What Is a PEP 401(k)?

Multiple Employer Plans (MEPs) have been around since the Taft-Harley Act in 1947. The law allowed labor unions to create agreements that applied to entire industries, across multiple employers. A Pooled Employer Plan operates very similarly to a MEP, but there are no restrictions on who can join. Different industries can be part of the same PEP 401(k) plan.

A Pooled Employer Plan takes a lot of administration off a small business owner’s plate, notably:

• The annual filing of Form 5500 with the IRS
• Approve distributions, rollovers, and loans
• Distribution of plan disclosures, fee notices, and quarterly investment reviews

The Pooled Plan Provider acts as the sponsor, rather than the employer. By passing off on these administrative duties, the small business owner doesn’t have to worry about the risk of fiduciary responsibility. Plan insurance rates will likely be much cheaper than one could afford going solo.

Once an employer has selected a provider and set up the plan, the employer will be responsible for paying a service fee, maintaining records of plan participants, submitting payroll information, and participating in occasional audits.

While there is less administrative burden and less risk, a PEP may not be your best choice.

• Flexibility

  With a PEP 401(k), the employer is beholden to the group’s central plan document. This means there is less flexibility in plan design and investment choices with a PEP. Employers who like to make frequent changes to the plan or like vast investment selection options may find a PEP too restrictive.

• Cost

  Joining a PEP can be more expensive if the third-party administrator charges extra fees. While a low-cost administrator like Ubiquity only charges a flat rate, others charge Assets Under Management fees and per person fees that grow with your 401(k) retirement plan.

•  Audits

  Small businesses with fewer than 120 participants won’t need an IRS audit. However, it may become necessary if the PEP is larger, as the IRS treats the conglomeration of different employers as one plan. The cost is shared by employers, but an independent audit would be necessary each year.