The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) created a new type of defined contribution multiple employer plan, the pooled employer plan. Unlike previous versions of multiple employer plans, it need not be limited to employers sharing a nexus or interest, or located in the same geographical area. Moreover, the plan as a whole is protected from disqualification due to the noncompliance of a participating employer, as long as the plan provides a mechanism for expelling a chronically noncompliant employer and holding such employer responsible for its noncompliance. As a result, pooled employer plans may be an attractive option for some employers.
A pooled employer plan provides several advantages, including the following:
- One-stop shopping. The "pooled plan provider" designates itself as a named fiduciary and plan administrator. In addition to providing a plan document (which should allow a participating employer some flexibility with regard to certain key plan terms), it assumes responsibility for all administrative duties (including oversight of functions that must be performed by participating employers).
- Reduced fiduciary exposure. The employer retains fiduciary obligations with respect to choosing and monitoring the pooled plan provider. However, beyond that, its fiduciary responsibilities are likely to be limited or nonexistent.
- Reduced administrative costs. Functions like filing the Form 5500, conducting the audit, bonding, etc., are done at the plan level by the pooled plan provider instead of having each employer do them separately. In addition, the IRS has been directed to issue model plan language for pooled employer plans, which may ultimately simplify the process of ensuring that the plan document meets qualification requirements.
- Economies of scale. Pooled employer plans may be able to offer administrative, recordkeeping, and investment management on a lower-cost basis than would be available to a smaller single employer plan.
There are, however, some disadvantages, including the following:
- Limited or no ability to choose recordkeepers. A pooled plan provider may offer limited or no ability to choose recordkeepers within the plan.
- Limitations on investment choices. The pooled plan provider will likely offer limited or no flexibility with respect to the investment menu. While this is advantageous because it limits the fiduciary responsibility of participating employers, some employers will not want to relinquish control over the investment menu.
- Inflexibility in plan design. An employer that wishes to have different benefit structures for different branches, job categories, etc., may be limited in its ability to do so based on the plan document options offered by the pooled plan provider.
- Unsuitability in certain situations. A governmental or church plan is unlikely to be able to use a pooled employer plan, because such plans are subject to different rules than ERISA-covered plans. The market for plans for such employers is likely to be limited enough that pooled plan sponsors will be unwilling to provide separate plans for non-ERISA employers. Similarly, a pooled employer plan is unlikely to be acceptable for a collectively bargained plan, as it does not allow for joint employer-union control.
In general, a pooled employer plan is likely to be most attractive to small or medium-sized employers that want economies of scale and are willing to cede a large degree of control over their plans. It is likely to be less attractive to larger employers that can obtain low costs on their own and want to maintain more control over their plans. Please contact us if you have any questions or would like to discuss this topic in more detail.