The Case for a Pooled Employer 401(k) Plan

A Brief History — and a Long-Standing Problem

For most of the history of the 401(k) — which has existed in substantially its current form since the Revenue Act of 1978 — access to a well-administered, professionally managed retirement plan has been heavily correlated with the size of an employer. Large corporations, with their human resources departments, dedicated benefits counsel, and economies of scale, have long been able to offer employees robust 401(k) plans with competitive investment menus, low fees, and institutional oversight.

Small and mid-size businesses, by contrast, have historically faced a formidable set of obstacles: the cost of establishing and maintaining a plan, the complexity of ERISA compliance, the weight of personal fiduciary liability, and the administrative burden of ongoing plan management. Many simply elected not to offer a plan at all. The consequences have been significant — millions of American workers at smaller employers have gone without access to employer-sponsored retirement savings vehicles for decades.

The Setting Every Community Up for Retirement Enhancement Act of 2019 — the SECURE Act — addressed this structural inequity directly with one of the most consequential changes to retirement plan law since ERISA itself: the creation of the Pooled Employer Plan.

What Is a Pooled Employer Plan?

A Pooled Employer Plan, or PEP, is a single ERISA-governed 401(k) plan that allows multiple unrelated employers to participate under a unified plan structure administered by a licensed Pooled Plan Provider (PPP). Unlike the Multiple Employer Plans (MEPs) that preceded them, PEPs require no common nexus among participating employers — no shared industry, geography, trade association, or other affiliation. Any employer, in any sector, anywhere in the country, may join.

The PPP serves as the plan's named fiduciary under ERISA, the plan administrator of record, and the legal plan sponsor. This structure fundamentally reallocates the administrative and fiduciary responsibilities that have historically fallen on individual employers — shifting the most burdensome obligations to the PPP, which is equipped and credentialed to discharge them at scale.

Each participating employer retains its own plan design elections — contribution formulas, matching structures, vesting schedules, eligibility requirements — within the parameters established by the PEP. Despite sharing a single plan, employers are treated as independent plan sponsors for most purposes and are generally insulated from the conduct of other participating employers.

The Fiduciary Relief Argument

To appreciate the significance of the PEP's fiduciary structure, it is necessary to understand what ERISA fiduciary obligations actually entail. Under ERISA, a plan fiduciary — which in a traditional single-employer 401(k) includes the employer itself — is held to a stringent standard of prudence: they must act solely in the interest of plan participants, with the care, skill, prudence, and diligence of a hypothetical prudent expert. Fiduciaries are personally liable for breaches of this duty.

In practice, this means an employer sponsoring its own 401(k) plan is responsible for: selecting and monitoring investment options; selecting and monitoring service providers including the recordkeeper, trustee, and third-party administrator; ensuring nondiscrimination testing is properly conducted; overseeing annual Form 5500 filing; and remaining current with regulatory changes. For a business owner whose core competency is running a restaurant, a medical practice, or a technology company — not managing retirement plans — this obligation is both unfamiliar and genuinely consequential.

In a PEP, the PPP assumes the role of the ERISA Section 402(a) named fiduciary and the ERISA Section 3(16) plan administrator. The PPP takes on responsibility for:

• Selecting, monitoring, and replacing investment options
• Overseeing and monitoring all plan service providers
• Maintaining plan documents and ensuring ongoing compliance
• Filing the consolidated annual Form 5500 for the PEP
• Managing plan corrections and compliance issues
• Ensuring the plan operates in accordance with its terms and applicable law

The participating employer's residual fiduciary obligations are substantially narrowed. The employer remains responsible for the initial decision to join a PEP (and the ongoing monitoring of the PPP's performance), for processing payroll deductions and remitting contributions on a timely basis, and for providing accurate employee data to the plan. These are manageable, operational responsibilities — not the broad investment and administrative oversight that characterizes the traditional single-employer plan sponsor's role.

As Dorothy Lank, a partner at KLB Benefits Law Group, has noted, the 2019 SECURE Act was the first time since ERISA's enactment in 1974 that the fiduciary obligation of a plan sponsor could be formally narrowed. The significance of that development for small and mid-size employers cannot be overstated.

Cost Advantages and Economies of Scale

The economic case for PEP participation is equally compelling. Retirement plan costs generally follow an inverse relationship with plan size: larger plans, with more participants and greater assets, command lower per-participant fees from recordkeepers, trustees, and investment managers. Small employers sponsoring their own plans have historically been price-takers, paying premium rates for the same services that large employers receive at a fraction of the cost.

By pooling assets across many employers, a PEP gains the purchasing power of a much larger aggregate plan. Recordkeeping fees are negotiated at scale. Investment options may include institutional share classes unavailable to smaller standalone plans. Administrative costs are spread across a broader participant base. The result is a materially lower cost structure that benefits both employers and their employees.

For participating employers, the practical consequence is straightforward: access to a professionally managed, fully ERISA-compliant 401(k) plan — with competitive investment options, comprehensive participant communications, and expert compliance oversight — at a cost that was previously achievable only by much larger organizations.

Consolidated Reporting: One Form 5500

A practical administrative advantage of PEP participation that deserves particular attention is the consolidated Form 5500 filing requirement. In a traditional single-employer 401(k), each employer files its own annual Form 5500 — and once plan assets exceed the applicable threshold, each plan is subject to its own independent audit by a qualified public accountant, which can cost several thousand dollars per year.

In a PEP, a single Form 5500 is filed for the entire pooled plan by the PPP. Individual participating employers do not file separate Form 5500s. While the plan as a whole is subject to an audit at the PEP level when required, individual employers are not required to commission their own separate plan audits. For employers whose plans are approaching the audit threshold, this can represent a significant and immediate cost saving.

