While large financial institutions with significant expertise in pension plan administration are widely expected to sponsor most pooled employer plans (PEPs), other companies (such as franchisors, employers of the gig economy, joint ventures, private equity firms, and smaller financial services firms) may benefit from sponsoring a PEP or making a “white label” PEP product available.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act allowed PEPs, a new type of multi-employer plan, to debut on January 1, 2021. PEPs are an exciting new tool in the retirement toolkit , especially for small and medium-sized enterprises. , 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 extensive expertise in pension plan administration, some other companies (such as franchisors, labor economy employers, joint ventures, capital companies -investment and smaller financial services companies) may also consider sponsoring a PEP as another way to streamline benefit offerings and provide a valuable tool for their franchisees, independent contractors, holding companies, or clients and customers (the optionally).
Before the PEP provisions of the SECURE Act came into force in 2021, there were generally no retirement vehicles in which multiple unrelated employers could participate. For example, participating employers in a multi-employer plan are required to participate under a collective bargaining agreement, and the U.S. Department of Labor (DOL) asserts that participating employers in a traditional multi-employer plan are required to have a “common bond”. The requirement of similarity can be satisfied when the employers belong to the same industry, to the same geographical area or are members of an association or a professional group. We have already discussed the regulations dealing with the commonality requirement in this ML Benefits blog post.
With the advent of PEPs, unrelated employers can now participate in a single defined contribution plan sponsored by a group plan provider (PPP). Currently, PEPs are limited to 401(a) defined contribution plans (for example, 401(k) plans) and certain plans that consist of individual retirement accounts. Defined benefit plans, 403(b) plans, 457(b) plans and multi-employer plans for collectively unionized employees cannot be structured as PEPs.
The DOL has noted that companies with less than 100 employees are less likely to offer retirement plans than larger companies, and it hopes to reverse that trend with PEPs, which give small businesses benefits typically reserved for larger companies. Small and medium-sized employers who participate in a PEP can benefit from reduced costs and efficiencies through asset pooling and economies of scale, streamlined reporting and disclosure requirements, and delegation of plan administration to a PPP. Additionally, depending on the state in which the employer operates, PEP may provide a cost-effective method of complying with state laws requiring employers to sponsor a pension plan or allow their employees to participate in a plan. state-run pension.
While participating employers are still responsible for selecting the PPP and carefully monitoring the performance of the PPP and other appointed trustees of the PEP, which may involve assessing their qualifications and background as well as their respective fees and expenses. , the PPP serves as the global PEP. trustee and administrator. To the extent they are delegated to another fiduciary (such as an investment manager) by the PPP, participating employers generally will not have fiduciary responsibility with respect to investment decisions made with respect to the PEP.
The SECURE Act also includes language that potentially protects participating employers who join a PEP from “a rotten apple ruler(also known as the “unified plan rule”), which generally requires the entire plan to be disqualified in the event that a single participating employer fails to qualify. Note that the IRS has issued proposed settlement dealing with the application of the statutory exception of the SECURE law to the “rotten apple rule”.
A PPP must be registered with the DOL and the US Department of Treasury before offering a PEP to its customers. The terms of the PEP shall designate the PPP as the plan trustee, 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 Tax Code of 1986, as amended.
The PPP must also acknowledge in writing that it acts as the appointed trustee and administrator of the plan with respect to the PEP, has discretionary authority 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 manages or is a trustee of the assets of the PEP is bonded pursuant to Section 412 of ERISA . The PPP is responsible for filing annual reports for the PEP, usually through a single filing of Form 5500 and a single audit for the PEP as a whole.
WHO SHOULD CONSIDER SPONSORING A PEP?
Companies in the pension industry or related fields – such as registrars, third-party administrators, investment advisory firms, mutual fund management companies, brokers, insurance companies, etc. . – can be well suited to serve as a PPP. These companies tend to have considerable expertise in retirement plan products, as well as the infrastructure to effectively administer a PEP that has grown to scale.
Additionally, many of these companies serve customers from disparate industries and sizes. Such a business can benefit from offering a PEP to its large customer base and customers can benefit from the economies of scale, streamlined administration, and reduced fiduciary responsibilities associated with PEP. In addition, PEP can provide these customers with a simple and cost-effective method of complying with a state law requiring employers to sponsor a retirement plan or participate in the state-operated retirement plan.
Some companies that operate outside the financial services sector can also benefit from the sponsorship of a PEP and its role as a PPP. For example, franchisors, private equity firms, joint ventures and gig economy employers, as well as financial institutions with less experience in the retirement business, may be able to streamline benefit offerings available among their constituents and customers (e.g., franchisees, holding companies, independent contractors, small business customers of financial institutions) by sponsoring a PEP and serving as a PPP.
Additionally, this offering may distinguish these entities from their respective competitors, allowing them to attract and retain key customers interested in offering a retirement savings plan to their employees without the cost, complexity and administrative burden. usually associated with the sponsorship of a single employer plan. Although the company serving as the P3 has significant control over the PEP, this would mean that it also has significant fiduciary responsibilities with respect to the PEP.
WHITE LABEL PEPS
Instead of sponsoring a PEP and serving as a PPP, companies may be interested in making a “white label” PEP product (also known as “rent-a-PEP”) available to their constituents and customers. The use of “white label” PEP products has been relatively common during the nascent stages of the PEP market, often by investment advisers who want to make PEPs available to their clients but do not want to serve as PPPs.
Generally speaking, “white label” PEPs are established and managed by an unrelated financial services company for the benefit of a specific “named” client. The financial services company serves as the PPP, manages the administration of the PEP, and bears the majority of the fiduciary responsibility for the PEP. But PEP only accepts participating employers approved by the “named” client and the PEP branding clearly indicates that it is made available through the “named” client.
In addition, the “designated” client may choose to bear some of the costs of the PEP that the participating employer or participants would otherwise bear. Providing a “white label” PEP instead of sponsoring a PEP and serving as a PPP would significantly reduce (or eliminate entirely) the “designated” client’s fiduciary responsibility for the PEP, but it would limit also the control that the “named” can exercise over the PEP.