How PEPs compare with traditional 401(k)s

Many benefits leaders at small and midsized businesses may be setting up their organization’s first retirement plan to comply with recent state mandates. As they weigh the options, they might be wondering how pooled employer plans, a newer plan type, compare with traditional single-employer 401(k)s.

The answer is much more nuanced than the acclaim for PEPs would have it seem. To choose the right retirement plan, benefits leaders must understand what problems PEPs try to solve, what trade-offs they introduce and how to evaluate them against the organization’s benefits goals.

Why employers may be interested in PEPs

The SECURE Act of 2019 introduced PEPs in an effort to reduce the high fees and fiduciary responsibilities that prevent small employers from offering 401(k) benefits. Under this model, unrelated employers who meet certain requirements share a single plan overseen by a pooled plan provider.

Around the same time, more states began requiring employers to offer a qualified plan or enroll workers in a state-run individual retirement account. As of April, twenty-two states passed legislation requiring businesses to offer retirement plans. As these mandates roll out, employers new to the retirement benefits game will have to find a plan that fits their budget.

PEPs attempt to reduce the cost and hassle of offering a retirement plan, but many small and midsized businesses report the opposite.

PEPs are often marketed to small and midsized businesses as the cost-effective, admin-light alternative to standalone 401(k)s. They’re designed to lighten human resource teams’ day-to-day workloads by outsourcing plan administration, compliance and fiduciary oversight to the PPP. In practice, for example, that structure shifts most annual filings — including the Form 5500 — to the pooled plan.

The promise of an easier, lower-cost annual audit in particular may attract many small and midsized businesses. Instead of each employer triggering its own audit when participant counts rise, the PPP conducts a single, plan-wide audit, and either absorbs or shares the cost across participating plan sponsors.

But PEPs aren’t necessarily guaranteed to reduce audit-related or overall retirement benefit expenses. In some cases, they may actually drive costs. For example, single-employer plans with fewer than 100 participants face shared audit fees under the PEP model. These very small companies would generally be exempt from annual audits if participating in a standalone plan.

A recent Human Interest survey of 500 U.S.-based benefits decision-makers at small and midsized businesses found that PEP sponsors spent about 65% more in total annual plan costs than 401(k) sponsors. While their base price can be lower, PEPs may introduce unexpected third-party service fees — some for mandatory or standard administrative processes — which can quickly inflate the benefit’s price tag. According to the research, a quarter (24%) of small and midsized businesses with a PEP have hired ERISA counsel, despite this plan type being specifically designed to offload the employer’s fiduciary liability.

The research further revealed that PEPs consume more administrative time than 401(k)s, undercutting another core selling point. Benefits decision-makers at small and midsized businesses with a pooled plan dedicated 81% more time each week to plan management than their counterparts offering 401(k)s.

PEPs standardize plan design at the price of control

The same structure that, in theory, can simplify costs and administration often restricts plan design flexibility. PEPs generally standardize eligibility rules, matching formulas and vesting schedules. The investment lineup is also set at the pooled level, which means employers — and their employees — work within a predetermined menu.

These constraints might work for organizations with simple workforce needs, but they may limit employers that rely on tailored retirement benefits to support hiring, retention or long-term compensation strategies.

Even though the PPP assumes many fiduciary duties, employers still hold responsibility for selecting and monitoring the provider. U.S. Department of Labor guidance on fiduciary duties makes clear that outsourcing day-to-day responsibilities doesn’t remove the obligation to oversee the PPP’s performance. That level of oversight may require more attention than some employers expect.

By contrast, a single-employer 401(k) may give businesses more control. Employers can shape eligibility rules, matching formulas and vesting schedules to match their compensation strategy or retention goals. A broader investment menu may offer more flexibility, especially for organizations with specific investment preferences or a diverse workforce. Additionally, many modern 401(k) features — such as payroll integrations and automated Form 5500 filing — may streamline plan administration to significantly reduce the day-to-day HR burden.

And since the PPP chooses the investment options and plan design, benefits leaders don’t have as much freedom to adjust PEPs as the business grows. Employers can update standalone 401(k)s more easily to stay competitive.

Evaluating whether a PEP fits the organization’s needs

To assess whether a PEP aligns with the organization’s goals and employee demographics, start with a few foundational questions:

• Does the PEP lower the cost of offering retirement benefits?
  Some PEPs may charge employers for additional services such as loan approvals, hardship withdrawal oversight, compliance testing, IRS filings or audit coordination, which may already be part of the cost structure of a single-employer 401(k).
• Will standardized plan design and pooled investment lineups meet the workforce’s needs?
  Consider whether the set investment menu and fixed rules around eligibility, vesting, or loan availability will hinder growth plans and retention.
• Is the organization prepared to spin off a new plan if its needs change?
  Because the PPP controls the plan, employers cannot terminate the PEP, only stop participating. That decision may require spinning off a new 401(k) plan or moving assets, both of which can involve more coordination than ending a standalone 401(k).

Some businesses may find administrative and cost relief from PEPs. Others may find them more burdensome and expensive. Single-employer 401(k)s offer more control over plan design and investments, which may better serve organizations with specific workforce needs.

Carefully reviewing these trade-offs — especially around costs, flexibility and ongoing fiduciary responsibilities — can help benefits leaders ensure the retirement plan they choose meets the organization’s needs and supports employees’ financial futures.

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