designed.
“There may be some technical reasons where a more complex plan design is needed,” Majors said. “In those cases, I tell our clients to talk to their financial advisers because sometimes these plans aren’t for everyone.”
But for most small businesses, these downsides pale in comparison to the potential benefits. And thanks to new legislation — known as the SECURE Act 2.0 — currently making its way through Congress, it will soon become even easier for nonprofits and religious groups to also participate in pooled employer plans.
“PEPs are a great option for a great number of small organizations,” Majors said. “I think, over time, many more will convert their existing plans over to them.”