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PEPs Are Coming Online, Merging Assets Into a Single 401(k)


When you offer a PEP, a pooled plan provider or PPP will be responsible for most fiduciary and administrative duties for the plan, freeing participating employers and enabling them to limit legal exposure. There's a streamlining of reporting and disclosure requirements as well.

Fidelity, Paychex and Aon are offering PEPs as PPPs. Fidelity's plan is aimed at small businesses with five to 50 employees that don't currently have a retirement plan but will evolve to include employers that already sponsor plans, the company said. Adopting employers pay a one-time $500 startup fee and an annual $1,200 recordkeeping fee covering plan administration, employee communication and education, and tax filings associated with the plan.

Employees pay an annual $100 subscription fee and annual 0.5% investment services fee based on their account balances. Principal Financial Group and Pentegra Services have registered as PPPs as well.

If you don't have a separate human resources department but want to do something for your employees at a fair cost, you may want to look into PEPs.

People are overspending on short-term risks like health coverage and underspending on longer-term risks like retirement, according to Aon North America CEO Paul Rangecroft, writing in Pension & Investments magazine. He predicts that more than half of employer plan sponsors will transition to PEPs by 2030.

A PEP comes with advantages:

  • The SECURE Act provides that eligible employers may be able to receive up to $5,000 in tax credits, with an additional $500 tax credit available for using automatic enrollment in the plan for the first three years that the plan is effective.
  • Only one Form 5500 needs to be filed for the entire PEP — individual employers aren't required to file their own form. PEPs may qualify for simplified reporting, avoiding the need for an annual audit if no single employer has 100 or more covered participants and if there are fewer than 1,000 participants in the plan overall.
  • PPPs retain virtually all administrative and fiduciary responsibility for operating the PEP.
  • Plans are expected to help reduce employer risk as well as the fees paid by employees in their plans while increasing governance for these employees and providing access to investment funds, education and tools usually reserved for the largest employers.
  • PEPs can create solutions for historically underserved employees. PEPs are ideal for very small companies and may someday be available to gig workers, according to Rangecroft.
  • The combined scale of multiple employers' participation will help drive lower plan costs, including recordkeeping and investment management fees, and reduce staff time dedicated to plan management.

But the plans have disadvantages, too:

  • The pandemic may have an impact on benefits planning. Small-business owners cite the cost and need to prioritize other benefits as obstacles to establishing a workplace retirement plan.
    • As individuals stress caretaking, health and children's learning schedules, retirement planning can take a back seat.
  • Given that many small businesses are closing because of the pandemic, how easily will the PEP hold together? Stable businesses don't want to be "subsidizers" within a given PEP.
  • Small employers have other options:
    • SEP and SIMPLE IRAs.
    • Competitively priced single-employer plans offered by firms that bundle recordkeeping services with fund management.

The goal of PEPs is to expand coverage to American workers who don't currently have a workplace retirement plan. The benefits include lower costs, reduced time commitment from corporate staff, improved governance processes and high-quality retirement planning.

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Scott Johnson
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