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The New Pooled Employer 401(k) Plan And The Hazards Of Advisor-Led PEPs

March 30, 2021
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Saving for retirement is one of the most common and important goals for individuals. Accordingly, to attract and maintain talent, many employers offer their employees the opportunity to save towards their retirement goals using an employer-sponsored retirement plan, such as a 401(k) plan.

Historically, most small businesses offering employees such an opportunity have done so using individual plans sponsored by the employer. But individual plans (e.g., a 401(k) plan sponsored and maintained by a single employer) can be expensive to create and/or administer, can expose the employer to added liability, and can also be operationally burdensome, particularly for those small business owners who lack strong financial skills.

The combination of these challenges is largely why many small businesses have not offered, and currently do not offer, an employer-sponsored retirement plan to their employees, despite the fact that saving for retirement remains a top priority for many workers. Notably, according to the US Department of Labor’s 2020 National Compensation Survey, less than half of individuals employed by a business with less than 50 employees have access to an employer-sponsored defined contribution plan. And, perhaps unsurprisingly, the percentage of employers with fewer than 10 employees who offer such plans is even smaller.

Over the years, Congress has attempted to minimize the challenges associated with creating and maintaining employer-sponsored retirement plans in a variety of ways. An income tax credit, for instance, was created (and later significantly expanded, effective January 2020, by the SECURE Act of December 2019) to help mitigate the cost of small businesses adopting a retirement plan.

Separately, decades ago, Congress authorized unrelated businesses to group together under a single plan, known as a Multiple Employer Plan (MEP), in an effort to allow them to achieve some of the economies of scale that are available to larger employers offering similar plans. However, as noted above, despite these and other efforts, many small businesses continue to eschew the adoption of an employer-sponsored retirement plan.

Historical “One Bad Apple” And “Nexus Rule” Limitations On Truly Open Multiple Employer Plan (MEP) Adoption

In the case of MEPs, while they have been around for decades, up until now they haven’t gained much traction. In large part, this was because as tax-preferenced and employer-sponsored retirement plans, they have been subject to oversight from both the IRS and the Department of Labor. And prior to the SECURE Act, both agencies had rules that stifled the adoption of such plans.

More specifically, prior to the SECURE Act, the IRS maintained the position that an impermissible action – or the failure to take a required action – by a single employer participating in an MEP would cause the entire MEP to lose its qualified plan status. In other words, if even just one employer in the MEP didn’t properly complete all the required steps of 401(k) plan administration, the entire plan – for all participating employers – would be disqualified. This rule had become ‘affectionately’ known as the “One Bad Apple Rule,” because just a single ‘bad apple’ would spoil the whole ‘bunch’! The SECURE Act statutorily eliminated the IRS’s long-standing “One Bad Apple Rule” for certain MEPs, as discussed further below.

Meanwhile, the Department of Labor’s so-called “Nexus Rule” created its own problems. Notably, the Employee Retirement Income Security Act (ERISA) requires that employer-sponsored retirement plans be established by an “employer” (which seems reasonable enough). Section 3(5) of ERISA goes on to define “employer” as “any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity.”

For many years, the Department of Labor’s interpretation of this definition was that unrelated employers could only band together under an MEP if they had “a particularly close economic or representational nexus” to satisfy the “group or association of employers” option. Essentially, businesses could only participate in MEPs with businesses that were in… well… the same line of business (e.g., butchers participating in an MEP for butchers, or car dealerships participating in an MEP with other car dealerships).

That interpretation was relaxed a bit in the summer of 2019, with the introduction of the Department of Labor’s Final Rule (regulation) on the “Definition of ‘Employer’ Under Section 3(5) of ERISA-Association Retirement Plans and Other Multiple-Employer Plans.” As part of the Rule, newly created Regulation Section 2510.3-55(b)(2)(B) broadened the interpretation of the possible nexus between businesses participating in the same MEP to include those businesses that were located within the same state or metropolitan area. Still, truly “open” MEPs – where completely separate employers, with no connection at all, would be able to participate in the same plan – remained out of reach.

SECURE Act Eliminates ‘One Bad Apple’ and ‘Nexus’ Problems Via The Creation Of Pooled Employer Plans (PEPs)

In its continued effort to make employer-sponsored retirement plans available to more workers (by minimizing the costs, complexity, etc., in creating and maintaining such plans), Congress included language in the SECURE Act to address – and definitively put to rest – the “One Bad Apple” and “Nexus” regulatory roadblocks that have long stymied efforts to get MEPs off the ground.

