A once ubiquitous offering to the American workforce, retirement plans have all but disappeared from the average small business benefits program.
However, with the inception of the Pooled Employer Plan (PEP), it is now possible for small and medium-sized business owners to have a great retirement plan. According to research by SCORE, 94% of small business owners who offer retirement plans report that these plans drive recruitment and retention.
Why this matters to you
In the face of a massive employee retention crisis, small businesses are losing their best talent to companies who can provide a better work environment and/or great long term value (benefits) to their employees.
Pooled Employer Plans are an innovative way for SMBs to compete with the benefit programs of larger enterprises and venture-funded small businesses. No longer do SMBs have to balance the cost, complexity, and risk of their 401k alternatives.
Your best employees stay right where they are and top talent is easier to secure. You’ll see increased productivity and profitability, reduced operational complexity, the list goes on…
In the sections below, we’ll outline:
- What a Pooled Employer Plan is
- How PEPs stack up against 401ks
- What to look for in a Pooled Plan Provider
- How to determine if a PEP is right for you
- And how to seamlessly integrate a PEP into your business
Let’s dive in.
What is a Pooled Employer Plan, aka PEP?
If you’re not fully clear on what a pooled employer plan is, here’s the Cliff’s notes description.
In January 2021, a new type of retirement plan from the provisions of the SECURE Act became available for business owners; the PEP is a retirement plan sustained by multiple employers. It allows small business owners to pool retirement resources with other employers to provide retirement benefits.
We’ll give you the basics here in this article, but for an in-depth explanation and exploration of PEP, we highly recommend a visit to FAQ page.
PEP vs Traditional 401k
Obviously, we think PEPs are great, but it’s important to know all of your options and compare how they stack up against one another. Here’s a breakdown of why we love PEPs more than traditional 401ks for nearly any small business.
- Pooled Employer Plans allow small business owners to pool administrative services with other employers to leverage group buying power.
- Nowadays, 401k plans are not easily understandable for most users. According to a study by the Government Accountability Office, around 40% of Americans that participate in a 401k plan do not fully understand the fees associated with the accounts.
- A company starting a new plan may be eligible for SECURE Act tax credits of up to $15,000 (over three years). If you want to know if you qualify for tax credits, use our free Tax Credit Calculator
- Thanks to its lower costs, a small business can implement a PEP plan without significantly affecting its overall budget or employers’ salary.
- PEPs allow for more people to effectively save for retirement than ever before, creating a positive economic impact over the long term (makes you feel all warm and fuzzy, right?).
- No dealing with tedious filings, notifications, or audits and time-consuming maintenance.
- Fewer liability risks for employers, thanks to their partnership with a PPP (more on this later).
- Easier management, you won’t have to worry about managing vendors, working with investment managers, or finding other employers to expand the pool.
- When speaking about the concept of PEPs in the retirement industry, a spokesperson from the law firm Morgan Lewis said, “PEPs represent an attractive opportunity for small employers that have never before sponsored a retirement plan. They may wish to take advantage of significant economies of scale, lower costs, and streamlined administration available through PEPs that traditionally have been available only to large-sized employers and plans.”
Why traditional 401ks are not accessible for many SMBs
- Administrative costs are usually higher, and the employer is responsible for more administrative tasks.
- The employer is the plan fiduciary and therefore assumes all risk.
- The employer is responsible for the plan set up, ongoing plan maintenance, and choosing investment options.
- Employers are responsible for signing and filing all forms, initiating and funding applicable audits, and employee communications.
- The setup, maintenance, investment options, and dealing with vendors require a significant amount of the employers’ time (creating additional costs).
Are PEPS compliance-friendly?
Yes! Since it is one plan shared by multiple small businesses, there is just one Form 5500, one audit, and one ERISA Fidelity Bond for the PEP. However, each employer will have to undergo and pass individual non-discriminatory testing (NDT).
NDT is a requirement for any employees that are key to the company or highly compensated to stay within a specific contribution rate. Their contribution rate is determined by the contribution rate of non-highly compensated employees.
Fortunately, a great Pool Plan Provider (PPP) will sort out these simple items with you (more on that later).
What does a PEP plan cost?
Costs may vary depending on the employer and the PPP; these are our simple, affordable rates:
- Employer: $750 Set up (one time) + $1000 annual fee
- Participant fee: $8 per participant each month +.25% on contributions
- Employer directed plans will require calculations and testing for an additional fee of $1000 annually
Who are the key players in a PEP?
So you’re starting to get a feel for why a pooled employer plan is such a strong asset for your business. Now let’s talk logistics. Who is involved in setting up and managing a PEP?
To put it simply, it’s only:
- The employees who participate in the retirement plan (your team)
- The individual employers that join the pooled plan (you)
- And a Pool Plan Provider (like peppermint)
Now it’s time to break down the action items involved in getting started with a pooled employer plan.
5 simple steps to incorporate a PEP into your SMB
Step 1: Determine your eligibility
Spoiler alert, you’re eligible. We didn’t want to squeeze in this additional benefit in the section above, we needed a way to make this critical point clear. Companies of any size can join a Pooled Employer Plan.
PEPs are meant to make retirement plans more accessible, period.
For example, here at peppermint we craft plans that support virtually any business, from SMBs and beyond. Our plans are designed this way because we believe that offering a great retirement program should be easy and affordable; every employee should have an option to save for their future.
