401(k) plan types: Pooled Employer Plan (PEP) vs. Single Employer Plan (SEP)

At the end of 2019, pooled employer plans (PEP)s were established as a new and improved version of multiple employer plans, or MEPs. Like a 401(k), a PEP is a defined retirement contribution plan, but multiple employers can participate. Employers who join a PEP designate their fiduciary role to a third-party pooled plan provider (PPP). 

Since PEPs are a relatively new retirement plan option, considering the pros and cons of a PEP versus a single-employer plan, like a 401(k), can be beneficial to employers considering between the two options. 

What is the difference between a PEP and a 401(k)?

A traditional 401(k) is a standalone plan sponsored by one employer, who retains full control and responsibility for plan administration, compliance, and investment decisions. While a 401(k) offers greater customization, it generally requires more effort and resources from the sponsoring employer.

PEPs are typically more cost-effective due to shared administration and economies of scale, but they offer limited flexibility since all participating employers follow the same plan structure. 401(k) plans, on the other hand, provide the flexibility to design unique features, such as eligibility rules and matching contributions, tailored to a specific workforce. However, this comes with higher administrative costs and fiduciary obligations. Ultimately, PEPs may be a practical choice for employers seeking an affordable and low-maintenance retirement solution, while 401(k) plans can be better suited for those needing more control and customization.

What is an MEP?

Designed to help smaller businesses benefit from economies of scale, an MEP is a retirement plan sponsored by multiple employers that are related by industry or region. In fact, MEPs often cost more to both plan sponsors and plan participants:

Source: Shnitser, N. 2020. Are Two Employers Better Than One? An Empirical Assessment of Multiple-Employer Retirement Plans, Journal of Corporation Law 45(3): 743-786.

Ideally, a MEP also makes it easier to offer a plan, by shifting some of the administrative burden of being a plan sponsor from the business to the MEP provider.

Keep reading to find out the pros and cons of group retirement plans, such as MEPs and PEPs, vs. a single employer plan 401(k).

How is a PEP different from a MEP?

Here’s how PEPs are designed to be an improvement over MEPs:

No more individual Form 5500s

• PEPs allow groups of employers to join a pooled employer plan, which is “considered one plan for the purposes of the Employee Retirement Income Security Act of 1974 (ERISA).” Thus, a PEP’s PPP would file “a single annual Form 5500 covering the entire arrangement,” rather than the individual employers in the plan each having to file their own Form 5500.

PEPs are less restrictive than MEPs

• They do not require employers to be related by industry or region.

• And there is no “one bad apple” rule, meaning, if one employer falls out of compliance, the entire plan can be disqualified.

Something to keep in mind is that, as a new offering, PEPs are almost certain to evolve, and because of their novelty, some aspects of PEPs are, in fact, still difficult to compare with well-established options like single-employer plans. The following benefits and disadvantages may shift in the coming months/years but here is the industry take so far…

What are the benefits of a PEP vs. a 401(k)?

PEPs may offer the following benefits:

• Offloading some fiduciary and admin responsibility: Significant fiduciary and administrative responsibility is shifted from employers sponsoring the plan to the PPP, though plan sponsors “retain fiduciary responsibility” for choosing and monitoring the PPP.

• Lower-fee audits (but higher risk of audits): In general, though they are more likely to be audited, any audit fees incurred by a PEP could be lower than those faced by an audit of a single employer 401(k) plan. And, the insurance provided by a PEP will likely be more comprehensive than that of a single-employer plan.

• Potentially lowered administrative costs: While yet to be seen, plan administration may be less costly as a result of pooling employers.

What are the disadvantages of PEPs vs. a 401(k)?

Employers have a fiduciary duty to their employees to find the retirement plan that’s best suited to the business and its team, and doing that due diligence upfront can save both parties administrative headaches and money in the long run. Here’s what to know about PEPs:

• Uncharted territory: Services and fees are likely to evolve over the next 12 to 16 months, according to experts.

• Potentially unpredictable costs: Because administration fees could be based on the percentage of assets in the plan, they might be lower than a traditional 401(k) but also more unpredictable. It may depend on the other companies in the PEP with you.

• One size fits all: PEPs are not currently customizable; it’s the same design and same investments for everybody and, so far, PPPs are not offering individualized service.

• Recordkeeping for PEPs isn’t going to be any less expensive, as PEP recordkeeping will be akin to recordkeeping a bunch of individual plans.

• Costs shifted to employees: Employees could bear more plan costs, based on the way PEPs are currently structured. PPPs may want to adjust compensation for recordkeepers or investment managers, a cost that could be passed on to the employer or plan participants.

• Higher risk of audits: PEPs are more likely than single-employer plans to be audited, adding to the costs that may not be baked into the upfront terms.

• Trustee work could get expensive: PEP trustees will have a more involved role than those for a 401(k), which means that fees for their services could also expand. In particular, PEP trustees will need to work out a process for the what-ifs, like sending an employer to collections or getting taken to court. These are likely not baked into a PPP’s advertised fees, and, as PEPs are new to trustees, there is often no clear protocol.

Considering a PEP? Here are the 9 questions you need to ask

If you’re considering a PEP, start by looking at the current design of the plan you have, or list the plan options that are important to you.

Know that there are several different types of PEPs, depending on which party is acting as the PPP. Compare the benefits and features of this versus other types of retirement plans so that you can make sure you’re getting what you and your employees need.

1. What is the level of experience of the PEP provider? And exactly what services do they offer?

2. Is the PEP actually lowering the cost of offering a retirement benefit? Keep in mind: A PEP could include “additional services.” These could be valuable, for example, loan and hardship withdrawal approvals and oversight, compliance testing, and annual plan audits, but an employer will need to make this determination based on its and its employees’ needs. Some of these costs may already be factored into the costs of a single-employer 401(k) plan.

3. Has the PEP bundled recordkeeping and third-party administrator services within the offering? (If they are unbundled employers need to determine if there is an additional cost to the plan sponsor and/or the participants. If there is an additional cost, will the employer need to pay more in administrative costs to keep fees reasonable for their employees?)

4. If the PEP is affordable, will it include the flexibility that you as the employer and your employees need?

5. If an employer is merging a single-employer plan into a PEP, will their employees' protected benefits be offered in the PEP?

6. Are there any compliance or data issues with your plan? PEP providers may be reluctant to add plans that have failed nondiscrimination testing or other compliance issues into the PEP.

7. What tools and technological investments is the PPP making for their PEP platform? With a PEP, the plan design and investment lineup are chosen by the PPP instead of the employer. This means you would not be able to make changes to key aspects of your plan such as employee eligibility and your plan’s investment lineup. Be sure to request a demo to see what admins and employees will experience.

8. Is there a retirement plan adviser specialist or TPA is running the PPP services?

9. Will an employer be trading the ability to get support for the PEP’s efficiencies of scale? How will an employer access information and make changes? What about support for employees?

The bottom line

While PEPs prioritize simplicity and shared responsibilities, traditional 401(k) plans can offer greater flexibility and customization but require employers to take on full fiduciary duties and higher administrative costs. Choosing the right plan depends on your business's size, resources, and need for control over plan design. By carefully weighing these factors, employers can select a plan that best supports their employees’ financial futures while aligning with the company’s goals.