The primary way Congress chose to do this was by creating a new ‘flavor’ of MEP, dubbed the “Pooled Employer Plan” (PEP). These plans, which may be offered beginning January 1, 2021, have both the ability to ‘kick out’ any ‘bad’ employers from the plan without ‘blowing up’ the entire PEP and can allow participation in the plan by completely disparate employers with no common nexus (i.e., no longer any obligation to be of the same industry or within the same geographic area).

More specifically, Section 101(a)(1) of the SECURE Act amends IRC Section 413 to add new Subsection (e), which says, in part, that if an MEP is maintained by employers with a common interest (an ‘old school’ MEP) or has a Pooled Plan Provider (more on this in a bit), and provided the plan is appropriately drafted (with language that essentially allows it to ‘spin-off’ the assets of the employees of the ‘bad’ employer to its own plan), then the “One Bad Apple Rule” won’t apply. Specifically, Subsection (e) says:

…the plan shall not be treated as failing to meet the requirements under this title applicable to a plan described in section 401(a) or to a plan that consists of individual retirement accounts described in section 408 (including by reason of subsection (c) thereof), whichever is applicable, merely because one or more employers of employees covered by the plan fail to take such actions as are required of such employers for the plan to meet such requirements.

And Section 101(b) of the SECURE Act, titled “No common interest required for pooled employer plans”, goes on to amend ERISA by eliminating the nexus requirement for MEPs that are structured as Pooled Employer Plans.

Thus, PEPs, the ‘new kid on the block,’ likely present the best opportunity to date to create large-scale retirement plans ‘cobbled together’ via the participation of many small (and, perhaps, some large) employers. This is appealing because, ultimately, if there is just a single plan, there may be only one Form 5500 filing (for the entire plan, not each employer), and many other administrative requirements are done just once for the plan as well (and not for each employer separately), which has the promise of reducing overall costs of small business 401(k) plans with consolidated plan administration more conducive to economies of scale.

The Pooled Employer Plan (PEP) And Pooled Plan Providers

Of course, this all begs the obvious question, “Aside from being a new type of MEP, what exactly is a Pooled Employer Plan?”

Per the new IRC Section 1002(43), PEPs are individual account plans (a plan where each participant has their own account) maintained by a Pooled Plan Provider on behalf of multiple employers without a common interest (and which also comply with a host of other operational requirements). The SECURE Act further provides that a Pooled Plan Provider (PPPs – yes, another PPP acronym!) is a person who:

…is designated by the terms of the plan as a named fiduciary (within the meaning of section 402(a)(2) of the Employee Retirement Income Security Act of 1974), as the plan administrator, and as the person responsible to perform all administrative duties[emphasis added]

In addition, prior to marketing its Pooled Employer Plan, a Pooled Plan Provider must register with the Department of Labor. In turn, on November 12, 2020, the Department of Labor announced its Final Rule for registration requirements, which establishes a streamlined electronic registration process for businesses who wish to become Pooled Plan Providers.

Critically, the DOL’s Final Rule provides that, in general, a Pooled Plan Provider will have to be registered with the Department of Labor at least 30 days prior to operating a Pooled Employer Plan. That general requirement, however, is waived through January 31, 2021, provided that registration occurs no later than when the Pooled Plan Provider begins operating the Pooled Employer Plan.

Accordingly, businesses who wish to become Pooled Plan Providers and be able to offer employers the ability to enroll in a PEP early in 2021 need to act now or risk being required to delay when they roll out their PEP offering. Thankfully, the relatively quick registration process can be completed entirely online by going to https://www.efast.dol.gov/.

CAN REGISTERED INVESTMENT ADVISERS (RIAS) BE POOLED PLAN PROVIDERS (PPPS)?

As the January 1, 2021 ‘go live’ date for Pooled Employer Plans approaches, one question that has been raised with increasing regularity is whether Registered Investment Advisers (RIAs) can serve as Pooled Plan Providers, to be able to offer a PEP to their own clients (e.g., the “Smith Financial Planning 401(k) PEP for all small business owner clients of Smith Financial Planning”). The answer to that question is, unequivocally, “Yes.”

Notably, the DOL’s Final Rule on PPP registration refers to “retirement plan advisors such as broker-dealers and registered investment advisers” as “plausible candidates…” Thus, RIAs certainly can register as Pooled Plan Providers.

