Group employer plans for 401(k)s are growing in popularity with small businesses. Here’s why it can save you money.
We all know there is a retirement crisis in this country. Too few people are saving for the future, and there are fears that our social security system is running out of money.
This is one of the main reasons why, in 2019, Congress passed the Preparing Every Community for Retirement Enhancement or SECURE law. It offers tax credits and other incentives for small businesses to set up 401(k) plans, which allow employees to save for retirement.
The legislation also contains a lesser-known provision that expands the availability of employer-sponsored group plans (PEPs). Whether your business already has a 401(k) or you need to create one, you should consider a PEP.
Why? Because a PEP can save you and your employees a lot of money — and potential headaches — by allowing you to pool pension plan assets with other companies and share an administrator to oversee the funds.
“We have seen a strong increase in the number of clients who have opted into administrative services for our pension plan over the past year, thanks to PEPs,” said Michael Majors, vice president of human resources services at payroll processing company Paychex. The company recently announced that it had passed the 100,000 milestone for the number of 401(k) customers it serves, and Majors credits PEPs as a major factor.
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Prior to the SECURE Act, a joint employer plan could only be established between companies that shared a “link” of interest, such as those in a similar industry or those located in the same geographic area. But not more. Now, small businesses from anywhere and doing anything can come together in a PEP. And more and more small businesses are taking notice.
“We tell our clients there’s a single employer, 401(k) option, and then there’s this other option called a joint employer plan,” Majors said. “And in most cases, we find that up to 70% of companies choose a group employer plan. It really changed the dynamic of how many shots we do in those categories.
Any company that offers a 401(k) plan must bear not only the costs of administering the plan, but also all expenses associated with filing tax forms and other documents with state and federal authorities. As a plan grows, these costs tend to increase.
That’s why Melinda Myers converted her company’s existing 401(k) plan to a joint employer plan. Myers is the human resources coordinator for H&H casts, an aluminum molding manufacturer in York. His company has had a 401(k) plan for years. But as the company added employees, it was forced by regulations to hire an outside accounting firm to perform an annual audit.
“The cost for us to do the audit was over $8,000,” she said. “And when it’s a small business like ours and COVID hits you and you’re struggling to find workers, that’s a big expense.”
But a common employer plan solves this problem: only one audit is needed for the whole group. The costs are then shared by all participants, with significant savings. Plan participants also share day-to-day administrative costs, which also reduces their costs.
PEPs offer a solution to another big problem: liability. When your small business has its own 401(k), you assume all fiduciary responsibility for that plan. You put the plan in place. You choose the investment options. You determine the rules. If anything happens, it’s on you.
But with a PEP, you delegate these responsibilities to the shared administrator. So if something goes wrong, it’s usually the responsibility of the administrator – and their responsibility.
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Majors agrees that the benefit of reducing these administrative responsibilities and liabilities “is significant.” This is “one of the main reasons,” he said, why his company is hired as a PEP administrator.
“Our small business clients aren’t experts on investment options or plan management,” says Majors. “They want us to take on those responsibilities.”
Migrating your existing 401(k) plan to a common employer plan takes time and effort. Myers said it took his company about four months to complete the process due to all the paperwork involved and the need to inform his employees about the change.
“Our employees were worried at first,” she said. “They’re like, ‘What do you mean? Are you taking our money and putting it somewhere else? With our admin, we had to have many conversations with them explaining how secure it was and how, in the end, it will reduce their costs and provide a better return on their investment.
Group employer plans have other limitations. If you choose to go this route, you will be delegating decisions. Your plan may have fewer investment options than before. You will have less choice over who administers your plan or how the plan is designed.
“There may be technical reasons why a more complex plane design is needed,” Majors said. “In these cases, I tell our clients to speak to their financial advisors, because sometimes these plans aren’t for everyone.”
But for most small businesses, these downsides pale in comparison to the potential upsides. And thanks to new legislation – known as SECURE Act 2.0 – currently going through Congress, it will soon become even easier for nonprofits and religious groups to also participate in joint employer plans.
“PEPs are a great option for a lot of small organizations,” Majors said. “I think over time many more will convert their existing blueprints into them.”
Gene Marks is a Chartered Accountant and owner of Marks Group, a technology and financial management consultancy firm in Bala Cynwyd.