Pooled Employer Plans (PEPs): A Practical Guide for Business Owners

Understanding the New Retirement Plan Landscape

Retirement plan design has historically favored large corporations with the scale to spread costs and compliance across thousands of employees. Business owners had to choose between sponsoring a standalone 401(k) plan which can be expensive and administratively heavy or offering no plan at all. 

That changed with the SECURE Act of 2019, which introduced the Pooled Employer Plan (PEP). For the first time, unrelated employers can join a single retirement plan run by a professional provider. This innovation has opened the door for companies of all sizes to provide high-quality retirement benefits without taking on the same fiduciary and compliance burden.

Who Benefits from a PEP?

PEPs are designed for:

• Businesses that want to offer a 401(k) but are sensitive to cost and complexity.
• Large businesses that offer a 401(k) but have struggled with both the cost of an independent audit and the administrative burden of working with an independent auditor.
• Owners under state mandate pressure (e.g., California’s CalSavers) who need to offer a retirement plan or enroll employees in the state-run IRA program.
• Employers seeking simplicity by outsourcing plan administration, annual filings and fiduciary responsibility to a professional Pooled Plan Provider (PPP).
• Employees who gain access to institutionally priced investment options, features like automatic enrollment and the security of a well-managed retirement savings program.

How Does a PEP Work?

Here’s the structure in plain terms:

• Pooled Plan Provider (PPP): A financial institution, TPA, or advisor group that serves as the plan sponsor, administrator and named fiduciary. They run the plan and ensure it stays compliant.
• Adopting Employers: Businesses that join the plan. Each employer has its own separate account structure, but all employers share in the pooled buying power.
• Participants: Your employees, who contribute and receive benefits just like in a traditional 401(k).

Employers make one key decision: selecting the PPP. After that, the PPP handles:

• Annual IRS/DOL filings (Form 5500)
• Compliance testing (nondiscrimination, top-heavy, etc.) for each Adopting Employer
• Investment menu design and monitoring
• Plan administration and recordkeeping

Why Choose a PEP?

Advantages for employers:

• Reduced administrative responsibilities
• Shared compliance and fiduciary oversight
• Potentially lower investment and recordkeeping fees
• Reduced cost for the annual independent audit (reqired for large plan filers).
• Exemption from state mandates (like CalSavers in California)

Advantages for employees:

• Access to a legitimate 401(k) with pre-tax and Roth contribution options
• Professional investment oversight
• Potential employer contributions (Safe Harbor or matching)

Comparison: PEP vs. Standalone 401(k) vs. State IRA (e.g., CalSavers)

Case Study: A California Business Owner with 28 Employees

Business Profile:

• Location: California
• Industry: Service-based business
• Employees: 28
• Goal: Provide retirement benefits to stay competitive, while controlling costs and avoiding administrative overload

The Challenge:

California mandates that employers with 5+ employees must either offer a qualified retirement plan or enroll their workforce in CalSavers, the state IRA program. While CalSavers is cost-free for employers, it offers limited benefits only employee-funded IRAs, capped at $7,000 annually. For high-earning employees (and the owner), this simply isn’t enough.

The Options:

1. CalSavers: No employer cost, but low contribution limits and no employer match.
2. Standalone 401(k): Full flexibility, but high setup and ongoing costs, plus fiduciary liability.
3. PEP: Midpoint solution affordable, less administrative burden, higher contribution limits and employer match options.

Decision:
The owner chooses a PEP. Here’s why:

• Employees can defer up to $23,500 (plus $7,500 if over 50).
• The business can add a Safe Harbor match to strengthen recruitment and retention.
• The PPP manages compliance and fiduciary oversight.
• The company is exempt from CalSavers.

Outcome: 

Employees gain a powerful retirement savings vehicle, while the owner positions the company as a competitive employer without taking on the weight of full fiduciary responsibility.

FAQs About PEPs

Q1: What’s the difference between a PEP and a MEP (Multiple Employer Plan)?
A MEP requires employers to have a “common nexus” (like an association or industry group). A PEP removes that requirement, any unrelated employers can join.

Q2: Can I leave a PEP if I want more customization later?
Yes. Employers can exit a PEP and establish their own standalone plan, though that requires setup and transition.

Q3: Do employees know they’re in a pooled plan?
Not really, their experience looks and feels like a traditional 401(k). They see their own balances and contributions, not the pooled structure.

Q4: Is a PEP less safe than my own plan?
No. In fact, compliance risk may be lower since a professional provider assumes fiduciary duties.

Q5: Does joining a PEP save me money right away?
Often yes, especially when factoring in reduced administrative work, lower audit exposure and pooled investment fees. Savings vary by provider and company size.

Put a little PEP in Your Step!

A PEP isn’t a one-size-fits-all answer, but for many business owners, particularly those in states with retirement mandates, it strikes the right balance of cost, simplicity, and employee value. The key decision is choosing a reputable Pooled Plan Provider who can deliver scale and oversight with integrity.