The "One Bad Apple" Problem — Solved

Prior to the SECURE Act, Multiple Employer Plans operated under what practitioners called the "one bad apple" rule: a compliance failure by any participating employer could jeopardize the qualified status of the entire plan, exposing all other participants to adverse tax consequences. This rule was widely viewed as one of the primary deterrents to MEP adoption among small employers, who were understandably reluctant to assume liability for the compliance failures of unrelated businesses they had no ability to monitor or control.

PEPs are explicitly protected from the one bad apple rule. Under the statutory framework established by the SECURE Act, a compliance failure attributable to a single participating employer generally does not affect the qualified status of the plan with respect to other participants. Each employer's participation is in most respects treated independently, and the PPP has the authority to spin off a non-compliant employer's assets into a separate plan rather than permitting a single participant's or employer's problem to contaminate the broader plan.

This protection fundamentally changes the risk calculus for employers considering PEP participation. The concern that has historically made multi-employer plan arrangements unattractive to prudent plan sponsors has been legislatively resolved.

SECURE 2.0 Tax Credits: The Cost of Entry May Be Zero

The SECURE 2.0 Act of 2022 layered substantial new tax incentives onto the PEP framework, making participation even more economically attractive for eligible employers — particularly those establishing a retirement plan for the first time.

Importantly, an employer that joins a PEP for the first time is treated as establishing a new plan for purposes of these credits, regardless of how long the PEP itself has been in existence. The available credits include:

Startup Cost Credit

Employers with 100 or fewer employees who have not sponsored a substantially similar retirement plan in the prior three years may claim a tax credit equal to 100% of qualified plan startup costs (for employers with 50 or fewer employees) or 50% (for employers with 51–100 employees), up to $5,000 per year for each of the first three years. Over three years, this represents up to $15,000 in dollar-for-dollar tax credits.

Employer Contribution Credit

A separate credit — available to employers with 100 or fewer employees — covers a percentage of employer contributions made on behalf of employees earning under $100,000 per year, up to $1,000 per eligible employee. The credit is 100% in years one and two, then phases down 25% per year through year five. For an employer with ten eligible employees, this credit alone could be worth up to $10,000 in the first year.

Auto-Enrollment Credit

Plans that include automatic enrollment — a feature that SECURE 2.0 now requires for most new plans — are eligible for an additional $500 tax credit per year for each of the first three years, for a total of $1,500.

The combined effect of these credits means that for many small employers, the net cost of establishing and operating a 401(k) plan through a PEP in the first several years is effectively zero — or close to it — after tax credits are applied.

The Talent Retention Argument

Beyond the pure economics and compliance considerations, the PEP presents a compelling human capital argument. Access to a robust retirement benefit has become a meaningful factor in employee recruitment and retention — particularly as the workforce has grown more mobile and employees have become more financially sophisticated about the value of employer-sponsored retirement savings.

Studies consistently show that workers place significant value on retirement benefits when evaluating employment offers. Small businesses that lack a competitive 401(k) plan are at a structural disadvantage relative to larger employers in attracting experienced talent. A PEP enables a business with five, ten, or fifty employees to offer a 401(k) plan with the same institutional quality as a Fortune 500 company's plan — the same investment options, the same participant communications, the same online account access — leveling the competitive landscape in a meaningful way.

Is a PEP the Right Structure for Your Business?

The Pooled Employer Plan is an appropriate consideration for a broad range of employers, but it is not the right solution in every circumstance. The following general framework may assist in evaluating fit:

PEP participation is typically well-suited for:

• Employers of any size who currently offer no retirement plan and wish to establish one
• Businesses that have outgrown a Solo 401(k) by hiring employees
• Employers who wish to substantially reduce their fiduciary exposure
• Organizations whose management team lacks the time or expertise to administer a standalone plan
• Businesses approaching the plan audit threshold who wish to avoid the cost of a standalone audit
• Companies seeking to offer a competitive benefit to attract and retain employees

Standalone plans may be preferable for:

• Employers who require highly customized plan designs beyond what the PEP structure accommodates
• Very large employers who already benefit from economies of scale in their existing plan
• Organizations that prefer complete control over investment menu construction

For the vast majority of small and mid-size employers, particularly those without an existing plan, the PEP represents a structurally superior alternative to the traditional standalone 401(k) — offering lower costs, reduced fiduciary risk, consolidated administration, and access to institutional-quality plan management that was previously reserved for much larger organizations.

401kAdministrators.com: The First Registered PEP Provider

When the SECURE Act was signed into law in December 2019 and Pooled Employer Plans became available to the market on January 1, 2021, 401kAdministrators.com — the practice of Craig Lewis Gillooly, Esq., J.D. — was ready. We had been tracking the legislation through its development and were positioned to register immediately upon the Department of Labor opening its registry.

401kAdministrators.com was the very first company to register as a Pooled Employer Plan provider with the United States Department of Labor. That distinction reflects not merely an administrative first-mover advantage, but a commitment that has defined our practice since its founding in 2003: the belief that access to high-quality, professionally administered retirement plans should not be a privilege of scale, but a resource available to employers and employees of all sizes.

Our PEP is available to employers of any size across the United States. There is no setup fee, no termination fee, and no long-term commitment. We handle plan documentation, ERISA compliance, Form 5500 filing (using our DOL-approved electronic filing software), participant communications, and ongoing administrative oversight — so that you can focus on running your business.

If you have been considering establishing a 401(k) for your employees — or if you are an existing plan sponsor looking for a more efficient administrative structure — we invite you to contact us for a complimentary consultation.