However, the DOL concluded that same sentence by saying, “…the Department believes that some would be reluctant to assume the named fiduciary and plan administrator roles.” Indeed, this part of the sentence hints at the answer to the much more relevant question, “Should RIAs (and/or broker/dealers) register as Pooled Plan Providers?”

And the answer to that question is, “Probably not.” At least not yet. Not until we have clearer guidance from regulators.

Being A Pooled Plan Provider And Providing Investment Services May Create A Prohibited Transaction

While there are a variety of reasons why RIAs should not be registered as Pooled Plan Providers at the present time, there is, perhaps, no more compelling reason than the fact that serving as both the Pooled Plan Provider and an Investment Advisor (e.g., a 3(21) or 3(38) ERISA Fiduciary) to the plan may very well be a prohibited transaction.

As noted above, a Pooled Plan Provider must be a named fiduciary of the plan. This creates the potential for conflict with IRC Sections 4975(c)(1)(E) and (F), which prevent a plan fiduciary from dealing with the income or assets of a plan for their own interest/account or from receiving any compensation from the plan in connection with transactions involving the income or assets of the plan, respectively.

Thus, absent some sort of Prohibited Transaction Exemption, it would appear as though an RIA serving as a Pooled Plan Provider may very well be prohibited from hiring themselves as the investment advisor to the plan in order to manage the plan assets for an AUM fee (which is presumably the primary reason that an RIA would want to serve as a Pooled Plan Provider in the first place!).

In other words, while RIAs can register as Pooled Plan Providers and serve in that capacity, they may have to hire a separate, unrelated advisory firm to the extent that they want the Pooled Employer Plan (for which they serve as the Pooled Plan Provider) to receive investment management services!

Notably, while it’s possible that the Department of Labor may ultimately provide some sort of guidance or Prohibited Transaction Exemption that alleviates this concern, the cost of being wrong could be substantial. The penalty for a Prohibited Transaction like this (potentially) starts at 15% of the amount involved, which, in this case, would presumably be the entire balance in the plan. And if the error is not rectified in a timely manner, the penalty – which would be owed by the RIA – becomes 100% of the amount involved!

For RIAs that hoped to be able to serve as both Pooled Plan Provider and Investment Advisor to the same Pooled Employer Plan, the Department of Labor’s much anticipated Prohibited Transaction Exemption 2020-02, Improving Investment Advice for Workers & Retirees (i.e., the Department of Labor’s new Fiduciary Rule), had provided a glimmer of hope. The thought among some experts was that if RIAs provided investment services at a reasonable price and if those services were otherwise in the best interests of plan participants (notwithstanding that the RIA might be paid twice, as the PEP provider and the investment manager), then the Department of Labor might provide relief under the then-forthcoming Rule.

However, when the Department of Labor released its Final Rule on December 15, 2020, it opted not to do so, a fact that the Department expressed in no uncertain terms. From Prohibited Transaction Exemption 2020-02:

Pooled Employer Plans under the SECURE Act

In connection with the exemption’s exclusion of named fiduciaries and plan administrators unless selected by a fiduciary that is independent, several commenters requested additional guidance and clarification regarding the exemption’s application to Pooled Employer Plans (PEPs), which were authorized by the SECURE Act, passed in 2019. The SECURE Act mandates that a PEP must be established by a Pooled Plan Provider (PPP) that is designated as a named fiduciary, plan administrator, and the person responsible for specified administrative duties. Commenters envisioned that some PPPs would want to make investment advice available through PEPs, by utilizing themselves or an affiliate as the advice provider. Commenters requested clarification that an employer that participates in a PEP could be considered “independent” so that this exclusion would not be applicable despite the fact that the PPP or an affiliate is providing advice.

The Department believes it is premature to address issues related to PEPs, given their recent origination, unique structure, and likelihood of significant variations in fact patterns and potential business models, as the PEPs’ sponsors decide how to structure their operations. In particular, the Department believes it is premature to provide any views regarding the “independence” of participating employers. The Department recently published a request for information on prohibited transactions applicable to PEPs and is separately considering exemptions related to these types of Plans. [emphasis added]

Reading between the lines, it seems the Department of Labor does see some sort of issue here. It’s worth noting, too, that the decision not to include Pooled Plan Providers in the entities eligible for relief under Prohibited Transaction Exemption 2020-02 was made under a Trump administration-led Department of Labor, which is generally seen as more financial-services-industry-friendly than the incoming Biden administration (which is arguably even less likely to grant such an exemption).

