A new kind of multiple-employer retirement plan, the pooled employer plan (PEP), offers a powerful alternative to a standalone plan, especially for smaller employers who may be wary of the expense and legal burdens associated with plan sponsorship. The key innovation of a PEP, created by the SECURE Act of 2019, is that it is sponsored not by the employer but by a professional third-party provider, known as a pooled plan provider (PPP), who assumes rather broad statutory fiduciary responsibilities under ERISA. PEPs also benefit from the logistical advantages arising from economies of scale and from the streamlining of certain routine compliance, which tend to lower the per participant cost for pooling employers.
However, PEP plans are not identical. While all kinds and sizes of businesses may participate, each PPP is likely to have its own acceptance criteria, PEP features, and operational rules. As with any new undertaking, an employer is well advised to compare prospective PEPs carefully before joining one. In addition, employers need to understand what a PEP can do for them and what remains the employer’s responsibility.
The Employer’s ERISA Duties in Standalone Plans
To utilize the many tax breaks available under the Employer Retirement Income Security Act of 1974 (ERISA), an employer sponsoring a retirement plan must strictly comply with a complex set of regulations to ensure that the plan is operated fairly, transparently, and exclusively for the benefit of the plan’s participants and beneficiaries. Enforced by the IRS and the Department of Labor, the Code and ERISA’s tax qualification and fiduciary rules cover a gamut of operations, financial activities, employee communications and annual reporting. To assist employers in compliance with their multiple duties, a complex industry has developed over the years, involving huge institutional trustees, registered investment advisors (RIAs), third-party administrators (TPAs), and financial auditors. Under the traditional, standalone plan rules of ERISA, this small army of sophisticated entities and professionals, each playing their role, technically answers to the employer who, in turn, is accountable for all plan compliance.
Wrangling all of the above aspects of operation and compliance requires the standalone plan sponsor to hire and continually monitor the outside professionals, while also performing its own in-house plan tasks. As a practical matter, plan compliance is a lot for employers to manage alone, especially those lacking in-house ERISA expertise. Of particular legal significance is the fact that, while the outside service providers owe ordinary contractual duties to the employer under written service agreements, they do not necessarily owe any legal duty to the plan itself. If ERISA duties are assumed at all, the provider must acknowledge them in writing, in advance; even then, the duty is only that of a co-fiduciary of the plan sponsor. Therefore, in a standalone plan, the employer is never able to completely delegate any of its duties, remaining accountable to government agencies and its participants for many, if not all, actions of service providers.
PPP’s Duties and Agency Enforcement
In SECURE, Congress added new section 3(44) to ERISA, thereby creating the PPP as a primary co-fiduciary with specific statutory duties. In order to become a PPP, Department of Labor guidance requires that an entity:
- Is designated by the terms of the plan as a named fiduciary under ERISA, as the plan administrator, and as the person responsible to perform all administrative duties…that are reasonably necessary to ensure that the plan meets the Code requirements for tax-favored treatment and the requirements of ERISA and to ensure that each employer in the plan takes such actions as the Secretary or the pooled plan provider determines necessary for the plan to meet Code and ERISA requirements, including providing to the pooled plan provider any disclosures or other information that the Secretary may require or that the pooled plan provider otherwise determines are necessary to administer the plan or to allow the plan to meet Code and ERISA requirements;
- Acknowledges in writing its status as a named fiduciary under ERISA and as the plan administrator;
- Is responsible for ensuring that all persons who handle plan assets or are plan fiduciaries are bonded in accordance with ERISA requirements; and
- Registers as a pooled plan provider.
See Final Rule, Registration Requirements for Pooled Plan Providers, Employee Benefits Security Administration, effective November 16, 2020 at Federal Register :: Registration Requirements for Pooled Plan Providers. Perhaps most significantly, these ERISA duties have real teeth from an enforcement perspective, providing that a PPP may be audited, examined and investigated by the IRS and the Department of Labor.
Unfortunately, even under the strictest regulatory regime, competence is never guaranteed. As the PEP market develops, it remains to be seen how well particular PPPs function in the role of primary fiduciary. Furthermore, conflicts of interest are a possible issue for PPPs who, as the Plan Administrator, may also be serving in other roles, such as the TPA and recordkeeper. It is important for employers to assess these issues, with independent ERISA counsel as necessary, to determine whether fees, expenses, and services are reasonable.
Streamlined Administration
Routine compliance for PEPs is simplified in the following respects:
- Filing of a single Form 5500 filing for all employers that are part of the PEP;
- A single financial audit (note however that large employers participating in a PEP must get a separate financial audit of their portion of the trust assets); and
- A single ERISA bond to cover all assets.
SECURE 2.0 made the start-up plan tax credit available for 3 years for employers joining a PEP, regardless of how long the PEP has been in existence, effective retroactively for taxable years beginning after December 31, 2019. SECURE 2.0 also refined the PEP rules as follows, effective for plan years beginning after December 31, 2022:
- A PEP may designate a named fiduciary (other than an employer in the plan) to collect contributions to the plan. Such fiduciary would be required to implement written contribution collection procedures that are reasonable, diligent, and systematic.
- 403(b) plans may be PEPs, thereby permitting eligible 403(b) employers such as charities, educational institutions, and non-profits, to participate.
What Does a Pooled Employer Still Have to Do?
In the context of a PEP, the employer is faced with a consumer issue and a fiduciary issue. As a consumer, the company should heed the age-old advice of buyer beware. In reviewing a PEP proposal, the employer should ask questions, identify gaps in services offered by the PPP and its TPA, RIA, and recordkeeper and shop around for the best fit. Does the employer like the PEP’s benefits, rights and features? Can it handle its assigned tasks in the PEP?
While the PEP is close to being a plug-and-play product for an employer, some legal liability remains. Pooled employers are still ERISA fiduciaries, responsible for the selection and monitoring of the PPP and other named fiduciaries of the PEP and for ensuring that plan administration and investment management is performed in the best interests of the plan participants. In this regard, the employer must ensure that the PEP is a suitable fit for itself and its employees. Further distinction and clarification of the respective duties of employers and PPPs will presumably be forthcoming from the IRS and the DOL.
After due consideration of the various factors involved in establishing a retirement benefit, an employer may find that a standalone plan is actually a better fit than a PEP, if it desires a more customized plan design for its employee population, more control to hire and fire vendors and more freedom to negotiate pricing on their own.
Going in With Eyes Open
Before establishing any type of retirement plan, an employer must go in with eyes open, after learning as much as possible about what each type of plan offers and about each plan provider or set of providers. As the cliché goes, read the fine print, literally, to understand all of the substantive terms of a plan and the service contract. How does a particular plan function? What is expected and required of the employer? Are the promised conveniences of a plan worth the inevitable tradeoffs?
As with any type of employee benefit, creating a potential defense to litigation and agency examinations requires employers to maintain procedures to oversee all service providers. All aspects of plan compliance—employee communications, operating in accordance with the terms of a correct plan document, and investment prudence—remain ultimately up to the employer to ensure, even in a PEP. Therefore, every employer providing a retirement benefit must exercise a degree of independence and knowledge sufficient to choose and oversee all plan fiduciaries.
If you’re looking for more information on Pooled Employer Plans, our friends at Kolb & Associates are experts and can help every step of the way. If you have questions you can get in contact with them by calling (202) 660-0516 or emailing Dorothy E. Lank, Esq: dlank@klblawgroup.com
© KLB Benefits Law Group, a dba of KLB BLG, PLLC, 2024, All Rights Reserved. This article is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. The information contained in this article is effective as of February 22, 2024.
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