How Does a Multiple Employer Plan Compare to a Single Employer 401(k) Plan?
Are MEPs and PEPs the new solution for workplace retirement savings or should I pick my own 401(k) plan?
Multiple employer plans (MEPs) have been around for many years, but the rules governing these types of retirement plans limit their availability to many employers. In an effort to help more small and mid-sized companies offer retirement savings plans to their employees, the SECURE Act ushered in new changes so that, beginning in 2021, any business can join a new type of MEP, called a Pooled Employer Plan (PEP). Because of this new development, MEPs and PEPs have become buzzwords in the industry and no doubt you’ll see advertisements touting the benefits of these one-size-fits-all type plans. But are they really the magic bullet policymakers are hoping will solve the “retirement savings crisis”? That remains to be determined, but for many employers, sponsoring their own 401(k) plan with the right plan provider is the best way to ensure their goals for a retirement savings plan are met.
What is a MEP?
A multiple employer plan or MEP is a retirement plan, often structured as a 401(k) plan, that is established and administered by an “MEP organizer.” The MEP organizer makes the plan available to many different employers. If the MEP meets certain requirements set forth in the tax laws and ERISA (Employee Retirement Income Security Act), it will be treated as a single plan managed by the organizer and not as a series of separate plans administered by each participating employer. The MEP organizer serves as plan fiduciary and typically assumes both administrative and investment management responsibilities for all employers participating in the MEP. An MEP is viewed by the Department of Labor (DOL) as a single plan eligible to file one Form 5500 only if the employers participating in the MEP are part of the same trade or association or are located in the same geographical area. There must be some commonality between the participating employers besides just participating in the MEP. A Professional Employer Organization (PEO) may also sponsor an MEP for its employer clients.
What is a PEP?
The rules limiting the benefits of an MEP to employers with commonality limited the usefulness of MEPs for many small businesses. To allow broader participation in MEPs, the SECURE Act added a new type of MEP, called a Pooled Employer Plan or PEP, effective for plan years beginning in 2021. A PEP is a 401(k) plan that will operate much like a MEP with a plan organizer and multiple participating employers, but there are a few important differences. Any employer can join a PEP; the businesses do not have to have any common link for the PEP to be considered a single plan. But the PEP must be sponsored by a “Pooled Plan Provider” (PPP) that has registered with the DOL and IRS.
The Pooled Plan Provider must be designated in the PEP plan document as the named fiduciary and the ERISA 3(16) plan administrator. This service provider is also responsible for ensuring the PEP meets the requirements of ERISA and the tax code, including ensuring participant disclosures are provided and nondiscrimination testing is performed. The PPP must also obtain a fidelity bond and ensure that any other entities acting as fiduciary to the PEP are bonded.
What are the benefits of participating in a MEP or PEP?
Studies have shown small businesses may refrain from adopting a retirement plan for their employees because of the administrative burdens, fiduciary liability, and cost associated with workplace plans. MEPs have been identified in recent years as a way to address these concerns for employers and potentially increase access to workplace retirement plans for employees of small and mid-size businesses. The MEP structure can alleviate much of the administrative and fiduciary burdens for participating employers, and potentially reduce costs.
- Reduced fiduciary responsibility – The MEP organizer or the PPP takes on fiduciary responsibility for managing the plan and for selecting and monitoring service providers. This generally includes selecting investments that will be offered in the plan.
- Reduced administrative responsibility – The MEP organizer or the PPP is responsible for day-to-day administration and complying with all applicable rules and regulations for plan operations.
- Investment pricing – A MEP/PEP arrangement pools plan assets of all participating employers, which may allow the MEP/PEP to obtain better pricing on investments.
- Reduced plan expenses – MEPs/PEPs allow small businesses to benefit from economies of scale by sharing the expenses for plan documents, general plan administration, and one Form 5500.
Because of these benefits, interest in MEPs has grown over the years, leading to the rule changes that open the MEP opportunity to all employers through a PEP.
How do MEPs & PEPs Differ from a Single 401(k) Plan?
Many of the responsibilities associated with managing a retirement plan that can challenge plan sponsors are taken on by the MEP organizer or the PPP. This third party is responsible for making almost all the decisions related to managing the plan, hiring and monitoring service providers, and overseeing the plan’s investments and operations. The MEP/PEP entity must perform these services on behalf of all participating employers and will be held to the high fiduciary standards of ERISA for these duties. Once the employer has prudently selected the MEP/PEP entity, the employer is relieved of the day-to-day operational oversight and investment management. However, this transfer of responsibilities also means a transfer of control over key decisions regarding the plan.
Conversely, when an employer establishes its own 401(k) plan for its employees, the employer retains many of these operational and investment responsibilities, which the employer typically fulfills with the support of service providers. The employer can design the plan based solely on their goals and objectives for the plan and their employees’ needs. The flexibility retained by an employer adopting a single 401(k) plan includes:
- Selecting the plan design features that fit their employees’ needs
- Picking the service provider that will assist them in operating the plan and provide relevant education and guidance to their employees
- Choosing the menu of investments that will be offered to participants in the plan or engaging an investment advisor to manage or guide investment selection
- Deciding whether to offer personalized advice to employees
When Might a Single 401(k) Plan Might Be Better?
While the shared expenses and reduced responsibilities of participating in a MEP/PEP can be attractive to small and midsize employers, sometimes what one employer sees as a benefit, another employer sees as a disadvantage. For example, because the MEP/PEP entity is operating one plan for many employers, the plan may be designed with the features that will be most widely accepted by most employers. There is typically little customization available in order to keep plan operations efficient (and cost effective) for the MEP/PEP entity. Participating employers generally have no control over service providers, plan design, or the participant experience.
Additionally, although the structure of a MEP/PEP is meant to reduce administrative and investment expenses for participating employers, it remains to be seen if the cost of these plans will be competitive with the low-cost 401(k) plans available today without compromising on the quality and breadth of services.
PEPs will open up the multiple employer plan market to all employers for the first time ever. And there are many financial organizations and service providers preparing to capitalize on this new solution by launching PEP products right away in 2021. But truth be told, the industry is still awaiting guidance from the IRS and DOL on a number of critical elements necessary for building the PEP plan product, including plan documents, acceptable compensation arrangements for service and investment providers, administrative responsibilities for PPPs, and special Form 5500 rules. With so many unknowns yet in the PEP market, it’s difficult to predict whether this new type of multiple employer plan will hit the mark for small business owners.
Employers can benefit from the simplicity of a single service provider solution and receive professional fiduciary and administrative support right now with a 401(k) solution designed specifically for small and midsized plans.
Ready for the right 401(k) solution?
Betterment for Business offers a digital platform that makes it easy for you to set up and maintain a plan, with low cost administration, guided onboarding, and expert investment and administrative support. Let us help you deliver a 401(k) plan that works for your organization and your employees.
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