The history of Pooled Employer Plans (PEPs) is about to move from a historical background to the birth of a new product. This article explores what brought the retirement plan market to the threshold of a new direction defined by PEPs and the historical background driving these changes.
Multiple Employer Plans
The history of PEPs begins with Multiple Employer Plans (MEPs). A MEP is a plan maintained by two or more employers who are not related. The MEP has one plan sponsor, created and maintained by one employer entity. Other employers adopt onto the MEP and are referred to as adopting employers. MEPs have several advantages over single employer plans including: economies of scale, outsourcing of fiduciary responsibility to professional entities, high levels of plan oversight, and increased retirement coverage of smaller employers.
Where the evolution of Multiple Employer Plans begins to vector towards a Pooled Employer Plan is with the creation of Open MEPs. Traditional MEPs served Professional Employer Organizations (think outsourced HR organizations), employers with multiple entities (car dealerships owned by one entity) and professional associations. The traditional reading of DOL requirements where interpreted to read that the participating employers in a MEP must have some common link. In the 2000s, several retirement service providers began to interpret DOL requirements more aggressively. The Open MEP was born on the interpretation that the commonality of the participating employers could be found in the common interest of providing retirement benefits.
The Open MEP provided all the advantages of an MEP but was now available to any employer willing to adopt the MEP plan document. Very quickly the Open MEP plan type began to gather many assets due to the benefits provided to the adopting employers (cost, outsourced HR and fiduciary responsibilities). One Open MEP provider, 401(k) Advantage LLC, decided with the quick growth of their Open MEP that it would be best to have the DOL advice about the legality of Open MEPs. The DOL published its Advisory Opinion on May 25, 2012. The DOLs opinion was that the 401(k) Advantage LLC open MEP is not a single plan for ERISA purposes.
With this opinion, the majority of Open MEPs converted to a master trust structure. A master trust is similar to MEPs but importantly each employer has their own plan and files their own tax and plan documents. Some of the benefits of the Open MEPs where lost in the master trust structure.
Pooled Employer Plans
On September 21, 2016, the Retirement Enhancement and Savings Act was unanimously approved by Senate Finance Committee. The legislation would allow for the creation of Pooled Employer Plans. This proposed legislation would address the problems faced by employers which the Open MEP previously solved.
Pooled Employer Plans would be defined contribution retirement plans that any employer (possibly limited by employee count) could adopt. The PEP structure would transfer certain legal responsibilities and nearly all administrative to a third-party pooled-plan provider. The pooled-plan provider would be responsible for the design and operation of the plan and take responsibility of administrative duties to meet the requirements of ERISA and the tax code.
Pooled Employer Plans requirements:
- Maintain one plan document
- File a single 5500
- Single plan audit
- Select one or more trustees responsible for collecting contributions and holding plan assets
- Designate a Pooled Plan Provider whose responsibilities would include:
- Be the named fiduciary
- Act as the plan administrator
- Distribute required disclosures to participating employers and employees
- Conduct annual nondiscrimination and top-heavy tests
Pooled-employer could not be disqualified by the actions of a single adopting employer. New regulations allow for the expulsion of a noncompliant adopting employer from the plan. Disqualified could only be due to noncompliance by the pooled-plan provider.
Summary
With the birth of PEPs, we expect a large number of smaller employers to take advantage of the benefits offered by Pooled Employer Plans.