Pooled vs. Single-Employer 401(k) Plans - Are PEPs for You?

February 11, 2023

For nearly 10 years, the financial services industry lobbied Congress to permit “open” Multiple Employer Plans (MEPs) – a form of 401(k) plan that can be adopted by multiple unrelated employers with no association at all. They got what they wanted in 2019 when the SECURE Act created Pooled Employer Plans (PEPs). Supporters claim PEPs can offer lower 401(k) fees for workers and greater liability protection for business owners than a single-employer plan. I think a single-employer plan with leading index funds and flat administration fees will beat PEPs on both fronts.

However, I can foresee some limited circumstances where a PEP is the superior choice. If you’re a business owner, you should understand the differences between PEPs and single-employer plans to make the best choice for your company in 2021 – when PEPs will first become available – and beyond.

The biggest difference between pooled and single-employer 401(k) plans is control

All 401(k) plans – regardless of their pooled or single-employer status - have the same basic fiduciary hierarchy. This hierarchy includes both fiduciary and non-fiduciary (“ministerial”) roles. In general, the fiduciary roles have discretionary power, while the ministerial roles do not. The named fiduciary sits atop the hierarchy with the power to delegate the other roles.

In most single-employer plans, the named fiduciary is the employer– which includes controlled groups and affiliated service groups. In a MEP, it’s the MEP provider - or Pooled Plan Provider (PPP) in the case of a PEP. As one might expect, a PPP could abuse this power by delegating other roles to related companies or selecting administration services and investments that put their profit ahead of participant interests. Recently, several MEP providers have been accused of doing just that.

Regardless of the roles you delegate to a single-employer plan or PEP provider, you have a fiduciary responsibility to “monitor” them – to ensure they’re doing competent job for “reasonable” fees. For this reason, I recommend you hire a 401(k) provider with straightforward administration services, investments, and fees.

Other important differences

In general, single-employer plans are more flexible and transparent than PEPs, while PEPs could be a way to lower certain investment and audit fees. Other differences include:

Feature	Single-Employer Plans (SEPs)	Pooled Employee Plans (PEPs)
Plan design options	SEPs generally offer more plan design options because each SEP is governed by its own plan document. These documents can be highly tailored by a consultative provider to meet an employer’s unique goals and budget.	All employers share the same PEP document. A PPP can limit an employer’s plan design options to basic ones that are inexpensive to administer.
Administration fees	401(k) admin fees cover asset custody, participant recordkeeping, Third-Party Administration (TPA), and investment management. Participant recordkeeping and TPA fees should be “flat” – based on employee headcount, not assets - to best match their provider’s level of service. Otherwise, they can quickly outstretch their provider’s level of service as plan assets increase. Today, SEPs are more likely than MEPs to charge flat recordkeeping and TPA fees. I doubt PEPs will change that.	In a PEP, admin fees are more likely to based on a percentage of assets. A PPP can use their 402(a) “Named Fiduciary” power to layer admin fees by hiring related companies as plan service providers.
Investment fees	Can pay similar fees for passive investments - which include index funds and ETFs. Fund companies tend to offer these funds in few – if any – share classes. That means a startup SEP with no assets can pay the same price for top funds as PEPs with lots of assets. Passive investments – which try to match the returns of a market benchmark (e.g., the S&P 500) – have become popular in recent years because they tend to outperform comparable active investments – which try to outperform their market benchmark – over the long-term, net-of fees.	May pay lower fees for active investments. Unlike passive investments, active investments tend to be offered by fund companies in multiple share classes – with each share class charging different fees. It can take lots of assets to qualify for the lowest-priced share classes of active investments. While there has been a trend towards passive investments in recent years, active investments remain popular and pooling assets can be a way for small business 401(k) investors to pay lower fees for them.
Audit fees	None for most small SEPs (less than 120 participants) because they don’t have an annual audit requirement. Large SEPs can pay thousands – if not tens of thousands of dollars – for an annual audit.	Small businesses are more likely to pay audit fees in a PEP – because PEPs that cover more than 1,000 participants are subject to an annual audit. Large businesses could pay lower audit fees in a PEP.
Form 5500	The employer usually files the Form 5500 for their SEP. However, many SEP providers will file a Form 5500 on behalf of employers at no charge with proper authorization.	The PPP files the Form 5500 for their PEP – which means no Form 5500 for the employer to file. However, this isn’t much of advantage when you consider employers can e-file a SEP Form 5500 in under five minutes today.
Plan qualification requirements	401(k) plans must satisfy IRS plan qualification requirements in both form and operation. In a SEP, employers must meet these requirements at the plan level only.	Employers must meet certain requirements at the employer-level and others at the PEP-level. For example, employers must generally count the service accrued at all PEP co-sponsors when determining an employee’s PEP eligibility and vesting.
Distributions and loans	Ultimately up to the employer to approve participant distribution and loan requests. Some SEP providers are willing to assume this 3(16) “Plan Administrator” fiduciary responsibility for additional fees.	Ultimately up to the PPP to approve participant distribution and loan requests. However, employers would likely still have a role in the approval process due to their employee records.
Participant notices	Ultimately up to the employer to distribute to participants. Some SEP providers are willing to assume this 3(16) “Plan Administrator” fiduciary responsibility for additional fees.	Ultimately up to the employer to distribute to participants. However, employers would likely still have a role in the distribution process due to their employee records.
Plan termination	Employers can easily terminate a SEP at any time.	Employers usually lack the fiduciary authority to terminate their portion of a PEP. Instead, they must transfer their employee accounts from a PEP to a SEP and then terminate the SEP to make the accounts distributable. Otherwise, employees are stuck in the PEP until they either terminate employment or qualify for an in-service distribution.
Risk of abuse	Generally lower because employers usually retain the 402(a) “Named Fiduciary,” 403(a) Trustee, and 3(16) “Plan Administrator” fiduciary roles. These powerful administration-related roles can be easily abused when delegated.	Generally higher because employers delegate the 402(a) “Named Fiduciary” role to the PPP. A PPP can abuse this power by delegating other fiduciary hierarchy roles to related companies to layer fees.
Risk of lawsuit	Slim to none for small plans. Most SEPs – even ones with objectively excessive fees and “imprudent” investments - are effectively lawsuit-proof because they lack the assets to trigger large participant losses.	Increases as employers join. The top reasons for 401(k) lawsuits today are “imprudent” investment selection, excessive fees, and self-dealing. As PEPs pool assets, they are more likely to attract these lawsuits due to the potential losses involved in a successful lawsuit.

Don’t believe the hype!

Today, a single-employer plan with leading index funds and flat administration fees can trounce a MEP on cost and fiduciary liability protection – the two purported benefits of MEPs. I don’t see PEPs changing that – despite the hype that will likely accompany the launch of this new MEP type.

However, PEPs may offer other advantages that tilt the scales in their favor. To make the best choice for your business, you should understand how PEPs and single-employer plans compare.