Recognizing that retirement saving is an important goal for many individuals, and an employee benefit that many job-seekers commonly screen for as they consider new employment opportunities, business owners commonly offer employer-sponsored retirement plans, such as 401(k) plans, to attract (and keep) their employees. For small business owners, though, the hassle and expense of setting up and running such plans can be a serious hurdle to offer competitive benefits for employees, and often are the reason that some small business owners have no retirement plan benefits in place to begin with! In an attempt to help small business owners offer employer-sponsored retirement plans to their employees, Congress has passed various pieces of legislation, one of the most recent being the December 2019 SECURE Act, which for the first time created a new “Pooled Employer Plan” (PEP) intended to make it easier for small business owners to establish and administer a 401(k) plan.
Notably, Multiple Employer Plans (MEPs) to facilitate employer-sponsored retirement plans for small business owners by allowing multiple employers to pool together and create one single plan for all of their respective employees have existed for many decades. But they have failed to rise in popularity, mainly because of limitations established by the IRS and Department of Labor (DOL) over the years, including the IRS’ “one bad apple” rule that can disqualify an entire MEP if one single participating employer fails to follow the plan’s requirements, and the DOL’s “nexus” rule that required an MEP’s participating employers to be in the same general line of business. The SECURE Act’s recently introduced Pooled Employer Plan (PEP) version, however, eliminated these limitations, clearing the way for multiple employer 401(k) plans without being in the same line of business, and with a pathway to remove an employer that fails to comply with the plan’s rules (without disqualifying the rest).
In order to create and offer a PEP, the plan provider must become a designated “Pooled Plan Provider” (PPP), registered with the Department of Labor, and serving in a fiduciary capacity as the plan administrator and performing all of the plan’s 3(16) fiduciary administrative duties.
Notably, RIAs (and broker-dealers) will be allowed to serve as PPPs, creating the potential that advisory firms could establish their own ‘private PEP’ for their small business owner clients (and gaining the efficiencies as the plan provider). However, there are several issues that advisory firms should understand before deciding to commit to a role as a PEP’s Pooled Plan Provider. Most significant is the fact that by providing investment services to the plan (and managing assets for an AUM fee) while serving as the PPP, there is potential for creating a Prohibited Transaction, as the Internal Revenue Code Section 4975(c)(1) disallows a plan fiduciary from dealing with the income or assets of a plan for their own interest, or from receiving compensation from the plan in connection with transactions involving the income or assets of the plan… with penalties for such Prohibited Transactions starting at 15% of the amount involved and, if not rectified in a timely manner, can be as high as 100% of the amount involved! Whether or not the DOL releases legislation that will provide for a Prohibited Transaction Exemption addressing the challenge created by IRC Section 4975(c)(1) is yet to be seen.
Ultimately, while the PEP may become a valuable tool for small business owners to be able to offer employees competitive retirement plan options, RIAs will need to carefully consider whether to choose to take on the role of a PPP for their small business clients plans and the associated ramifications if they do choose to do so… including asking the question of whether branching out into plan administration would actually result in more business anyway, or if it will be better to find a third-party administrator (TPA) to partner with instead?