Deciphering the new and old types of pension plans: a guide to untangling the jargon


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Recently, lawmakers have introduced new categories of retirement plans, all with the goal of helping small businesses offer 401(k)-like benefits. Introduced by the SECURE Act of 2019, the intention of these new plan types is to make it easier for small employers to achieve some of the administrative efficiencies and economies of scale enjoyed by large plans: management and bookkeeping.

Below is a brief description of how these types of plans can help employers balance fees, audit costs, fiduciary risks, and more.

Single employer scheme (SEP)

Overview

SEPs are sponsored by a single employer. Often working with a financial advisor and external service providers, a company that decides to establish a unique business plan will need to choose a range of funds, design the features of its plan, sign a plan document and follow all the steps. to set up a retirement plan. Like managing employee health benefits, it can take time.

Summary

Large and small employers can operate in very different markets. Larger employers who prefer a hands-on approach can customize the plan to meet their specific goals, often with the help of an advisor. Maintaining a custom plan can get expensive and time-consuming, but larger companies are able to use economies of scale to offset fees, allowing them to create complex and accommodating plans of plans.

Smaller companies tend to keep their plan design and investment ranges simple and, by extension, low cost. Standardized and bundled SEPs that are more common in the small business market can be an attractive option for small employers. These standardized plans typically take on most of the employers’ fiduciary obligations and partner with specialist providers to perform the required testing and compliance.

Employers best suited to MS

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

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

Multi-employer plan (MEP)

Overview

MEPs differ from their single-employer counterparts in some key respects. MEPs allow two or more employers who have a “common bond” to combine their resources into a single plan, managed by an MEP sponsor. A common bond is a way of saying a kind of common relationship, such as being in the same industry or sharing another type of association or commonalities. Typically an industry association or professional group, the MEP assumes the role of plan sponsor and acts on behalf of employers. This can help make pension plans more accessible for small businesses. Although the MEP Sponsor itself acts as a fiduciary, it may also outsource some of its responsibilities, such as administration and record keeping, to other financial services companies.

Summary

MPs can bear much of the fiduciary risk for the employer that comes with offering a pension plan, especially for smaller companies that are ill-equipped to handle the intricacies of designing a range of funds or to Comply with complex and ever-changing federal laws. Instead of assuming all the costs and risks individually, joining a MEP can help employers streamline their retirement plan while enjoying the cost savings. Nonetheless, employers are responsible for the careful selection and monitoring of an MEP and at least one service provider (usually the primary trustee of the MEP). Employers should be careful to choose an MEP supplier that will maximize their savings through efficiency and innovation.

Best-suited employers for MEPs

MEPs are best suited to small and medium-sized employers who value lower fees and the convenience of fiduciary outsourcing over flexibility.

Group employer plan (PEP)

Overview

Created in 2019 and commissioned in 2021, PEPs are in many ways similar to MEPs, but with one important distinction. PEPs – sometimes called “open” MEPs – do not need to be made up of related companies, so they can extend the benefits of pooling to a wider range of employers. The extension of pension coverage was one of the main justifications for the creation of PEPs in the SECURE law. PEPs are administered by an independent pooled plan (PPP) provider, a trustee responsible for overseeing all other service providers, including outsourced trustees such as the 3(16) administrative trustee and 3(3) investment trustee. 38) (as described in the following glossary) which service the plan.

Summary

Like MEPs, PEPs can bear much of the fiduciary risk of offering a pension scheme, especially for smaller companies ill-equipped to handle the intricacies of designing a range of funds or to Comply with complex and ever-changing federal laws. Instead of assuming all the costs and risks individually, joining a PEP can help companies streamline their retirement plan while taking advantage of potential savings. Employers should still be careful to enter a PEP carefully and choose a PPP that will maximize their savings through efficiency and innovation.

There have been criticisms that MEPs and PEPs are more expensive than single employer plans. However, this is based on a false analogy. While it may be true that a MEP/PEP may be more expensive than a SEP of the same size, as it will incur more reporting costs due to the number of participating employers, if the employers participating in the PEP had instead put set up their own plans, their plans would have been much smaller in terms of assets and participants and therefore would certainly have incurred higher costs. By joining a PEP, however, employers can take advantage of the economies of scale typically only available to much larger plans.

Employers best suited to PEPs

There has been a lot of interest in PEPs. In 2021, over 70 different entities have registered as PPPs to sponsor a PEP. Many of these PEPs are already in place, but it is not yet clear how strong adoption by small employers has been. PEPs have the potential to be very attractive vehicles for small and medium employers who wish to access economies of scale and outsource the administration and monitoring of the scheme to a professional entity. Because different PEPs have adopted different interpretations of common acquisition and service requirements, and the extent to which the PPP assumes overall fiduciary oversight, employers should carefully review different PEPs to ensure that they obtain the service characteristics to which they relate.

Plan group

Overview

GoP – the new middle ground that will be active for 2022 – is a hybrid system incorporating elements of both group schemes (MEP and PEP) and single employer schemes (SEP). As the name suggests, GoP is not a single plan, but a group of individual plans. Plans within a GoP use the same administrators, trustees, and investments; they are also able to file a single Form 5500. The GoP is very similar to a set of standardized single employer plans, except that it is able to file a consolidated annual Form 5500. However, this advantage is currently offset by recent rules imposing audit requirements. Provided the auditing problem is resolved, this new system offers an attractive third option for employers new to the retirement business who wish to reduce fees.

Summary

It is still too early to tell if GoPs will be a viable alternative. The appeal – and adoption – of GoPs should largely depend on how the DOL handles audit requirements.

The next chapter in pensions

Much of the discussion surrounding the evolution of new types of plans has taken place against the backdrop of new regulations set out in the SECURE Act of 2019. Intended to narrow the coverage gap and help remove some of the barriers that small businesses face, it paved the way for PEPs. The intention was to help smaller plans negotiate lower fees through economies of scale, giving them similar purchasing power to their larger counterparts while operating within the regulatory environment of a small MS.

Like all great plans, PEPs must balance lower fees and higher regulatory costs, such as audits. Early rulemaking by the DOL and other federal regulators could mitigate the effects of the SECURE Act, with some of the benefits being outweighed by audit costs of up to thousands of dollars that are typically borne by larger plans. important.

Catherine Reilly, CFA is passionate about finding creative answers to client challenges. She has over 20 years of experience in the asset management and retirement industry in Europe and North America, in roles spanning investment research, product design and business strategy. She enjoys leveraging her diverse background to create innovative approaches to help people save and spend with confidence until retirement. She is currently Director of Retirement Solutions at Smart, a leading global retirement technology company, where she focuses on investment and advisory strategy, public policy and thought leadership.

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