Accordingly, while future Department of Labor guidance may still pave the way for RIAs to become both Pooled Plan Providers and Investment Advisers to the same plan, for the time being, the potential risks likely outweigh the benefits.

The Pooled Plan Provider Must Be The 3(16) Administrative Fiduciary

Another reason that RIAs may want to steer clear from registering themselves as a Pooled Plan Provider – and one that won’t go away, even if the Department of Labor ultimately provides favorable guidance – is that the Pooled Plan Provider is statutorily required to serve as the 3(16) Administrative Fiduciary.

As a 3(16) Administration Fiduciary, the Pooled Plan Provider is responsible for a number of key fiduciary actions, including:

  • Filing and signing the plan’s annual Form 5500;
  • Distributing required documents to participants, such as the Summary Plan Description, fee disclosures, tax notices, and enrollment packages;
  • Verifying whether a Domestic Relations Order (DRO) meets the requirements of a QDRO;
  • Interpreting plan language and making decisions, such as who is eligible to participate in the plan, accordingly;
  • Correcting plan errors;
  • Signing off on distributions to participants; and
  • Ensuring contributions are processed timely and properly.

These services are generally not part of an RIA’s core competencies. Rather, they are often services that an RIA would help business clients obtain from a Third-Party Administrator (TPA) or other qualified professional.

Accordingly, barring the existence of qualified individuals already on staff, an RIA wishing to act as a Pooled Plan Provider will have two choices: either hire qualified professionals directly or outsource those duties. In either case, it’s an added cost that must be factored into the overall decision. The added expense of hiring an individual – or team – to perform the duties required of a Pooled Plan Provider is likely cost-prohibitive for all but some of the largest RIAs.

And unfortunately, outsourcing is far from ideal, too. Importantly, RIAs (or any other Pooled Plan Provider) must understand that while they can outsource administrative responsibilities to third parties, they cannot outsource the liability for those functions. Thus, even if the RIA outsources responsibilities to an otherwise qualified person or entity, if that person/entity errs, it will ultimately be the RIA’s (ERISA fiduciary) responsibility. That added liability, combined with the substantial liability that RIA’s already deal with, may be more than some firms want to take on.

BECOMING A POOLED PLAN PROVIDER (PPP) MAY NOT ACTUALLY LEAD TO MORE BUSINESS ANYWAY?

Ultimately, the primary reason that an RIA would want to become a Pooled Plan Provider is, naturally, to increase business. But there’s no guarantee that by becoming a Pooled Plan Provider, that would actually happen. In fact, there’s even a possibility that it could jeopardize existing business.

Notably, many RIAs work closely with TPAs that provide administration services to plans for which the RIAs provide investment services. Many of those administration entities are likely to try to become Pooled Plan Providers themselves. It’s only natural, then, to think that such partnerships could become strained if administrators suddenly feel that formerly collaborative relationships have turned competitive (i.e., because the TPA becomes a Pooled Plan Provider, and the RIA declares that it, too, is becoming a [competing] Pooled Plan Provider, potentially to the same shared clients).

Additionally, while some third-party plan administrators will have decades of experience to draw upon and promote, the same will not generally be true for RIAs. This is particularly important when considered in tandem with an employer’s fiduciary liability to select an appropriate Pooled Plan Provider.

In other words, while an employer can use a Pooled Employer Plan to shift much of the responsibility and liability of administration to a Pooled Plan Provider, the employer themselves must still act as a Fiduciary when selecting that Pooled Plan Provider. And, simply put, a TPA with a decades-long track record of successful plan administration is likely to give employers a lot more confidence that they are fulfilling that duty than an RIA offering a new start-up Pooled Plan Provider service.

Given the various business, regulatory, operational, and other challenges, one has to wonder whether the vast majority of RIAs won’t be better off sticking with what is essentially the status quo, which would mean letting the administrators be the Pooled Plan Providers and administrate, while the RIAs continue to focus on investment advice and participant education – a system that has worked so well, for so many, for so long.

Why Would An RIA Even Want To Be A Pooled Plan Provider In The First Place?

Given all the complications that RIAs could face in trying to create their own Pooled Employer Plan by becoming a Pooled Plan Administrator, one has to wonder why an RIA would even want to consider going that route in the first place. Put differently, if the DOL does ultimately provide Prohibited Transaction relief (or if an RIA takes the much more aggressive position that such relief is not needed in the first place), what would possess an RIA to want to get into the PEP ‘game’ as a PPP to begin with?

