PEPs Pique Small Businesses’ Interest, But Hurdles Remain

A new survey finds that small employers are interested in learning more about pooled employer plans, although there is still some hesitancy on the road to implementation.

In fact, more than half of smaller employers surveyed by the Secure Retirement Institute (SRI) that are considering a defined contribution plan are interested in learning more about PEPs—regardless of whether they have a retirement plan currently in place. 

Created by the SECURE Act in 2019 and first approved for use in 2021, a PEP is a type of 401(k) plan that allows unrelated businesses to participate in one plan managed by a pooled plan provider (PPP). 

SRI found that employers with 10–99 employees are significantly more interested in learning more about PEPs, especially the largest (small) employers (those with 50–99 employees). Included among those employers that were either “very” or “somewhat” interested in learning about a PEP were: 

• 90% of employers with between 50–99 employees;
• 86% of employers with between 20–49 employees; and
• 80% of employers with between 10–19 employees. 

For those employers with 2–9 employees, the level drops to 58% that were either “very” or “somewhat” interested, while 26% said they were “not at all interested.” In comparison, only small percentages (7% or less) of those employers with 10–99 employees said they were not interested. 

Not Ready to Implement

Still, while small employers without current retirement plans are interested in exploring PEPs, few expressed interest in adding them, notes Deb Dupont, Assistant Vice President of Worksite Retirement at SRI. 

The reasons for a lack of interest in PEPS were relatively consistent across employer sizes up to 99 employees, SRI notes. 

Small employers that are avoiding switching to a PEP express concern about lower levels of support for the company (42%) or lower levels of service for their employees (39%). Nearly 4 in 10 small employers want to retain control of plan design decisions, and an additional third of employers do not believe a PEP would reduce plan costs. A similar number of small employers cite wanting to retain control of vendor selection as the reason not to switch.

At the same time, many small employers which currently sponsor DC plans are open to the idea of discontinuing their existing plans in favor of joining a PEP. The likelihood of trading an existing DC plan for a PEP grows with organization size among these smaller employers. According to the findings, more than 8 in 10 employers with 20–99 employees are at least “somewhat likely” to want to make the switch. 

It’s less common for the smallest employers to have a DC plan in the first place and, among those who do, there is strong reluctance to switch to a PEP, SRI notes. 
Lowering plan costs is the main reason an employer would choose to join a PEP—whether switching an existing plan or beginning to offer a plan with a PEP. The top five responses to SRI’s survey when asked about the appeal of a PEP are: 

1. Lower plan costs (52%)
2. Reduce administrative responsibility (35%)
3. Reduce legal liabilities (32%)
4. Reduce or avoid investment management responsibility (26%)
5. Free up resources for other employee benefits (25%)

“Lower cost is the most compelling reason employers would choose a PEP, but other reasons may combine to create a powerful value proposition for this new construct,” says Dupont.

When it comes to awareness, fewer than half of small employers are even “somewhat familiar” with PEPs. The smallest employers are least likely to have near-term plans (within two years) to introduce a retirement savings plan.

“The attraction of a PEP is similar, whether employers currently do or do not have a DC plan in place. For both, cost is most compelling, but reducing administrative responsibilities also has a stronger appeal for employers that currently manage administrative responsibilities of an existing plan,” Dupont observes.