A pooled employer plan (PEP) is a type of defined contribution retirement plan made possible by the SECURE Act. PEPs, which first became available in 2021, aim to build economies of scale and reduce fiduciary risk by allowing unrelated employers of any size to participate in a single defined contribution plan. Participating employers retain the flexibility to select the key contribution and other design features that align with their business needs.
Pooled employer plans (PEPs) are the latest expansion in defined contribution plan outsourcing in the U.S., and pooled plan arrangements are well established across the globe in countries such as Australia, Belgium, Germany, South Africa, and the United Kingdom. In the U.S., PEPs are reshaping the way retirement benefits are delivered. Since the SECURE 2.0 Act passed in 2022, over 50,000 401(k) plan sponsors have adopted a PEP model[1]. PEPs will soon become available to tax-exempt employers eligible to sponsor 403(b) plans.
A PEP is sponsored by a pooled plan provider (PPP), which is the named fiduciary and entity responsible for management and administration of the PEP. Participating employers shift nearly all oversight and governance to the PPP, including fiduciary responsibility for investments and plan administration. Employers maintain responsibility for selecting and monitoring the PPP. The PPP selects and monitors other service providers.
Q: What’s the difference between a traditional 401(k) retirement plan and a PEP?
A: A PEP is a defined contribution retirement plan that allows unrelated employers of any size to participate in a single plan, rather than each company sponsoring its own 401(k) plan. A PEP provides access to the benefits that come with scale while retaining the flexibility for participating employers to select the key contribution and other design features that align with their business needs.
In a traditional 401(k) plan, the employer is the plan sponsor, has fiduciary responsibility, and full control of the plan. The sponsor has fiduciary responsibility for investments, managing third party relationships and administrative decisions. In a PEP, the employer transfers most of the responsibility to the pooled plan provider (PPP) and retains responsibility to select and monitor the PPP. The employer transfers fiduciary risk to the PPP, receives potential savings due to economies of scale, reduces time and effort spent on plan management, and provides participants with service enhancements.
Q: Why would an employer join a PEP?
A: PEPs can bring value to employees and employers:
- Expert-driven plan design and investment structure
- Lower investment and service fees achieved through scale
- Reduced fiduciary risk
- Lessened administrative effort
- Improved participant experience and outcomes
- Emphasis on innovation and financial resilience
PEPs deliver what matters – they change the 401(k) experience to create value for employees and employers.