There are, no doubt, many such reasons, but primary factors include the ability to offer a ‘tricked out’ plan that also streamlines internal operations while offering an appealing set of features to small business owner clients (e.g., to facilitate mega backdoor Roth 401(k) contributions!?), and perhaps most importantly, the ability to make certain the RIA actually gets the investment management, financial planning advice, and/or participant education business they really want from the plan and its participants (because while some RIAs could see negative implications from competing with TPAs, etc., other RIAs could see growth by ‘winning’ that battle and ‘forcing’ its MEP to use its investment services).

With respect to plan design, some Pooled Employer Plans may offer employers the opportunity to customize their plan experience to varying degrees (e.g., what type of employer contribution they want to provide, when distributions will be allowed, what investments will be offered), but many Pooled Employer Plans are likely to adopt a “take it or leave it approach,” where substantially all of the ‘options’ that employers have when adopting their own, individual retirement plan, are standardized (and likely to the plan options that are easier for the Pooled Plan administrator to administer, not necessarily what planning-centric small-business-owner clients will most want?).

In contrast, offering a standardized Pooled Employer Plan as an RIA could allow the firm to ensure that planning-friendly provisions, such as the ability to contribute after-tax dollars to the plan, in-service distributions, and Designated Roth Accounts, are all made available to participants. Furthermore, the plan could stipulate that the same investments are available to all participants of the PEP, regardless of their employer, recognizing that having a single lineup of the RIA’s most recommended investment choices could substantially reduce the amount of time it would take to perform 3(21) and/or 3(38) fiduciary due diligence (as compared to the amount of time it would take if each employer participating in the PEP separately needed such services).

Ultimately, though, the biggest reason for an RIA’s interest in becoming a Pooled Plan Provider is the ability to direct the plan to use its Investment Advisory services in the first place. Notably, according to the Department of Labor, “Pooled plan providers are in a unique statutory position in that they are granted full discretion and authority to establish the plan and all of its features, administer the plan and to act as a fiduciary, hire service providers and select investments and investment managers.” [emphasis added]

A report prepared by global professional services firm, Aon, predicts that by 2031, roughly half of all US plan sponsors will have transitioned to Pooled Employer Plans. Accordingly, some RIAs see the creation of their own Pooled Employer Plan as a critical step in ensuring the continuity of their plan advisory service offering. In other words, becoming the PPP can guarantee the RIA with the investment work (unless the RIA, serving as the PPP, fires itself as the investment manager, which, while theoretically possible, is hard to imagine happening in reality).


Employer plans are a critical part of the retirement savings ecosystem. Unfortunately, too many employees today are still without access to such plans. Maybe, just maybe, access to Pooled Employer Plans, which will start on January 1, 2021, will begin to assuage business owners of their concerns about adopting retirement plans enough that a meaningful uptick in adoption and participation will occur.

Critically, these new employer plans will be operated by a Pooled Plan Provider who has properly registered with the Department of Labor. And those Pooled Plan Providers will be required to serve as the plan’s 3(16) Administrative Fiduciary. Thus, while employers will continue to maintain fiduciary responsibility in the selection of a Pooled Plan Provider, prudent selection of such an individual/entity will allow the employer to offload fiduciary liability for reporting, audits, plan document updates, participant notices, testing, and other administrative requirements.

RIAs and other investment-related entities will be eligible to register as Pooled Plan Providers. Most RIAs, however, should not do so… at least not yet. Notably, the question of whether a Pooled Plan Provider hiring itself, or a related entity, to provide other services, such as investment advice, would constitute a penalty-inducing prohibited transaction remains open. Plus, the ability to effectively administer an ERISA plan is likely not an activity most RIAs could successfully navigate without help in the first place.

Nevertheless, with or without RIAs serving as Pooled Plan Providers, Pooled Employer Plans are coming. Companies like Aon have already announced that they will begin offering their Pooled Employer Plan beginning on ‘Day 1,’ on January 1, 2021, and many more are sure to follow suit.

Whether Pooled Employer Plans ultimately do end up with the 50+% market share that some have predicted in 10 years or are just the latest move by Congress to try and expand retirement savings that will fizzle out remains to be seen. The bottom line, though, is that beginning in 2021, there’s a new game in town that at least has the potential to reshape the employer-sponsored retirement plan market in a way not seen for decades.