DOL Offers a PEP Talk

On July 28, the Department of Labor (DOL) issued guidance and a request for information regarding pooled employer plans (PEPs).  The “limited interpretative guidance” is designed to “help small employers select high-quality, low-cost” PEPs.

In addition, the DOL is requesting information about prevailing pooled employer plan market practices that it says will be considered as part of a process aimed at developing a potential regulatory safe harbor or safe harbors that “comprehensively encourage market participants to offer and employers to join such plans” as a means of not only reducing investment costs for retirement savers, but to help small employers provide more attractive benefits to potential hires.

What’s a PEP?

A PEP arrangement allows multiple plans to benefit from the economies of scale and administration by a pooling of plan assets.  The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) removed possible legal barriers to the broader use of multiple employer plans by authorizing a new type of ERISA-covered defined contribution retirement plan—a “pooled employer plan” operated by a “pooled plan provider.”

Why does this matter?

While not restricted to smaller plans, such a structure can allow most of the administrative and fiduciary responsibilities (and costs) of sponsoring a retirement plan to be transferred to a pooled plan provider (the employer/plan sponsor retains fiduciary responsibility for the prudent selection and monitoring of the pooled plan provider, however).  These concerns have been thought to slow the adoption of new plans, particularly among small businesses.  Additionally, a PEP may, but does not have to, restrict plan design choices, notably investment selection.

What’s the guidance?

The DOL’s guidance includes several fiduciary tips for small employers selecting a PEP, along with some relevant questions for any PEP under consideration.  Among those tips are:

• Consider what a PEP could offer, specifically the potential for lower administrative and investment costs, as well as a reduced administrative burden.
• Know that all PEPs are not the same – and consider the experience, customer service, and qualifications of the pooled plan provider (“understanding the experience and qualifications of the pooled plan provider is one of the most important – if not the single most important – aspects of joining a PEP”).
• Make sure you ask questions about the fees – taking care to get a breakdown by service of all the fees and expenses associated with joining the PEP, as well as a breakdown by service of how much the pooled plan provider (and any affiliate) gets paid and who approves these fees and expenses.
• Make sure you understand the investment options – what they are, how they have performed relative to their benchmarks, who selects the funds, and how.  For example, what is the default investment for employees who do not direct the investment?
• Ask questions about your exposure to fiduciary liability for investments – specifically, whether the pooled plan provider hires an investment professional to act as a fiduciary with respect to investment selection.  If not, the DOL reminds that the plan sponsor/fiduciary retains responsibility for the investment and management of the portion of the PEP’s assets attributable to your employees.
• Don’t forget to monitor your PEP on an ongoing basis.

Comments Requested: Along with the guidance (and some data regarding PEP adoption and structures to date), the DOL also requested responses to a number of questions that it states are “primarily for the purpose of considering whether additional guidance to facilitate small employers joining PEPs would be helpful”.

Those questions – and the mechanisms to respond – can be found at 2025-14281.pdf