PEP vs. 401(k): Which Is Right for Your Small Business?

The Pooled Employer Plan (PEP) was created by the 2019 SECURE Act as a “new and improved” version of the Multi-Employer Plan (MEP). The PEP is geared toward lowering fees and increasing liability protection for small businesses in particular.

 You might want to consider a PEP if:

• You want a 401(k) for your employees but are daunted by the administration aspect.

  PEPs shift much of the administrative burden off the employer. Instead, the Pooled Plan Provider is responsible for sending out notices to plan participants, managing contributions, rollovers, loans, and filing the annual Form 5500. (Keep in mind that many traditional 401(k) providers will only prepare IRS paperwork on your behalf.) You still bear some fiduciary responsibility in choosing and monitoring the Pooled Plan Provider, but your liability is relatively limited.

• You want to pay less for audits.

  If you have more than 120 plan participants, you’ll need to pay for auditing each year to be sure you’ll pass the nondiscrimination tests required by the IRS and DOL. With a PEP, the cost of auditing the plan is spread out over multiple employers, so the cost is less for each participant as compared to a single-employer 401(k). Furthermore, the insurance provided by a PEP will be more comprehensive than what you could obtain on your own.

• You like simplicity.

  Unlike traditional 401(k)s, PEPs are not as customizable and generally offer similar design and investment options to all participants. If you’re looking for a set-it-and-forget-it approach to retirement savings, a PEP might work for you.

You might want a traditional, stand-alone 401(k), also known as a Single Employer Plan, if:

• You want control over your plan.

  Single employer plans can be modified as often as you wish, whereas PEPs are as not customizable. There is no limit to the types of investments you can add to your lineup when you’re the one authoring the plan. With a full-service 401(k) provider, you can choose to offload much of the fiduciary responsibility.

• You want predictable administration fees.

  Services and fees associated with PEPs are likely to evolve over the next few years, making administrative costs somewhat unpredictable.

• You want to avoid the hassle of audits.

  PEPs are much more likely to be audited than single-employer plans.

No matter which type of retirement plan you choose for you and your employees, exercise due diligence in hiring the right provider.

• Ubiquity offers administration for one transparent, low monthly fee, while others may charge based on “per participant” or a percentage of “assets under management” on top of everything.
• You’ll want a provider with a high level of experience catering to your market. Ubiquity has focused on the small business crowd since 1999.
• The best small business 401(k) providers offer educational tools and support to both employers and employees as needed. We have portals for both sides.
• If you’re a busy small business owner looking to limit fiduciary responsibilities and paperwork, consider working with Ubiquity. Some of our plans include built-in assurance that you’ll meet federal investment fiduciary standards.