Breaking Down the Alphabet Soup of Group Retirement Plans
MEPs and PEPs, although not new in concept, have become more popular due to recent law changes. They are similar in many ways, distinct in others, and altogether different than their single employer plan counterparts. In this post, I’ll break down MEP and PEP characteristics and discern when they make sense for plan sponsors.
What the what?! The similarities between MEPs and PEPs
MEPs and PEPs might be as closely related and distinctly palatable as Tennessee Whiskey and Kentucky Bourbon. Just as all bourbon is whiskey but not all whiskey is bourbon, all PEPs are MEPs, but not all MEPs are PEPs (try saying that 10 times fast).
Here are their similarities:
- Both are made up of plans sponsored by unrelated employers.
- Both file a single Form 5500 reporting on a qualified trust that encompasses all participating plans.
- Service and compensation with one employer in the MEP/PEP counts for the whole plan, even when an employee moves from one employer to another (remember these employers are unrelated). However, the individual participating plans are separate for nondiscrimination testing and deduction limits.
- Both allow participating employers to hand-off a generous portion of the fiduciary responsibility and liability. Selecting and monitoring a MEP/PEP provider remains a fiduciary function.
The differences between MEPs and PEPs
MEPs may be established by Professional Employer Organizations (PEOs), trade or professional associations with similarities that range from industry to legal geography (i.e. chambers of commerce), and closely related companies that are not affiliated or controlled to the point that they need to be treated as one employer.
PEPs, on the other hand, must be established and fiduciarily supervised by a Pooled Plan Provider (PPP) who has registered with the Department of Labor (DOL). These plans are specifically designed for employers with no affiliations, industry or otherwise. PEP is the baby of the bunch, officially launched with the SECURE Act for plan years beginning after December 31, 2020, or after recovering from COVID-19 (too soon?).
Why are these MEP and PEP gaggles attractive?
Afterall if these were crows, they would be called murders. Why do families choose crowded vacation resorts over private island getaways?
- Cost is usually a factor. Typically, the MEP/PEP share a group of vetted service providers, a screened menu of investment options, and potentially limited design decisions to create an economy of scale.
- A “safety in numbers” mentality might also be a reason. “If it is good for many, maybe it is good for me too.”
- Set it and forget it convenience. Business owners have businesses to run and let’s face it, retirement plans, like families on vacation, are complex, requiring a variety of specialties. MEPs/PEPs offer a group of professionals to whom employers hand off their plans so they can get back to widgeting the widgets that they widget. Or in the family vacation scenario, send the kids off to activities while parents get their relaxation on.
Service providers like MEPs/PEPs for similar reasons and scale. It is the Field of Dreams, “build it and they will come” approach. MEPs/PEPs open their doors wide for the weary, bedraggled hordes who have had enough of these plans and their complexities.
What’s the downside, you ask?
Remember, the decision to join a MEP or PEP and monitor the providers remain fiduciary functions that should be undertaken with the highest standard of care.
- Lack of customization. What about that scale thing? Yes, if the MEP/PEP has been created for scale, meaning a plethora of adopters in a short period of time, attention to details and complex needs may not be in the equation. If a company’s associates have varied and complex needs that relate to the plan, the consulting element may not be scalable and therefore lacking in the MEP/PEP.
- Audit requirement. A potential buzz kill is the SECURE Act provision allowing a plan audit waiver for a MEP/PEP with no individual large plan filers that has not reached 1,000 participants. A closer look at further guidance leads us back to the 100 participant threshold for an audit requirement and therefore makes the PEP less attractive for small employers, but a positive for large employers who might reduce their audit expense.
- Exiting the group. What goes PEP, might go pop! If employers want more alternatives or want to exit the group for any reason, it’s important to note that getting out is not as easy as getting in. It is a process with the potential of additional costs.
What now?
MEPs/PEPs require no urgency on anyone’s part. If you have a plan and are happy – great! If you are curious about whether a MEP/PEP is out there for you, speak to a knowledgeable and unbiased professional to evaluate your situation and outlook.