Step 2: Evaluate your unique needs
Every business is unique and you should evaluate the particular requirements of your business before you apply to employee benefits and retirement plan options.
It’s important to do so prior to evaluating Pool Plan Providers (we’re almost to that section!) and Pooled Employer Plans so you know which of each is best suited for your organization. Here are some questions to ask prior to looking at specific options for your company:
- Do my employees want this as a part of their benefits package? Does your team think long term or short term? Consider whether or not your team will find a PEP valuable and be interested in contributing to it.
- Do we have fewer, highly compensated employees or a greater number of lower paid employees? This might impact which plan you choose. For example, two of our plans optimize personal retirement for owners and highly compensated employees.
- Is the company mature enough to budget for a required annual contribution or will a plan that allows for flexible contribution better suit your current state?
- Are you willing to take on testing, fees, and potentially higher risk in order to receive flexible contribution options? Fixed contribution typically eliminates the need for these items.
- Will you qualify for tax credits? The tax benefits of a PEP should be taken into consideration. Use this tool to determine your savings.
- Do we want employees to be able to retain 100% of the investment if they leave the company or incentivize retention with a plan that withholds a percentage upon their exit?
- How much of our employees’ salaries will be contributed into these retirement plans?
Consider the impact of each of the questions above. By doing so ahead of time you’ll be able to evaluate both providers and plans through an informed lens.
Step 3: Choose a Pool Plan Provider (PPP)
To become a part of a PEP, an employer must partner with a PPP (Pool Plan Provider) on the roster of plan administrators with fiduciary capacity within the US Department of Labor.
What is a Pool Plan Provider aka PPP?
A PPP serves as the central hub between all employers in the PEP. Having the sponsor and fiduciary outsourced through a professional organization with experience managing retirement plans helps the employer narrow their fiduciary liability and focus on running their business.
What a good PPP does for you
A Pooled Employer Provider oversees the employer and employee’s plan. They should:
- Handle the development of the PEP. They should guide you through the enrollment process by filling necessary forms, find other business owners to join the pool, send notifications to employees, etc.
- Manage the PEP: Ensure that all documentation is up to date and that every question gets answered.
- Help with any issues related to PEP’s process: If any situation arose with an employee, a good PPP would help you provide them with information to solve the issue.
- Deal with any questions or requested clarifications from the employer and employees.
- Facilitate loans for participants on the plan: If workers or employers need to withdraw part of their savings, the PPP will be ready to aid them with available options.
- Be up to date with legal or regulatory changes, notifying all participants if changes are needed from their end for compliance.
- Educate all parties on the vital elements of the PEP and solve any doubts if needed.
- If an audit is required, they’ll coordinate with the employer to provide them with necessary information and documentation to make the process as easy as possible.
- Handle any reviews and signatures, file the annual 5500, and deal with any form or report that would take time away from the employer.
Once you’ve selected the ideal provider for your business, the next step is to choose the perfect plan based on the unique requirements of your employees and your organization.
Step 4: Choose a Pooled Employer Plan
Depending on your PPP provider, you’ll have a variety of plans to choose from. They will generally be broken down into two categories: Safe Harbor and Employer Directed plans. At Peppermint we have two Safe Harbor plans and a single Employer Directed plan.
This plan includes a mandatory employer contribution match. It requires an annual employer contribution and the employee keeps 100% of investment if they leave the company at any time. With this plan, the employer will be exempt from most of the annual compliance testing. Safe Harbor optimizes retirement for you and your highly compensated employees.
This plan gives the employer more traditional options like contributing as little or as much as they prefer. The employer can create a vesting schedule to maintain a percentage of the earnings from their employees, depending on the duration of their employment. This option requires annual testing, and the employer has more liability in case of legal issues.
Once you’ve selected a plan, your PPP will walk you through the rest of the process and you’re officially off to the races. But wait, you’re not done!
Step 5: Put your plan to work
Once you have your PEP in place it’s important that you take advantage of the benefits it provides to your employees and your business.
Retain your existing employees
Your employees will undoubtedly be excited for the added benefit of a PEP being introduced into the company, but don’t assume that they’ll automatically understand the full extent of the benefit they’re receiving.
Walk each of your team members through the specific impact it will have on their lives. Help them understand what is expected from them, and what your company will be contributing.
Let them know that you’re making an investment in their future because you value their contribution to the company and look forward to supporting them for years to come. The clearer you can help them understand the “why” behind the gesture, the more impactful it will be in the immediate term.
Attract top talent as you grow
As you scale your company, you’ll find it easier to attract and hire better employees, but only if you use your PEP to your advantage.
Promote your benefits in your job postings and social media when advertising for an open position. Include it on your careers page, and let it be known that you take employee benefits seriously.
During interviews, help candidates understand the details of what is included in your benefits plan. Illustrate the long-term benefits of the program when they apply to the role and forecast the additional value the prospective hire would receive beyond their salary.
PEPs are a simple, affordable way to provide the retirement plans your employee’s desire and deserve.
While in the past you may have been able to brush off the idea of implementing a 401k because of the cost, complexity, and liability – you no longer have that to contend with. Instead, you’re operating in the midst of an employee retention crisis where only the proactive will prevail.
Have questions? Reach out to our team here.
Ready to get started with your very own PEP? You’re one click away.