While large financial institutions with significant expertise in retirement plan administration are widely expected to sponsor most pooled employer plans (PEPs), other firms (such as franchisors, gig economy employers, joint venture enterprises, private equity firms, and smaller financial services companies) may benefit from sponsoring a PEP or making available a “white labeled” PEP product.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act authorized PEPs, a new type of multiple employer plan, to make their debut on January 1, 2021. PEPs are an exciting new tool in the retirement toolbox, especially for small and midsized employers, which may not have the resources or internal structure to sponsor a single-employer plan.
While many PEPs are sponsored by large financial institutions with significant expertise in retirement plan administration, certain other firms (such as franchisors, gig economy employers, joint venture enterprises, private equity firms, and smaller financial services companies) may also wish to consider sponsoring a PEP as another way to streamline benefit offerings and to provide a valuable tool for their franchisees, independent contractors, portfolio companies, or customers and clients (as applicable).
Before the SECURE Act’s PEP provisions became effective in 2021, there were generally no retirement vehicles in which multiple unrelated employers could participate. For example, participating employers in a multiemployer plan are required to participate pursuant to a collective bargaining agreement, and the US Department of Labor (DOL) asserts that participating employers in a traditional multiple employer plan are required to have a “nexus of commonality.” The commonality requirement may be satisfied where the employers are in the same industry, the same geographic region, or are members of an association or trade group. We previously discussed regulations addressing the commonality requirement in this ML BeneBits blog post.
With the advent of PEPs, unrelated employers can now participate in a single defined contribution plan sponsored by a pooled plan provider (PPP). Currently, PEPs are limited to defined contribution 401(a) plans (e.g., 401(k) plans) and certain plans that consist of individual retirement accounts. Defined benefit plans, 403(b) plans, 457(b) plans, and multiemployer plans for collectively bargained employees are not permitted to be structured as PEPs.
The DOL has noted that businesses with under 100 employees are less likely to offer retirement plans than larger companies, and it is hoping to reverse this trend with PEPs, which give smaller businesses advantages that are typically reserved for large companies. Small and midsized employers that participate in a PEP can take advantage of lower costs and efficiencies due to pooling of assets and economies of scale, streamlined reporting and disclosure requirements, and delegation of plan administration to a PPP. Moreover, depending on the state in which the employer operates, the PEP may provide a cost-efficient method of complying with state laws requiring employers to either sponsor a retirement plan or enable its employees to participate in a state-run retirement plan.
While participating employers are still responsible for selecting the PPP and prudently monitoring the performance of the PPP and the PEP’s other named fiduciaries, which may involve evaluating their qualifications and track record as well as their respective fees and expenses, the PPP serves as the overarching PEP fiduciary and administrator. To the extent delegated to another fiduciary (such as an investment manager) by the PPP, participating employers generally will not have fiduciary responsibility with respect to the investment decisions made regarding the PEP.
The SECURE Act also includes language that potentially shields participating employers that join a PEP from the “one bad apple rule” (also referred to as the “unified plan rule”), which generally requires the entire plan to be disqualified in the event a single participating employer has a qualification failure. Note that the IRS has issued proposed regulations addressing the application of the SECURE Act’s statutory exception to the “one bad apple rule.”
A PPP must be registered with the DOL and the US Department of the Treasury before offering a PEP to its clients. The PEP terms must designate the PPP as the plan fiduciary, administrator, and party responsible for performing the administrative duties necessary to ensure that the PEP meets the applicable requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the Internal Revenue Code of 1986, as amended.
The PPP must also acknowledge in writing that it is acting as a named fiduciary and plan administrator with respect to the PEP, has discretion over investments (unless the PEP is structured such that the participating employer retains authority over investment decisions that affect its participating employers), and is responsible for ensuring that any person or entity that handles assets of, or is a fiduciary to, the PEP is bonded in accordance with ERISA Section 412. The PPP is responsible for filing annual reports for the PEP, typically by means of a single Form 5500 filing and a single audit for the PEP as a whole.
Who Should Consider Sponsoring a PEP?
Companies in the retirement industry or related fields—such as recordkeepers, third-party administrators, investment advisory firms, mutual fund management firms, broker-dealers, insurance companies, and the like—may be well suited to serve as PPPs. Such companies tend to have significant expertise with retirement plan products, as well as the infrastructure necessary to efficiently administer a PEP that has grown to scale.
Moreover, many of these companies service clients of disparate industries and sizes. Such a company may benefit from offering a PEP to its broad client base and the clients may benefit from the economies of scale, streamlined administration, and reduced fiduciary responsibilities associated with the PEP. Further, the PEP may provide these clients with a simple and cost-efficient method to comply with a state law requiring employers to either sponsor a retirement plan or participate in the state-run retirement plan.
Certain companies that operate outside of the financial services industry may also benefit from sponsoring a PEP and serving as its PPP. For example, franchisors, private equity companies, joint venture enterprises, and gig economy employers, as well as financial institutions with less experience in the retirement space, may be able to streamline the benefits offerings available among their constituents and clients (e.g., franchisees, portfolio companies, independent contractors, small business clients of financial institutions) by sponsoring a PEP and serving as its PPP.
Further, this offering may distinguish these entities from their respective competitors, which would allow them to attract and retain key clients that are interested in offering a retirement savings plan to their employees without the cost, complexity, and administrative burdens ordinarily associated with sponsoring a single-employer plan. While the company serving as the PPP would have significant control over the PEP, this would mean it also has significant fiduciary responsibilities with respect to the PEP.
White Labeled PEPs
As an alternative to sponsoring a PEP and serving as its PPP, companies may be interested in making available a “white labeled” PEP product (also known as a “rent-a-PEP”) to their constituents and clients. The use of “white labeled” PEP products has been relatively common during the nascent stages of the PEP market, frequently by investment advisors that want to make PEPs available to their clients but do not want to serve as the PPP.
Broadly speaking, “white labeled” PEPs are established and operated by an unrelated financial services company for the benefit of a specific “named” client. The financial services company serves as the PPP, handles the administration of the PEP, and bears the majority of the fiduciary responsibility with respect to the PEP. But the PEP only accepts participating employers approved by the “named” client and the PEP’s branding makes clear that it is being made available through the “named” client.
Further, the “named” client may choose to bear some of the PEP’s costs that the participating employer or participants would otherwise bear. Making available a “white labeled” PEP in lieu of sponsoring a PEP and serving as its PPP would dramatically reduce (or eliminate entirely) the “named” client’s fiduciary responsibility with respect to the PEP, but it would also limit the control that the “named” client may exercise over the PEP.