Decoding Retirement Plan Types: Guide to Cutting Through the Jargon

Recently, U.S. legislators have introduced new classes of retirement plans, all with the aim of helping small businesses offer 401(k)–style benefits.

Ushered in by the 2019 SECURE Act, the intention of these new plan types is to make it easier for small employers to achieve some of the administrative efficiency and economies of scale enjoyed by large plans. That’s because as retirement plans grow in asset size, they tend to secure lower management and recordkeeping fees.

Below is a short breakdown of how these plan types can help employers find a balance of fees, audit costs, fiduciary risks, and more.

Single Employer Plan (SEP)

Overview:  SEPs are sponsored by just one employer. Often working with a financial adviser and outside service providers, a company that decides to establish a single company plan will have to pick a fund lineup, design its plan features, sign onto a plan document, and go through all the steps to set up a retirement plan. Much like managing employees’ health insurance benefits, it can become time-consuming.

Summary:  Large and small employers can operate in very different marketplaces. Large employers that prefer a hands-on approach can customize the plan to meet their specific objectives, often with the help of an adviser. Maintaining a customized plan can become expensive and time-consuming, but large corporations are able to employ economies of scale to offset fees, allowing them to build intricate and all-accommodating plan designs.

Smaller businesses tend to keep their plan designs and investment lineups simple and, by extension, low-cost. The standardized, bundled SEPs that are more common in the small-business market can be an attractive option for smaller employers. These standardized plans typically take on most of the fiduciary obligations for the employers and partner with specialist providers to carry out the required testing and compliance.

Employers best-suited for SEPs:  SEPs can work well for both large and small employers. Employers with complex needs—those with a diverse array of employment classifications, or that feel the need to customize their plans—will find a SEP well-suited to their needs, particularly if they are large enough to negotiate low fees. On the other hand, the standardized SEPs that are more common in the small-business market can provide a good, cost-effective solution for employers that are not subject to audits.

That said, PEPs may provide even more advantages for small employers once the audit issues (discussed below) have been resolved. For now, small businesses that are not required to be audited could find a SEP their best option.

Multiple Employer Plan (MEP)

Overview:  MEPs differ from their single-employer counterparts in some key ways. MEPs allow two or more employers who have a “common nexus” to combine their resources into one plan, run by a MEP sponsor. A “common nexus” is a way of saying some sort of common relationship, such as being in the same industry or sharing some other type of association or commonality. Typically an industry association or trade group, the MEP assumes the role of the plan sponsor and acts on the employers’ behalf. This can help make retirement plans more accessible for small businesses. Though the MEP sponsor itself acts as a fiduciary, it can also outsource some of its responsibilities, like administration and recordkeeping, to other financial services companies.

Summary:  MEPs can take on much of the fiduciary risk for the employer that comes with offering a retirement plan, especially for small businesses ill-equipped to handle the intricacies of designing a fund lineup or complying with complex and ever-changing federal laws. Instead of shouldering all of the cost and risk individually, employers joining a MEP can streamline their retirement plan while taking advantage of cost savings. Still, employers are responsible for prudently selecting and monitoring a MEP and at least one service provider (generally the main fiduciary of the MEP). Employers should take care to choose a MEP provider that will maximize their savings through efficiency and innovation.

Employers best-suited for MEPs:  MEPs are best-suited for smaller and midsize employers that prioritize lower fees and the convenience of fiduciary outsourcing over flexibility.

Pooled Employer Plan (PEP)

Overview:  Created in 2019 and first introduced in 2021, PEPs are similar in many ways to MEPs, but with an important distinction. PEPs—sometimes referred to as “open MEPs”—do not need to consist of related companies, so they can expand the benefits of pooling to a wider range of employers. Expanding retirement coverage was a key rationale for the creation of PEPs in the SECURE Act. PEPs are administered by an independent pooled plan provider (PPP), a fiduciary that is responsible for overseeing all the other service providers, including the outsourced fiduciaries such as the 3(16) administrative fiduciary and the 3(38) investment fiduciary that service the plan.

Summary:  Like MEPs, PEPs can take on much of the fiduciary risk that comes with offering a retirement plan, especially for small businesses ill-equipped to handle the intricacies of designing a fund lineup or complying with complex and ever-changing federal laws. Instead of shouldering all the cost and risk individually, companies joining a PEP can streamline their retirement plan while taking advantage of potential cost savings. Employers should still take care to prudently enter a PEP and choose a PPP that will maximize their savings through efficiency and innovation.

There has been some criticism that MEPs and PEPs are more expensive than single employer plans. However, this is based on a false comparison. A MEP or PEP can be more expensive than a SEP of the same size, as it will incur more reporting costs due to having more participating employers. If each employer participating in the PEP had instead set up its own plan, each of those plans would have been much smaller in assets and participants, and would thus certainly have incurred higher costs. By joining a PEP, employers leverage the economies of scale usually available only to much larger plans.

Employers best-suited for PEPs:  There has been a great deal of interest in PEPs. In 2021, more than 70 different entities registered as PPPs to sponsor a PEP. Many of these PEPs are already live, but it is not yet clear how strong the uptake from small employers has been.

PEPs have the potential to be very attractive vehicles for small and midsize employers that want to access economies of scale, while outsourcing plan administration and oversight to a professional entity. As different PEPs have adopted varying interpretations of the common vesting and service requirements, and the degree to which the PPP assumes the overall fiduciary oversight, employers should carefully vet different PEPs to make sure they are getting the service features they are aiming for.

Group of Plans (GoP)

Overview:  GoPs—the new middle ground which will be active for 2022—is a hybrid system incorporating elements from both pooled (MEPs and PEPs) and single employer plans (SEPs). As the name suggests, a GoP is not a single plan but a group of individual plans. The plans within a GoP use the same administrator, fiduciaries, and investments. They’re also able to file a single Form 5500. The GoP is very similar to a collection of standardized single employer plans, except for the ability to file a consolidated annual Form 5500. However, this advantage is currently outweighed by recent rules imposing audit requirements. If the audit issue is fixed, this new system will offer an attractive third option to employers new to the retirement space who want to reduce fees.

Summary:  It’s too early to tell whether GoPs will be a viable alternative. The appeal—and adoption—of GoPs is largely expected to hinge on how the DOL treats audit requirements.

The Next Chapter for Retirement Plans

Much of the discussion surrounding the evolution of new plan types has been in the context of new regulations set forth in the 2019 SECURE Act. Intended to reduce the coverage gap and help remove some of the hurdles faced by small businesses, it opened the way for PEPs. The intention was to help smaller plans negotiate lower fees through economies of scale, giving them similar buying power to their larger counterparts while operating within the regulatory environment of a small SEP.

Like all large plans, PEPs must find a fulcrum between lower fees and higher regulatory costs, such as audits. Early DOL and other federal regulators’ rulemaking could dampen the effects of the SECURE Act, with some of the advantages being offset by audit costs that could run into the thousands of dollars and which are usually shouldered by larger plans.

Catherine Reilly, CFA, is passionate about finding creative answers to client challenges. She has over 20 years’ experience working in the asset management and retirement industry in Europe and North America, in roles covering investment research, product design, and business strategy. She enjoys leveraging her diverse background to create innovative approaches to help people save for and spend confidently through retirement. She is currently the director of retirement solutions at Smart, a leading global retirement technology business, where she focuses on investment and advice strategy, public policy, and thought leadership. 

From: BenefitsPRO