Welcome to The 403(b) PEP

The Future of
Pooled Employer Plans

Pooled Employer Plans: A Promising Shift in the Retirement Plan Landscape

By Rick Donley – Director of MEP and PEP Programs for PlanPILOT

The concept of bundling services to achieve economies of scale is not new. From Consortiums to Multiple Employer Plans (MEPs), the retirement plan space has long embraced the idea of leveraging scale to reduce costs and improve service. However, the introduction of Pooled Employer Plans (PEPs) into the 403(b) retirement plan market represents a fresh and exciting development that has begun to gain significant traction in recent years.

While 401(k) plans in the for-profit sector have benefited from various cost-saving programs and services, the 403(b) market has traditionally lagged behind in adopting these models. In particular, nonprofits have faced unique challenges in keeping up with the evolving landscape of retirement plans. This is changing, however, as PEPs become more recognized and accessible within the nonprofit space. This editorial explores the growing role of PEPs in the 403(b) market and discusses why this trend is likely to continue and flourish in the future.

What is a Pooled Employer Plan?

At its core, a Pooled Employer Plan (PEP) is a retirement plan that allows multiple employers to join together in a single, aggregated plan. This pooled structure allows plan sponsors—particularly those in the nonprofit space—to benefit from the economies of scale typically enjoyed by larger organizations. By pooling their resources, smaller employers can access a broader range of investment options, improved administrative services, and reduced costs for participants.

Historically, organizations in the nonprofit sector have had to navigate the complexities of retirement plan administration, often without the same resources or expertise as their for-profit counterparts. As these challenges mount, especially with the new requirements of SECURE 2.0, PEPs offer an attractive alternative for small to mid-sized organizations that lack the time or resources to manage a standalone retirement plan effectively.

The Growing Popularity of Pooled Employer Plans

Why are PEPs gaining popularity now? The most significant factor is the recent legislative recognition of PEPs in the 403(b) space. While these programs have existed in the 401(k) market for some time, the 403(b) market has often lagged behind in adopting similar solutions. However, the introduction of PEPs into the 403(b) market has begun to bridge this gap, providing nonprofit organizations with access to affordable, high-quality retirement plan options.

The nonprofit sector, unlike for-profit organizations, is not under the same financial pressures to quickly adopt new technologies or approaches. As a result, it takes longer for trends to gain mainstream acceptance. However, once these trends take root, they tend to be evaluated carefully and, when deemed valuable, adopted widely. PEPs are rapidly gaining attention because they allow plan sponsors to outsource complex administrative tasks, reduce fiduciary risk, and lower overall plan costs—benefits that nonprofits increasingly find appealing.

For many nonprofit organizations, managing a retirement plan involves juggling various responsibilities, often without dedicated staff or resources. Many small to mid-sized organizations struggle with meeting the requirements of SECURE 2.0, which includes over 80 new provisions impacting plan design, compliance, and administration. PEPs offer a solution by relieving plan sponsors of some of the administrative burden, allowing them to focus on their core operations while still providing employees with a robust retirement plan.

Advantages of Pooled Employer Plans

For Mid-Size Organizations

Mid-sized organizations benefit from 403(b) PEPs by gaining access to a wide menu of investment options at more competitive rates than they would secure by managing the plan alone. This scalability allows larger employers to offer a broader selection of investment choices for their employees, ultimately enhancing the retirement plan’s appeal. Additionally, the administrative simplicity offered by PEPs can save significant time and resources. By consolidating administrative tasks across multiple organizations, large employers can reduce the administrative burden, freeing up time for other essential tasks and improving overall operational efficiency.

For Small Organizations

Smaller organizations find significant advantages in PEPs. By joining a pooled plan, these organizations can provide employees with a more attractive benefits package, which is essential for recruiting and retaining top talent. Reduced plan costs and shared fiduciary responsibility enable smaller employers to access the same high-quality services typically reserved for larger corporations. Moreover, by lowering overall administrative fees, PEPs make it easier for small organizations to maintain a robust retirement offering without overstretching their limited resources, ultimately benefiting both the employer and employees.

For Every Organization

The appeal of PEPs lies in their ability to streamline retirement plan administration while enhancing plan services. One key benefit is the ability to outsource fiduciary responsibilities. PEPs often include enhanced 3(38) outsourced fiduciary services, which provide plan sponsors with an added layer of protection compared to the traditional 3(21) co-fiduciary model. This shift allows sponsors to delegate significant fiduciary duties, reducing their liability and workload.

In addition to outsourcing fiduciary responsibilities, PEPs offer significant cost savings. By pooling resources, participating employers can access a wider range of investment options, better Third Party Administration, and more efficient recordkeeping, all at a lower cost than they would typically achieve with a standalone plan. These cost reductions can be substantial, improving the overall retirement benefits offered to employees while ensuring the organization meets its fiduciary obligations.

Employee education is another area where PEPs shine. Many small organizations lack the resources to provide in-depth education to plan participants. However, through a pooled plan, participants can access comprehensive education and support, empowering them to make more informed decisions about their retirement savings.

Moving Towards Adoption

While the benefits of PEPs are clear, getting plan sponsors to adopt them can be challenging. The initial barrier is simply getting the sponsor’s attention long enough to explain the program’s advantages. Retirement plan sponsors, particularly those in the nonprofit sector, are often juggling numerous responsibilities and may not be aware of the potential benefits of a PEP.

Another challenge is the initial hesitation to switch from a standalone plan to a pooled model. Plan sponsors may be wary of losing control over certain aspects of plan administration or may be hesitant to make changes without fully understanding the new structure. Educating plan sponsors about the flexibility and benefits of PEPs is essential to overcoming these hurdles.

A Vision Ahead: The Future of Pooled Employer Plans

Looking ahead, the future of Pooled Employer Plans in the nonprofit space is promising. As more recordkeeping giants like Voya begin to offer PEPs tailored to 403(b) plans, the options available to plan sponsors will continue to expand. These large providers, who have already established PEPs in the corporate sector, are now bringing their expertise and scalable solutions to the nonprofit market.

PEP programs are becoming more mainstream as nonprofit organizations recognize the value they offer in reducing costs, outsourcing fiduciary duties, and enhancing employee benefits. In the coming years, PEPs will likely become a go-to option for small to mid-sized nonprofit organizations looking to improve their retirement plans while managing their administrative burden.

In conclusion, the rise of Pooled Employer Plans marks a significant shift in how nonprofit organizations approach retirement plan administration. With the ability to achieve economies of scale, reduce costs, and outsource complex fiduciary responsibilities, PEPs are well-positioned to become a mainstay in the 403(b) market. As more plan sponsors discover the advantages of this approach, the popularity of PEPs will only continue to grow, making them an increasingly attractive option for nonprofit organizations across the country.

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